WASHINGTON — The Federal Deposit Insurance Corp. on Tuesday proposed clarifying the insurance status of foreign deposits in a bid to quell international pressure about how overseas customers are treated in a bank failure.
The proposal, aimed at solving concerns — especially in the United Kingdom — about the U.S. being a "depositor preference" regime, would make clear that foreign-branch deposits payable both in the U.S. and abroad do not enjoy the same FDIC guarantee afforded U.S. bank customers. The new rule is intended to open the door to banks making their foreign deposits dually payable, while also curbing additional financial risk to the FDIC.
"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 approved a 60-day comment period on the proposal.
The U.S. is among a handful of nations that place domestic depositors at a higher level than those in overseas branches in the line of uninsured claims paid by the FDIC receiverships. Yet both the Financial Stability Board and the U.K.'s Financial Services Authority have sought to discourage such preferential treatment. A recent FSA proposal would force U.S. banks to convert their U.K. branches into separate subsidiaries — a step opposed by the industry — if they do not put U.S. and foreign depositors on more equal footing.
But some large banks have concerns about the costs of converting deposit agreements to make them dually payable. (Customers in effect have access to funds around the world, but foreign-branch deposits of U.S. banks are now technically payable only in the country where the customer holds the account.)
Institutions would prefer the FDIC essentially reverse a 1994 legal opinion that would result in equal treatment of domestic and foreign deposits, while limiting the cost on banks. Yet FDIC officials say that move could lead to a expansion of the FDIC's basic guarantee for depositors throughout the globe.