FDIC Weighs Rule Change for U.S. Bank Branches in U.K.
By Jesse Hamilton - Sep 10, 2013 12:01 AM ET
The Federal Deposit Insurance Corp. is set to adopt a rule today responding to concerns that commercial depositors in the U.K. branches of U.S. banks could be disadvantaged in the event of a lender’s collapse.
U.K. regulators had expressed concern that domestic depositors to U.S. banks were favored over foreign-based account holders. In response, the FDIC proposed in February that overseas branches of the U.S. companies make deposits payable in either country, giving them greater protection if a bank fails.
One of the FDIC’s chief concerns was writing a rule that walls off its deposit-insurance fund from non-U.S. deposits, so the proposal maintained a clear barrier. The agency’s board will vote on the final version of the rule today.
The change, a revision to the agency’s definition of “insured deposit,” would mean the overseas deposits of large, corporate customers would also be payable in the U.S. That would put the foreign depositors who aren’t covered by FDIC insurance in line ahead of general creditors in a liquidation.
In a joint letter to the agency in April, officials from Bank of New York Mellon Corp., Northern Trust Corp. (NTRS) and State Street Corp. (STT) argued that instead of forcing banks to make the deposits dually payable, the FDIC could just give the same treatment to all global deposits of a bank without extending government insurance protection — an effort they acknowledged could require more rulemaking.
“Dual payability is not an optimal way to treat custody depositors and our customers have not asked to have their deposits made dually payable,” the banks said in the letter.
FDIC Chairman Martin Gruenberg said in February that the proposed rule would bring U.S. banks into compliance in the U.K. without requiring the institutions to turn their branches into subsidiaries.
Restructuring foreign-branch deposit agreements and making operational changes will be “an administratively challenging and costly process,” according to a letter from the Clearing House Association LLC, a New York-based trade group that represents large U.S. banks including JPMorgan Chase & Co. (JPM) and Bank of America Corp. “Because of the negative consequences to U.S. banks that result from dually payable deposits, U.S. banks are likely to make their foreign branch deposits dually payable only when forced to do so by a foreign regulator.”
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