Many states had their own insurance fund to protect depositors. The critical problem with these state funds is:

Question

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The critical problem with state insurance funds is that no state fund is large enough to withstand a run on all of the banks it insures. This means that if there is a large-scale financial crisis or bank run, the state insurance fund may not have enough funds to cover all of the insured deposits. By contrast, the Federal Deposit Insurance Corporation (FDIC) has the backing of the federal government, which enables it to insure deposits at a much larger scale and with more security.

Many States Had Their Own Insurance Fund to Protect Depositors