Deposits at foreign banks, including branches of U.S. institutions, are not entitled to government insurance according to a final rule approved by the Board of Directors of the Federal Deposit Insurance Corporation on Tuesday.

Deposits held at foreign branches of U.S. banks have doubled since 2001 and now total nearly $1 trillion, according to the FDIC. In many cases these branches do not engage in retail deposit taking or other retail banking services. Instead, their depositors include large businesses that choose to bank in a foreign branch of a U.S. bank under deposit agreements, governed by foreign law, to take advantage of a large bank's multinational branch network, which allows the transfer of funds to and from branch offices located in different countries and time zones.

Currently, under the Federal Deposit Insurance Act, funds deposited in foreign branches of U.S. banks are not considered deposits, unless they are dually payable in the U.S. However, the “overwhelming majority” of the foreign branch deposits of U.S. banks are payable only outside of the U.S., according to the FDIC. In the past, making deposits in foreign branches dually payable would have been costly to U.S. banks for several reasons, including increasing the institution's deposit insurance assessment base and regulatory requirements imposed by the Federal Reserve.

Those issues, however, have recently become less problematic. With the Dodd-Frank Act, Congress changed the deposit insurance assessment base so that it now, in effect, covers all liabilities, including foreign branch deposits. The Federal Reserve also now allows more flexibility regarding the reserves banks are required to hold against their deposit liabilities and it pays interest on those funds.

Overseas developments are also changing the landscape. A recent Consultation Paper by the UK's Prudential Regulation Authority (PRA), formerly the Financial Services Authority, proposes that banks from non-European Economic Area countries that have depositor preference laws be prohibited from accepting deposits at their U.K. branches, unless the banks take steps to ensure that UK depositors are no worse off under depositor preference laws than the depositors in the home country if the bank fails.

The PRA paper mentions that such efforts could include changing deposit account agreements to make U.K. branch deposits dually payable in the United States. As a result, some large U.S. banks are expected to change their deposit agreements to make U.K. branch deposits payable in both the UK and the U.S. to provide depositor preference to U.K. branch deposits. The final rule adopted by the FDIC clarifies that these U.K. branch deposits are not FIDC insured.

The final rule does not affect FDIC insurance for deposits in overseas military banking facilities that are governed by regulations of the Department of Defense.

The FDIC insures deposits, up to $250,000, 6,940 banks and savings associations.

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