LONDON, March 22 (Reuters) - Depositors in the British arms of Cypriot banks could be treated differently in the event Nicosia is unable to agree a debt bailout, because of the way they are structured.
Cyprus Popular Bank, also known as Laiki Bank and the island's second biggest lender, operates as a branch in Britain. If the parent bank hits trouble, its UK savers would be dependent on a guarantee backed by the government in Nicosia.
Its bigger rival Bank of Cyprus operates as a subsidiary in Britain, which means its depositors automatically receive a UK government guarantee for balances they hold up to 85,000 pounds ($129,000).
Laiki Bank UK said its savers had the same level of protection as those in Britain, under the EU's requirement that deposits are guaranteed up to 100,000 euros ($129,300).
But that guarantee is provided by the home state, not Britain.
Savers at Laiki UK branches are able to withdraw money and were operating as usual, several branch managers and officials contacted by Reuters said.
"It is business as usual. There are very, very low levels of withdrawals and we are sitting on a sea of cash," Ruth Harvey, a member of Laiki Bank UK's management team, told Reuters. "We're obviously watching events in Cyprus, but it's very much a case of keep calm and carry on."
Laiki Bank UK has about 13,000 depositors in Britain and operates four branches, offering both private banking and corporate banking.
Britain's financial watchdog has been keen for arms of overseas banks to set up as subsidiaries, rather than branches, following a row over who would reimburse Icesave customers when its Icelandic parent Landsbanki collapsed in 2008.
Since the financial crisis the Financial Services Authority (FSA) has limited the number of branches it has allowed. Regulators in the United States and elsewhere are also introducing stricter rules to ensure local operations of foreign banks have enough capital and liquidity.
Subsidiaries are regulated in the same way as a local bank, but branches are extensions of the parent group and are mainly regulated by the home authority.
As a subsidiary, Bank of Cyprus UK is protected by the UK's Financial Services Compensation Scheme. It has about 50,000 deposit accounts and said on Friday it had experienced "positive levels of deposit retention and investment".
The ruling party in Cyprus said on Friday it was close to a deal to raise billions of euros that could avert financial meltdown and an exit from the euro.
One of the proposals being considered includes splitting Cyprus Popular Bank into good and bad assets.
The crisis erupted last weekend when Cyprus said it would tax all deposits, prompting concern among Cypriots in Britain about savings in their homeland.
The proposed levy on deposits would not have affected deposits held with overseas branches, so savers at Laiki Bank UK or Bank of Cyprus UK would not have to pay the levy.