FDIC Advances Rule to Keep Deposit Insurance Within U.S.

U.S. banks would have to restructure how they handle deposits in their U.K. branches under a rule proposed by the Federal Deposit Insurance Corp. in answer to a U.K. regulatory push for more depositor protections.

U.S. bank branches in the U.K. may have to make deposits payable in both jurisdictions to avoid running afoul of U.K. expectations that depositors there be put on even ground with those in the U.S. if the bank fails. The rule proposed today by the unanimous FDIC board clarifies how that would work while insisting its deposit-insurance fund stay walled off to non-U.S. deposits.

The U.K.’s Financial Services Authority has been trying to ensure depositors to non-U.K. bank branches are treated similarly to those in the institutions’ home countries during bank liquidations. The FDIC proposal is meant to align with those changes while guaranteeing the FSA’s eventual requirements don’t result in the FDIC insuring deposits there.

“Today’s proposed regulation would allow U.S. banks with U.K. branches to exercise existing authority that would bring them into compliance with the FSA’s proposal by making deposits payable in the United States, without triggering U.S. deposit insurance coverage,” said FDIC Chairman Martin Gruenberg.

The FDIC’s proposal says depositors at overseas branches of U.S. banks, typically large corporations rather than retail customers, could be granted so-called depositor preference if the deposits were also payable in the U.S. In case of a bank failure, that would put the uninsured depositors in line ahead of general creditors.

Changing Agreements

“If the FDIC addresses only whether a deposit is insured or not, it doesn’t seem to be addressing the underlying issue,” said Michael Krimminger, a former FDIC general counsel who left the agency last year to work for Cleary Gottlieb Steen & Hamilton LLP in Washington.

He said his U.S. banking clients would have preferred that the regulator eliminate discrepancies with U.K. protections by simply granting depositor preference to the deposits in their overseas branches without requiring that they also be payable in the U.S. The FDIC instead focused on protecting its insurance fund and forcing banks to change their deposit agreements, Krimminger said.

The FDIC’s vote opened the rule for a 60-day public comment period before it is presented to the board for a final approval.

The FSA’s rulemaking process is also continuing, and Arthur Murton, director of the FDIC’s insurance and research division, told the board that U.K. regulators have been receptive to the U.S. proposal.

Before it's here, it's on the Bloomberg Terminal.