To provide safe haven for the vast majority of people/orgs whose cash assets can fit in that bucket, since there's some scale at which you can't afford the overhead of privately managed risk management (diversification, private insurance, etc). It provides stability on the low end, especially for naive and casual wealth, so that their naivite doesn't cause problems for everyone else.
But above that bucket, people/orgs are expected to know and appropriately manage the risks that they're taking with their money or have the float to pay someone who does.
Experienced money doesn't see large bank deposits as safe by nature because they never have been. It's only people new to wealth and chronically blind to tail risk (hello startup industry!) that assume a $5M portfolio can be treated as casually as their personal checking account.
But above that bucket, people/orgs are expected to know and appropriately manage the risks that they're taking with their money or have the float to pay someone who does.
Experienced money doesn't see large bank deposits as safe by nature because they never have been. It's only people new to wealth and chronically blind to tail risk (hello startup industry!) that assume a $5M portfolio can be treated as casually as their personal checking account.