WASHINGTON — 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.
The new proposal amounts to a green light for banks to allow withdrawals by a foreign depositor both at an overseas branch and on U.S. soil where the bank is headquartered. Such "dual pay" accounts would undo a policy — opposed in the U.K. — that requires the FDIC to favor domestic depositors over foreign ones in the payment of failure claims above the standard U.S. deposit insurance limit.
Specifically, the rule would make clear that foreign-branch deposits payable both abroad and in the U.S. do not enjoy the agency's standard $250,000 guarantee for U.S. customers.
"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 at a meeting of the FDIC's board of directors, which unanimously issued the proposal with a 60-day comment period.
Officials who briefed the FDIC board on the plan said banks could potentially switch to dual pay accounts without any action from the agency. But that would expose the DIF to a large expansion of its coverage.
"Absent this rulemaking, the DIF faces potential liability that could be global in scope," said Ruth Amberg, a senior counsel for the FDIC.
At issue is the "depositor preference" status of U.S. banks. In September, the U.K.'s Financial Services Authority proposed that banks with such statutes from their home countries must convert British branches into separate subsidiaries to allow U.K. authorities potentially to use assets from the failed bank to pay its citizens with accounts there.
But banks sharply oppose "subsidiarization", which would also complicate the FDIC's creation of a streamlined facility to resolve globally-connected behemoths.
Dual-pay deposit accounts, however, are seen as a more manageable solution. Such accounts — which are rare today — would result in domestic and foreign depositors from failed banks being on an even playing field in the FDIC's payment of uninsured claims.
Yet while banks want to avoid having to establish separate subsidiaries, they also view dual pay accounts as an unappealing option, arguing they will lead to undue expenses.
"More time is needed to develop a system that addresses the FDIC and U.K. banking regulators' concerns while posing fewer operational burdens for U.S. financial institutions," said Frank Keating, the president of the American Bankers Association, in a statement.
A separate proposal by three law firms representing large banks urges the FDIC to reconsider a 1994 legal opinion interpreting the U.S. statute as excluding deposits payable "solely at a foreign branch" from "depositor preference" treatment. They argue that would eliminate the need for banks to establish "dual-pay" accounts, and still limit FDIC guarantees only to domestic depositors.
"If they were to simply revisit that interpretation and conclude that deposit liability does in fact include foreign deposits, then it would eliminate pressure on the deposit insurance system and make sure there was no further tension with foreign regulators over depositor preference," said Michael Krimminger, a former FDIC general counsel and now a partner at Cleary Gottlieb Steen & Hamilton LLP. (The other two law firms are Davis Polk & Wardwell LLP, and Sullivan & Cromwell LLP.)
But that option, officials say, could still increase risk to the DIF. "The deposit liability approach in and of itself does not address our concern about possibly having insured deposits abroad," said one FDIC official, who spoke on the condition of anonymity.
The FDIC said it would review comments from the public on any potential alternatives to the proposal. The agency sought specific comment on an alternative idea to allow account structures providing FDIC insurance to foreign depositors as long as the bank pledged collateral in return for the FDIC coverage. The proposal also put forth a specific exemption that would explicitly grant deposit insurance to customers of "overseas military banking facilities" subject to Department of Defense regulations.
At the board meeting, officials indicated that the FSA has reacted positively to the FDIC proposal.
"We have had some discussions with them on this. I think they were generally supportive of the approach that we were taking," said Arthur Murton, the director of the FDIC's insurance and research division. "They suggested that they could adjust the timing of their implementation to accommodate our process."