The argument that deposit insurance can prevent the failure of an otherwise sound bank is based on the idea that

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The argument that deposit insurance can prevent the failure of a sound bank is based on the idea that the existence of deposit insurance may prevent self-fulfilling panics. When customers know that their deposits are insured, they are less likely to rush to withdraw their money, even if they hear rumors about the bank's financial health. This can help prevent a panicked run on the bank, which can cause the bank to fail even if it is otherwise sound.

The Argument That Deposit Insurance Can Prevent the Failure of an Otherwise