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From Banking and Finance Law Daily, September 10, 2013

FDIC adopts rule on deposits in foreign branches

By Andrew A. Turner, J.D.

In order to protect the Deposit Insurance Fund against the liability that it would otherwise face as a potential global deposit insurer, the Federal Deposit Insurance Corporation has adopted a rule under which deposits in foreign branches of U.S. banks would not be covered by deposit insurance. The amendment clarifies that foreign branch deposits are not insured deposits, regardless of the location at which the deposit is payable. The amendment takes effect 30 days after publication in the Federal Register.

The FDIC, with a supporting staff memorandum, noted that a pending proposal by the United Kingdom’s Financial Services Authority has made it likely that large U.S. banks will change their U.K. foreign branch deposit agreements to make their U.K. branch deposits payable in both the United Kingdom and the United States. If these types of deposits were treated as insured, this could expose the DIF to expanded deposit insurance liability and created operational complexities.

Deposit liability. Some commenters suggested that the FDIC formally interpret “deposit liability” for purpose of the depositor preferences regime in the Federal Deposit Insurance Act to include all deposits of a U.S. bank, wherever payable. However, this proposed alternative would contradict General Counsel Advisory Opinion 94-1, which raised the question whether the term deposit liability would include deposit obligations payable solely at a foreign branch of a U.S. bank. Under the interpretation set forth in the 1994 Advisory Opinion, an obligation in a foreign branch of a U.S. bank has not been considered a deposit liability for purposes of the national depositor preference provisions. The FDIC concluded that the interpretation of deposit liability suggested by the commenters was inconsistent with statutory language and refused to overturn the 1994 Advisory Opinion.

Dual payability. The amendment would not affect the ability of a U.S. bank to make a foreign deposit dually payable. Should a bank do so, its foreign branch deposits would be treated as deposit liabilities under the depository preference regime in the same way as, and on an equal footing with, domestic uninsured deposits.

Overseas Military Banking Facilities. The amendment does not affect the operation of Overseas Military Banking Facilities operated under Department of Defense regulations or similar facilities authorized under federal statute.

RegulatoryActivity: BankingOperations DepositInsurance

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