Individuals and corporations do not have enough information to evaluate the safety of placing deposits in banks.

So what is the bad thing that would happen if ALL deposits were covered by deposit insurance?

I agree that most people can't accurately assess bank safety. But there are private market solutions that provide additional deposit insurance: MaxSafe, Depositors Insurance Fund, and IntraFi Network Deposits. These are either excess insurance policies, or methods for splitting deposits between many banks. I prefer these methods over just providing millions of FDIC coverage to individual banks.

A large deposit is safer when split up between multiple banks. All of the banks are unlikely to all fail at once. This diversification would also make bank failures less likely, as one bank would not have to handle a large influx of deposits. SVB got a mountain of cash during the Venture Capital boom, and made some bad decisions that led to failure. In the case of SVB, the big depositors were getting benefits that encouraged them to keep large deposits at SVB. For example, a start-up could get a loan equal to their deposits.

If excess insurance is needed, that particular bank should pay for it. SVB was an unusual bank and could have purchased excess insurance. Higher FDIC insurance will be paid by all banks. Why should a small community bank pay for SVB's insurance needs?

Maybe an annual red flag letter is needed telling customers with accounts over $250k that they do not have full FDIC insurance and there are alternatives.