Paul Krugman has a useful post outlining the role that insuring bank liabilities will play in any policy of nationalization. Part of the problem in the nationalization debate is that the policy of taking over failing banks is being considered outside the broader set of policies that would be imposed on the banking system. So though it's true that simply nationalizing a few banks would create a chain reaction that detonates a bunch of other banks, that's not a policy anyone is thinking of putting into place. Rather, nationalization advocates envision something along the lines of the Swedish experience, which also includes insuring the liabilities of the non-nationalized banks. Under this set of policies, investors can be confident that the non-nationalized banks have 1) passed a stress test and 2) have nothing to fear from their debts being called in. In this world, the government nationalizes some banks and guarantees others. There's no reason, then, for investors to flee any of them.
