There is nothing to stop the banks from pretending to have much more money in the vaults than actually exists. The presence of deposit insurance means that (as customers) we have no need to be vigilant about the activities of the banks. If we removed deposit insurance then banks would not be able to inflate the currency without the risk of going out of business, as it is (with deposit insurance) the central bank would be obliged to issue a great deal of currency if there were to be a bank run. It means nothing to have deposit insurance without the willingness to inflate the currency after a run on the banks, if it means anything, unless it is a bluff, it means a preparedness to monetise the obligations of the banking sector.
Deposit insurance might be a bluff.
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