Fundamentally, deposit insurance exists to protect the banking system against the risk of bank “runs”, that is, unrestrained demand for cash by savers, which can cripple the financial intermediation process, disrupt the payments system, and constrain the performance of the Financial Sector.
In the normal course of events, healthy banks are encouraged to lend the deposits that are entrusted to them in a process called financial intermediation, where banks make savings available for investment and economic development. However, when banks face difficulties and become unable to service their obligations as they fall due, their creditors, including depositors, risk suffering ruinous losses.