Yes, but depositors are generally not expected to be sophisticated investors in the context of bank liquidity abd solvency. You don't get a prospectus of the bank itself when you consider opening an account.

"KYB" now means "Know Your Bank". :-D

More seriously, you don't need to do extra due diligence. Just buy insurance for your funds above $250K. Or use standard treasury methods like using institutional insured liquid deposits or sweep accounts.

Liability insurance is required for automobile drivers, because of the externalities. Perhaps bank run insurance should be required for depositors, because of the externalities. That'd force depositors to internalize the externality of banking with a fragile bank.

The prospectus is easily available, for all the good it would do.

In any case, you don't need to be a sophisticated investor as a depositor. Ordinary market participants manage 'flights to quality' just fine, even if they are not sophisticated investors. See https://en.wikipedia.org/wiki/Flight-to-quality

If you want to have a stable financial system, you shouldn't suppress the incentives for people, including depositors, to look for safety. Just the opposite, you should have them sensitive so that they make moves (on the margin) long before danger is serious. Have people move their deposits _before_ it's too late.

But someone that has over 250K in a bank can be expected to understand that FDIC insurance is (or better was, effective now it is unlimited) 250K, right?

First, no. My wife earns more than me, but phrases like "FDIC insurance" make her eyes glaze. She'd ask her parents, "What do you do?" They'd answer, "Keep cash under your mattress."

Second, what does that really mean? How to evaluate the quality of your bank isn't typically discussed by personal finance teachers, beyond looking at the interest rates and fees.

I might be missing something, but not sure why this was downvoted.

Deposits <$250k are FDIC insured. One could say those accounts didn't evaluate the institution that held their funds and didn't really need to. But were they aware of FDIC limits? IMHO, they should have been and likely were.

Depositors >$250k are well aware of FDIC and the risk associated with money in their bank. They really should think about the banks they work with and understand their risk profiles.

Subjective, but I understood how FDIC worked when I opened my first bank account that was no where close to 250k. If it was greater, I would optimize my holdings across different institutions and instruments.

Yes. Though as a normative statement, I would prefer if they would abolish FDIC.

That way small time depositors are also drawn into the ranks of the watchmen of the financial system.

In a more perfect world, I totally agree. But with American average savings so low and with the average level of financial literacy so low, expecting half of America to join the ranks of financial system watchmen is, IMHO, a tough hill to climb.

[study on financial literacy from 2022](https://gflec.org/wp-content/uploads/2022/04/TIAA-Institute-...)

People now ain't stupider than in the past. And banking systems around the world (apart from the US, probably) did just fine without government backed deposit insurance. Eg in Canada or Scotland during their free banking eras.