The provision of efficient and sound mechanisms to protect depositor’s funds, protect safeguard banks from faltering, and maintain the financial stability of the banking system are essential, given the critical role banks play in impacting the macro-economy. Therefore, bank’s capacity to operate efficiently within an economy depends on the extent to which they meet their financial obligations, and thus earn depositors’ confidence and increased placement.

The failure of a bank and its inability to meet the claims of depositors may threaten financial stability and become ominous of an acute financial crisis within the banking system leading to a decline in public confidence in the performance of the entire banking system. To avoid such a crisis, state authorities establish a “deposit insurance system” to serve as a major component of an effective financial safety net to counter future crises facing the banks. The need for such a system increases with the rising transition towards the open-door economy model, and the globalisation of banking as banks started to accept deposits and offer services across borders. As a result, a financial crisis could become contagious and spread from one country to the other.

A “deposit insurance system” is a mechanism established by governments through laws and regulations and intended to protect depositors these (particularly with small accounts) against the loss of their deposits in case of a bank failure, thereby safeguarding the financial stability of the banking system as a whole and promoting savings and economic growth.

Upon publication of the PMA decision to liquidate a member bank, the PDIC becomes legally responsible for reimbursing insured depositors with that bank. The PDIC is obliged to compensate depositors in accordance with the specified coverage ceiling. The coverage ceiling for each depositor is calculated on all of his/her deposits combined, including interest accrued and benefits earned, on the date of publication of the liquidation decision of the member bank in the Palestinian Gazette.

Pursuant to the Presidential Decree-Law No. (7) Of 2013, PDIC is the sole liquidator of a failing bank following the issuance of a liquidation decision by the Palestine Monetary Authority.

PDIC shall have the authority to take all legal measures necessary to safeguard the bank’s rights, and conclude the liquidation proceedings. PDIC shall replace depositors, to the extent it will reimburse them, and the reimbursed amounts shall be registered as debts owed to PDIC by the liquidated bank. PDIC shall maintain the right to recover the payout on insured deposits prior to all other shareholders and creditors.

PDIC has full power to take necessary measures to: terminate a bank’s operations, settle bank’s debts, collect its dues and take all necessary measures aimed at: recovering its rights and conducting an inventory of its accounts. Subsequently disposing of the bank’s movable and non-movable assets or part thereof, or take any other action or measure required to conclude the liquidation proceedings in order to pay back depositors and settle its debts.

The PDIC will exert every effort to reinforce its reserves to ensure the protection of depositors’ rights with member banks. Hence, it should establish reserves amounting to no less than 3% of total deposits subject to the provisions of its Law. The reserves include membership fees collected from member banks on quarterly basis, returns on investments and other returns after deducting all expenses.