UK and US bank supervisors have recently issued proposals to address the impact of US and other national depositor preference regimes on local depositors. This memorandum summarises these proposals and in particular discusses the impact on US (and other similarly placed) banks operating by way of branches in the UK.
National depositor preference regimes typically operate to prefer claims of depositors in the home country of a bank to claims of depositors of branches of the bank outside the home country. Such regimes present obstacles to the orderly and fair resolution of global financial institutions and the Financial Stability Board has called for them to be removed. Despite that, long standing national depositor preference regimes in some countries, for example, the United States, Australia, Singapore and Turkey, remain and are likely to continue. In September 2012 the UK FSA published proposals which would require banks to take steps to eliminate any subordination of UK branch depositors to home country depositors in the event of the bank’s insolvency. In the US, the Federal Deposit Insurance Corporation (“FDIC”), which is responsible for liquidating insolvent insured banks, is concerned that US banks, in response to the FSA proposals, will be compelled to cause UK branch deposits to be payable also by US offices, making them “deposits” for FDIC purposes. The result would be that UK branch deposits would be treated as preferred deposits in the US and insured by the FDIC. The FDIC has issued a proposal that would prevent such UK branch deposits from being treated as “insured deposits” whilst permitting such deposits to have preferred status.
The FDIC proposal appears to provide US banks with a solution that would satisfy the FSA’s proposed requirements. However, a US bank would still need to amend its terms and conditions with customers and may still be subject to notification and disclosure requirements under FSA rules. Otherwise, a bank will need either to subsidiarise its UK deposit-taking operations or ring-fence the UK branch assets effectively to eliminate the effects of any national depositor preference scheme of its home state on its UK branch depositors.
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