Frb and deposit insurance means the banks have no incentive to keep healthy reserves

If the banking sector benefits from (having been given) deposit insurance there is no need for them to be prudent when it comes to customers’ funds, they have not defrauded the customer when it loans reserves, at least not in a direct sense. With full-reserve banking and no deposit guarantee banks would need to keep the money held in the bank vaults. Frb means the banks don’t need to (are allowed not to) keep the money in reserve. The market will not intervene in a run on the bank, as it would without the insurance, and there is no law against the practice of lending deposits. The deposit insurance has removed the natural incentive (for the bank) to keep all the money in reserve, the bank has no incentive to hold full reserves.