Regulatory forbearance is a dangerous strategy for a deposit insurance strategy due to the following reasons:

• When a bank becomes insolvent, it keeps borrowing more money, which makes the deposit insurance agencies to keep breaking its financial morals to try and stabilize it.
• Deposit agencies also face the risk of making huge losses if a financial institution becomes bankrupt and fails to pay the money borrowed.
• Continued provision of loans to banks encourages them to take higher risks, which eventually becomes morally hazardous; this leads to a decline in the overall economic growth of the agencies. The more lending, the fewer profits the agencies make, and this puts them at risk of losing investments.