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With its new depositor preference proposal, the FDIC decided to skip over the current problem and fix one that doesn't exist yet. Its solution places more burden on banks, but may save the agency from eventually insuring foreign deposits.
March 1 -
The Federal Deposit Insurance Corp. proposed steps Tuesday that could open the door to U.S. banks satisfying a United Kingdom mandate to treat foreign and domestic depositors more equitably.
February 12 -
The FDIC is expected to shortly unveil a clarification concerning deposits at overseas branches in an effort to resolve an ongoing issue between the U.S. and the U.K.
February 7
WASHINGTON The Federal Deposit Insurance Corp. resisted big-bank pressure to overhaul a rule, issued Tuesday, that clarified that U.S. bank deposits held in a foreign branch do not receive FDIC insurance, even if they can be withdrawn in the U.S.
The agency's decision has implications for how large FDIC-insured banks handle complaints by overseas governments, including the United Kingdom, that U.S. policy puts domestic depositors ahead of foreign ones in payouts of uninsured failure claims.
At issue is a 2012 proposal by the U.K.'s Prudential Regulation Authority that was designed to combat "depositor preference" regimes by forcing banks based in the U.S. to take steps ensuring more equal treatment of their U.K.-based depositors. The proposal gave banks numerous options, including converting branches to U.K.-regulated subsidiaries a step the industry strongly opposes or allowing foreign deposits to be payable in the U.S.
In its rule on Tuesday, the FDIC said if banks establish such "dual-pay"accounts, they will not receive deposit insurance. The agency is trying to ensure it does not expand its insurance guarantee to back foreign customers.
"Today's final rule allows U.S. banks with U.K. branches to exercise existing statutory authority that would bring them into compliance with the [U.K.] proposal by making the deposits dually payable in the United States, and thus subject to depositor preference, without triggering U.S. deposit insurance coverage," FDIC Chairman Martin Gruenberg said at Tuesday's meeting of the agency's board.
The issue of depositor preference regimes applies primarily to commercial deposits and those that would exceed standard deposit-insurance account limits. (It does not apply to deposits at certain military bank facilities overseas, which are regulated by the Department of Defense and would continue to receive deposit insurance.)
To date, U.S. banks while allowed to offer dual-pay accounts have largely avoided setting them up for foreign-branch customers because of costs and other issues associated with establishing them.
FDIC officials said the agency is not directly advocating for a specific approach banks should take to comply with the pending U.K. regulation.
"It is important to note that this measure does not compel or mandate financial institutions to take any action," said Jeremiah Norton, an independent director on the FDIC board, at the meeting. "However, in the event that financial institutions elect to offer foreign-based depositors dually payable contracts," he added, the rule would "preclude deposit insurance to such instruments."
Yet U.S. bank industry advocates have said the FDIC move represents implicit support for offering dual-pay accounts. Large banks had urged the FDIC to address the issue by reinterpreting a 1993 statute with a ruling that effectively says deposits payable only at a foreign branch do not fall under the "depositor preference" policy. Such a reinterpretation, they had argued, would remove any need by institutions to start offering foreign accounts that are also payable in the U.S., which would in turn prevent added risk to the Deposit Insurance Fund.
"Because of the substantial disadvantages of the dual payability approach for U.S. banks, they are likely only to convert deposits to be dually payable on a jurisdiction-by-jurisdiction basis and only when required to do so by a specific jurisdiction or market practice," wrote John Court, managing director and senior associate general counsel for the Clearing House Association, in an April 22 comment letter to the FDIC. "Even if the PRA were prepared to recognize dual payability as a sufficient mechanism to eliminate foreign branch deposit subordination, other jurisdictions may not be or may impose significant obstacles to making deposits dually payable."
But FDIC officials said the alternative plan favored by the industry could run afoul of federal law.
"After careful consideration the ultimate conclusion reached was that that interpretation was not consistent with the language of the Federal Deposit Insurance Act," Gruenberg said. "Thus, we are proceeding with the rule as originally proposed."
But industry representatives did not back down in responding to the final rule Tuesday, saying the agency still needed to make changes.
"We are still evaluating the consequences of the FDIC's decision today, but it is fair to say that the FDIC did not directly resolve the issue of deposits located in foreign branches of U.S. insured banks," said Michael Krimminger, a former general counsel for the agency who is now a private banking attorney at Cleary Gottlieb Steen & Hamilton.
He added that the rule "placed the burdens for addressing issues created by U.S. depositor preference in foreign jurisdictions solely on the banks when an alternative interpretation of the FDI Act could have resolved the issue once and for all."
