September 10, 2013 / 2:41 PM / 6 years ago

U.S. FDIC says foreign deposits not eligible for deposit insurance

WASHINGTON (Reuters) - U.S. bank regulators said Tuesday deposits in foreign branches of U.S. banks are not covered by U.S. deposit insurance, clearing up confusion over new rules in Britain.

In some countries, including the United States, individuals with bank deposits have preference over general creditors when a bank fails. In the United States, foreign deposits have not received preferred treatment.

In 2012, Britain’s Financial Services Authority called for British depositors in the U.S. and other non-European banks to be treated no worse than domestic depositors in the event of a bank failure.

The U.S. Federal Deposit Insurance Corp (FDIC) clarified on Tuesday that while foreign depositors in U.S. banks could have the same preference over other creditors that U.S. depositors receive, deposits in foreign branches would not qualify for U.S. deposit insurance.

“The final rule protects the deposit insurance fund, while at the same time recognizing both the FDIC’s commitment to maintaining financial stability through the prompt payment of deposit insurance and the evolving nature of the global banking system,” FDIC Chairman Martin Gruenberg said.

The confusion centered around the British recommendation that banks comply by making deposits “dually payable,” or payable both in Britain and the U.S. Other options, including replacing British branches with subsidiaries, were less appealing to U.S. banks.

U.S. regulators sought to clarify that even if banks changed contracts to ensure British deposits were payable in the United States, those deposits would not be eligible for deposit insurance here.

FDIC officials said U.S. banks hold about $1 trillion in foreign-branch deposits, about 40 percent of which is in the UK.

The FDIC proposed similar language in February and finalized it on Tuesday. Banks did not object to the proposed change but warned they could face litigation risks if they made foreign deposits payable in the United States, FDIC officials said.

Reporting by Emily Stephenson; Editing by Bernadette Baum

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