FDIC Approves Proposed Rule on the Definition of Insured Deposit at Foreign Branches of U.S. Banks - Rule Would Clarify That These Deposits Are Not Insured by the FDIC
Commentary by Scott Cammarn
The FDIC approved a notice of proposed rulemaking which would clarify that, although deposits in foreign branches of U.S. banks can be "deposits" for purposes of the national depositor preference statute (entitling depositors to priority over unsecured creditors in a liquidation), they are not FDIC-insured. Currently, funds deposited in foreign branches of U.S. banks are not considered "deposits" unless the funds are expressly payable in the U.S. Under the proposal, deposits that are carried on the books and records of a foreign branch of a U.S. bank may be considered "deposits" for purposes of the depositor preference statute, but will not be deemed "deposits" for purposes of FDIC insurance coverage.
The FDIC proposal is in response to a recent decision by the United Kingdom's Financial Services Authority relating to the effect of national depositor preference laws, which makes it likely that large U.S. banks will change their deposit agreements to make their U.K. branch deposits payable in both the U.K. and the U.S.
Comments Due: Written comments on the proposed rule must be received by the FDIC not later than [Insert date 6f0 days after publication in the Federal Register].
Cross-Reference(s): Dodd-Frank Section 331 ("Deposit insurance reforms").
See: Proposed Rule on the Definition of Insured Deposit. See also: Fact Sheet.
Commentary
The FDIC proposal would eliminate the FDIC's longstanding bright-line test, i.e., that a deposit which is expressly payable from a domestic branch is a "deposit" for FDIC insurance purposes, while a deposit which is solely payable from a non-domestic branch is not a "deposit" for FDIC insurance purposes. Instead, FDIC insurance coverage would be determined based on whether the deposit is "carried on the books and records of" a non-domestic branch. By eliminating the simple bright-line test that is based on the express terms of the deposit agreement, and instead adopting a books-and-records standard, a depositor may be unable to independently verify the FDIC insurance coverage of a deposit that is dually payable at multiple branches.
Moreover, the proposed change may have adverse consequences in the long term. The stated reason for the change is to deny FDIC insurance coverage to a trillion dollars of deposits held in U.K. branches of U.S. banks which are soon expected to become dually payable -- and thus to protect the solvency of the Fund in the short run. Nonetheless, it is important to recognize that the proposed changes will not reduce systemic risk.
These changes will make it much more difficult to manage a failing bank or to resolve a bank once it has failed. By encouraging the creation of the deposits jointly payable at multinational locations, the UK and FDIC proposals actually increase uncertainty about depositor rights in the event of insolvency and the likelihood of deposit runs, encourage authorities to seize bank assets within their respective jurisdictions, and reduce the likelihood of an orderly liquidation of a multinational bank.