In economics, moral hazard can exist when a party to a contract can take risks without having to suffer consequences. It can also be characterized as cleaning up another’s mistakes so they do not have to live with the negative consequences of their actions and so will make the same mistake over and over. As a perfect example, in the Great Recession, every major bank in the U.S. (with the exception of J.P. Morgan) became insolvent. The Federal Reserve Bank bailed them all out. Since that bailout, the major banks know that they are “too big to fail,” so they will continue to take big risks in the future. This is a prime example of moral hazard.
In the Great Depression, thousands of banks went bankrupt, and people lost their deposits. There were runs on the banks, but the money was gone. That is the reason the FDIC was established, to stop runs on the banks. It guarantees deposits up to $250,000 per account. Unfortunately, financial crises are cyclical and with the Fed bailouts essentially encouraging moral hazard, bank failures will be cyclical also. When there is a financial crisis, a higher number of borrowers default on loans, banks become insolvent, and the FDIC or the NCUA has to take them over and make the depositors whole.