U.S. Deposit Insurance Not a Free-for-All

U.S. Deposit Insurance Not a Free-for-All

Who said it? “We had a bad banking situation. Some of our bankers had shown themselves either incompetent or dishonest in their handling of the people’s funds. They had used the money entrusted to them in speculations and unwise loans. This was of course not true in the vast majority of our banks but it was true in enough of them to shock the people for a time into a sense of insecurity and to put them into a frame of mind where they did not differentiate, but seemed to assume that the acts of a comparative few had tainted them all.”

President Bush? President Obama? Fed Chairman Bernanke? Alan Greenspan? None of the above. These were words uttered by President Franklin D. Roosevelt on March 12, 1933 shortly before the establishment  of the FDIC.

Since the establishment of the FDIC, there has been a definite distinction between domestic and foreign deposits.

Foreign deposits (deposits at foreign branches of U.S. banks)  were not considered deposits at all for purposes of the FDIC, except under certain and rare circumstances. Banks were not assessed an insurance premium for these deposits, nor were they guaranteed by the FDIC like domestic deposits.

Dodd-Frank has changed part of that equation so that banks are now assessed on all liabilities, including foreign deposits, but it did not extend deposit insurance coverage to them.

This distinction is important as a Consultation Paper in the United Kingdom recently proposed that non—European banks that have depositor preference laws (as we do) be prohibited from accepting deposits at their U.K. branches.

In our opinion, insuring foreign deposits was not the intent of FDIC insurance coverage. A Final Rule just issued by the FDIC on the subject agrees. FDIC insurance is intended to maintain public confidence in our nation’s financial system. In order to do that effectively, it must, above all else, protect the Deposit Insurance Fund (DIF).

This ruling could garner an adverse reaction by U.K. authorities. But foreign branch deposits have doubled in the past twelve years and now total  approximately $1 trillion. If we allow those in the U.K. to be insured, what would prevent other countries/regions from demanding the same? An additional $1 trillion of insured deposits would undermine both of FDIC’s mandates: promoting consumer confidence in the U.S. banking system and protecting the Deposit Insurance Fund.

Currently 94 U.S. banks have foreign offices. Many of these offices don’t handle retail deposits or retail banking at all. Their purpose is to provide services to multinational companies. Deposit insurance coverage doesn’t matter nearly as much to them as having a large institution that caters to their needs. If the banks are no longer allowed to take those corporate deposits, that’s another story. Total assets of those banks is $10.3 trillion—just 10 times more than the uninsured foreign deposit dollar amount. We don’t know how much of the $1 trillion in deposits is in the United Kingdom, but we can say with certitude that FDR and his Congress established the FDIC for U.S. citizens to have confidence it their banking system to protect our interests here at home, not to give deposit insurance protection the world over.

And, that’s what the Final rule states, with unusual clarity we might add: “Deposits in branches of U.S. banks located outside the United States are not FDIC-Insured deposits.”

“The final rule protects the Deposit Insurance Fund, while at the same time recognizing both the FDIC’s commitment to maintaining financial stability through the prompt payment of deposit insurance and the evolving nature of the global banking system,” said FDIC Chairman Martin J. Gruenberg.

Note: The Final Rule does not apply to deposits at U.S. military facilities in foreign countries. They continue to be insured as they have been.