FDIC moves to clarify rules on foreign bank deposits

Federal regulators proposed a new rule Tuesday to make clear that deposits in foreign branches of American banks are not insured by the U.S.

The Federal Deposit Insurance Corporation’s (FDIC) measure seeks to protect the agency’s insurance fund from liability in the event of a bank failure, but would also clarify that depositors to foreign branches would get preferential treatment over creditors if calamity strikes. 

The action, approved by FDIC’s board of directors, follows a proposal put forth last year by United Kingdom’s Financial Services Authority (FSA) that would ban banks from some countries, including the United States, from operating branches there unless steps are taken to ensure depositors get preference over creditors in those situations. 

"Today's proposed regulation would allow U.S. banks with U.K. branches to exercise existing authority that would bring them into compliance with the FSA's proposal by making the deposits payable in the United States, without triggering U.S. deposit insurance coverage…" said FDIC Chairman Martin Gruenberg.

Currently, deposits in foreign banks total roughly $1 trillion, with a significant portion of that money in the United Kingdom, according to the FDIC.

While they would not be insured by the U.S., deposits in foreign branches would “receive preferred status over general creditors should the bank fail and be placed in receivership, although the deposits in the foreign branches would not receive FDIC deposit insurance,” the proposed rule states.

The rule would not affect deposits in overseas military banking facilities governed by regulations of the Department of Defense.

The public will have 60 days to comment on the rule once it is published in the Federal Register.