U.S. regulators propose clarifying deposit insurance rules

WASHINGTON Tue Feb 12, 2013 11:12am EST

WASHINGTON (Reuters) - U.S. bank regulators proposed rules on Tuesday clarifying that deposits in foreign branches of U.S. banks are not eligible for U.S. deposit insurance, in an effort to resolve confusion over recent proposals from financial officials in the United Kingdom.

The directors of the Federal Deposit Insurance Corp voted unanimously to propose the clarification.

The confusion stems from laws in some countries, including the United States, that give depositors preference over general creditors when a bank fails. In the United States, foreign deposits have not historically fallen under that definition.

The UK'S Financial Services Authority last year proposed requiring non-European banks to ensure that UK depositors would be treated no worse than domestic depositors if the bank failed, or else to stop accepting deposits at their UK branches.

The FSA said banks could change deposit agreements so that deposits in UK branches of U.S. banks would be payable in both countries or restructure branches into subsidiaries.

The U.S. FDIC rule would clarify that deposits in foreign branches of U.S. banks do not qualify for deposit insurance but that they would count as deposits for purposes of preference over general creditors if the bank failed, FDIC staff said.

Under the change, if a U.S. bank failed, UK depositors, like U.S. depositors, would have preference in getting back their money before other creditors.

"The proposed rule would protect the deposit insurance fund, while at the same time recognizing both the FDIC's commitment to its mission of maintaining financial stability through the prompt payment of deposit insurance and the evolving nature of the global banking system," FDIC Chairman Martin Gruenberg said.

Industry groups will have 60 days to comment on the proposed rule.

(Reporting By Emily Stephenson; Editing by Kenneth Barry)

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