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FDIC rule clarifies that deposits in foreign branches of U.S. banks are not insured

150px-US-FDIC-Logo.svgThe FDIC board of directors approved a proposed rule last week that clarifies that deposits in foreign branches of U.S. banks are not insured by the regulator.

Currently, under the Federal Deposit Insurance Act, deposits in foreign branches of U.S. banks are not considered deposits unless the money is payable in the U.S.

The move comes after a recent proposal by the U.K.’s Financial Services Authority that would ban banks from some nations, including the U.S., from operating in the U.K. unless depositors are given preference over creditors. The proposal will likely prompt U.S. banks to alter deposit agreements in order to make U.K. branch deposits payable to both the U.K. and U.S.

“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 the deposits payable to the United States, without triggering U.S. deposit insurance coverage or the restructuring of branches in subsidiaries,” FDIC Chairman Martin Gruenberg said.

The proposed rule will not affect deposits in overseas military banking institutions under Department of Defense regulations, and the funds will continue to be insured by the FDIC.

Deposits in foreign banks total approximately $1 trillion, and a significant portion of deposits is located in the U.K. While deposits in foreign branches will not be insured, they would “receive preferred status over general creditors should the bank fail and be placed in receivership,” according to The Hill.

The public will have 60 days to comment on the proposed rule after it is published in the Federal Register.

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