The primary objectives of the DPS are to provide a measure of protection to depositors and to contribute to the stability of the banking system. The stability of the banking system hinges on the level of confidence that depositors have in the system. Sudden loss of confidence by depositors and hence withdrawal of funds from a bank, irrespective of whether the bank is healthy or not, can precipitate into a bank failure. A properly designed DPS can reduce the likelihood of a bank failure caused by rumour-driven runs, and contain the impact of any such failure by preventing a bank run from spreading across the system.
Moreover, the establishment of the DPS provides a consistent mechanism for resolving problem banks.
In summary, the DPS can help to meet the following objectives:
- reduce the probability of failure by reducing the risk of rumour-driven runs;
- provide an orderly means of compensating depositors if a bank failure does occur; and
- reduce the fall-out effects of a bank failure.