Nothing more is required than deposit insurance to enable banks to inflate the money supply, fiat money is nothing more than state credit. We value fiat currency out of necessity not infatuation, it has value for no other reason than the state. Only if the currency is valued for its own sake (like a commodity currency) would the deposit insurance (of banks) be meaningless, or not a threat, because it could not be validated by the state, they would be unable to pay and so money would not be created.
Deposit insurance is not benign (immaterial to the money supply) because the state is feared. The money supply is not independent of deposit insurance. Sound money relies upon bad firms (and their credit) being allowed to fail. Inflation happens when bad firms are not allowed to fail.
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