WASHINGTON — The Federal Deposit Insurance Corp. is about to take another look at a decades-old policy that many say discriminates against foreign depositors of U.S. banks.

As a result of 1993 budget legislation, the U.S. practices so-called "depositor preference", a policy held by just a handful of nations that essentially put a bank's domestic depositors in a better class than those in overseas branches when receiving payouts after a bank failure.

But the policy, which affects large commercial depositors more than retail customers, has caused friction with other countries, particularly the United Kingdom. Amid efforts by international regulators to coordinate post-crisis, and fears the U.K. could penalize U.S. banks over opposition to depositor preference, the FDIC is expected to propose steps putting U.S. and foreign-branch depositors on more equal footing.

"The FDIC may be trying to come up with a way to satisfy everybody. I don't know what that solution would be, but that could very well be what they're talking about," said Bradley Sabel, a partner at Shearman & Sterling LLP.

The FDIC is expected to address the issue in a proposal to be considered by the agency's board of directors at a meeting on Tuesday. The details are likely to be technical, but industry insiders say the agency has numerous options.

Some say the most likely route involves steps that effectively treat foreign and U.S. deposits similarly in the payment of uninsured claims after a failure, but does not go as far as giving foreign depositors the same guarantee of up to $250,000 enjoyed by domestic depositors.

"It's very clear that that is what they're planning to do at this point," said Michael Krimminger, a former FDIC general counsel and now a partner at Cleary Gottlieb Steen & Hamilton LLP.

Such a plan would help U.S. banks steer clear of a U.K. proposal — seen by the industry as the worst-case scenario — that would force them to convert their British branches into more distinct subsidiaries. That extreme step could also complicate the FDIC's ongoing construction of a new resolution regime for globally-connected U.S. firms.

The FDIC's potential solution would result in a "dual-pay" structure for foreign-branch deposits of U.S. banks. Under that option, deposit accounts would become payable both domestically and abroad. (Technically, under the current system if a depositor places funds in a foreign branch of a U.S. bank, the institution is not obligated to pay those funds inside the U.S. Practically speaking, however, a customer would still have access to those funds throughout the world.)

Still, the dual-pay option is not ideal since it would impose new costs on banks.

Dual pay is "the best worst option," said Denyette DePierro, a senior counsel at the American Bankers Association. "Both subsidiarization or dual pay would place all of the burden and cost of fixing this international regulatory issue on the industry."

Banks would prefer the FDIC essentially reverse a 1994 legal opinion that said U.S. depositor preference did not apply to "obligations payable solely at a foreign branch."

Krimminger said the FDIC could simply alter the opinion if it wanted to.

"There would be no negative consequences. … The FDIC has clear authority to make such an interpretation under its receivership rules," he said.

The 1993 statute, part of an "omnibus" budget bill, grew out of a belief that national depositor preference would help the FDIC limit costs from failed banks. But it had other consequences.

"It's been a real irritant in U.S. regulatory interaction with foreign regulators ever since," Krimminger said.

And the issue seems to have come to a head recently. A 2011 paper by the Financial Stability Board outlining steps for developing "effective resolution regimes" said nations should end practices that lead to unequal treatment. "National laws and regulations should not discriminate against creditors on the basis of their nationality, the location of their claim or the jurisdiction where it is payable," the FSB said.

Sharper disapproval came in a September proposal by the U.K.'s Financial Services Authority. The FSA's "consultation paper", which appeared to target the U.S., proposed requiring foreign-owned banks based in "depositor preference" countries to convert their U.K. branches into separate subsidiaries, which would give U.K. authorities easier access to assets in a failed institution to help pay off their citizens.

"Despite such calls for the removal of national depositor preference laws there has been little evidence that countries that operate such regimes have made any attempt to change or amend their existing laws or that any change is envisaged," the FSA said.

Observers say the deposit insurance scheme in the U.K. affords customers of foreign-owned branches the same basic guarantees enjoyed by customers of British-owned banks. (The non-governmental, industry-funded Financial Services Compensation Scheme covers different amounts for various account categories, but most depositors are protected up to £85,000.)

But without access to holdings in the branch of a failed U.S. bank, the U.K. is hampered in efforts to satisfy claims of uninsured depositors should the institution fail. In the FDIC resolution, those depositors would be in a lower creditor class compared to U.S. customers.

"Unlike in the U.S., the U.K. does insure local branches of foreign-owned banks. But then the question is: What about the uninsured depositors?" said Sabel. "There would likely be less left for them in a resolution because the U.K doesn't currently have ring-fencing of the branch. Effectively, all of those people would have to wait for the FDIC liquidator to pay them whatever cents on the dollar they can get."

Christopher Bates, the head of the London financial regulation practice at Clifford Chance, said negative effects of the FSA proposal could be curtailed by clear U.S. statements indicating plans to treat uninsured depositors of the two countries equally.

"There are many ways of solving the issue. The simple one is: nondiscriminatory systems," he said. "There may be other ways of addressing the issue, which people will be putting forward in their responses to the consultation [paper]. Obviously the most direct way is for it to be resolved through the U.S. authorities communicating with the UK authorities that can provide appropriate assurance."

Some observers said preventing the conversion of U.S.-owned branches to subsidiaries in the U.K. would also avoid a potential snag in the FDIC's development of a new facility under the Dodd-Frank Act to resolve systemically-important companies. The FDIC and Bank of England lately have been united in harmonizing their resolution approaches. In December, Bank of England Deputy Governor Paul Tucker told an FDIC advisory committee that the U.K. would not interfere in resolutions of U.S.-owned entities.

But Krimminger said the establishment of U.S.-owned subsidiaries around the world — instead of branches — in response to depositor preference rules could mean more involvement of foreign jurisdictions in wind-downs the FDIC was trying to manage.

"It would end up creating more of a balkanized structure," he said.

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