Alert September 17, 2013

FDIC Issues Final Rule Regarding Insured Deposits at Foreign Branches of U.S. Banks

The Board of Directors of the FDIC approved and the FDIC issued a final rule (the “Final Rule”) that excludes deposits in foreign branches of U.S. banks from the guarantee of FDIC insurance under the Federal Deposit Insurance Act (the “FDIA”), even if such deposits are expressly payable at both the foreign branch and at a branch of the bank in the U.S.  That is, the Final Rule clarifies that a deposit carried on the books and records of a foreign branch of a U.S. bank is not insured under the FDIA regardless of the location at which the deposit is payable.  The Final Rule is meant to protect the assets of the FDIC’s Deposit Insurance Fund by avoiding expansion of FDIC coverage to deposits overseas.  Currently under the FDIA, deposits in foreign branches of U.S. banks are not considered covered deposits unless the funds are also payable at a U.S branch.  In the Final Rule the FDIC states that the vast majority of deposit agreements that U.S. banks have with their foreign depositors do not make the deposits payable at both a foreign branch and a U.S. branch of the applicable bank.

The Final Rule provides that deposits held at foreign locations in Overseas Military Banking Facilities operated under regulations of the Department of Defense are covered by FDIC insurance.  Such deposits will continue to be FDIC insured because Overseas Military Banking Facilities are not deemed offices located outside of the U.S.

The Final Rule provides that a deposit in a foreign branch of a U.S. bank that is expressly payable at a U.S. branch of the bank, although the deposit is not FDIC insured, will be deemed a “deposit liability” for purposes of the 1993 national depositor preference statute, which gives priority to holders of a deposit liability, in the event of the applicable bank’s failure, over unsecured creditors (including depositors at a foreign branch whose deposit liabilities are not payable at a U.S. branch of the bank).

As explained in the release accompanying the Final Rule, the United Kingdom’s Prudential Regulation Authority (the “PRA”) has a pending proposal in which the PRA voices concern that U.K. depositors could be subordinated to foreign depositors (such as U.S. depositors) under certain depositor preference laws outside of the European Economic Area (“EEA”).  The PRA advocates a position in which depositors in U.K. branches of non-EEA banks would benefit from the same depositor preferences benefitting such bank’s depositors in its home country in the event of a non-U.K. bank’s failure (and U.S. banks would be prohibited from accepting deposits at their U.K. branches unless the U.S. depositor preference statute provided that U.K. depositors were no worse off under the depositor preference regime than U.S. depositors).  The PRA’s proposal, states the FDIC, “has made it more likely that large U.S. banks will change their U.K. foreign branch deposit agreements to make their U.K. deposits payable both in the United Kingdom and the United States.”  Should a U.S. bank make its foreign deposits dually payable, the foreign deposit would not be FDIC-insured, but would be treated as a deposit under the FDIA’s depositor preference provision and would be “on an equal footing with” U.S. non-insured deposits for purposes of depositor preference.

The Final Rule becomes effective on October 15, 2013.