If banks aren't allowed to fail then they become some kind of protected entity. Are you saying we should just let it happen?
We need a secondary class of banks: ones that don’t leverage their deposits into investments, but rather simply keep people’s money safe.
That way you can choose your bank. Do you want a bank that will actually yield return on your deposits and pay you back in kind or do you just want to keep your money safe? It would effectively bring back investment carried savings but also allow people to store their money in safer banks with actual deposit insurance if that was their goal. The problem is that a bank is a bank and we don’t know what their business priorities or risk calculus is in any meaningful terms, so how are we supposed to choose a “safe” one?
The problem is that those suggesting this aren't really engaging with how our finance system works. What they're saying is "I don't want my money at risk" but what they're proposing is "I don't want to ever be able to get a mortgage". They're saying "I'd be happy with an account that doesn't pay interest" but actually, if this product was offered, you'll likely find people still opt for the interest paying accounts that have risk because they aren't really capable judging that risk.
It's also just quite a difficult thing to imagine happening, can you imagine it - out comes this product from a bank "100% backed, guaranteed not to default, 20bps charge, 0 interest", and let's imagine it really is popular and capital flees to it. You've just caused the single biggest run on the US banking system in history. How do you mechanically actually make this work?
There was actually a recent case where one bank (Custodia) tried to do this - they wanted to charge fees instead of gambling with their clients money. But the FED denied their application. They say it’s because they wanted to service crypto companies - but how would that even be a problem if they’ve always got all the deposits at hand. It smells fishy.