What is the primary purpose of deposit insurance?

The primary purpose of deposit insurance is to protect depositors' money in the case of bank failures. This insurance mechanism ensures that even if a bank becomes insolvent and is unable to return depositors' funds, the government or an equivalent insurance organization will compensate the affected individuals up to a specified limit. This protection serves to maintain public confidence in the banking system by assuring individuals that their savings are secure, thereby encouraging financial stability within the economy.

While encouraging more savings accounts might be a consequence of deposit insurance, it is not its primary purpose. Similarly, deposit insurance does not directly influence interest rates on savings accounts, nor does it guarantee loans provided by banks; its scope is focused solely on safeguarding depositors' funds.