Foreign Deposits

Foreign deposits are deposits made at, or money put into, domestic banks outside the United States. These deposits are not subject to deposit insurance premiums (a premium paid to ensure that funds can be retrieved if the debtor cannot repay the deposit), or reserve requirements (the amount of funds an institution must hold relative to its deposits). The leniency awarded to foreign deposits regarding deposit insurance and reserve requirements is an effort to compete with offshore banking centers.

In September 2013, the Federal Deposit Insurance Corp. clarified that foreign deposits made at U.S. banks with branches overseas are not covered by federal deposit insurance. The FDIC made this announcement in response to new banking rules in Britain, which called for non-European banks, including U.S. banks, to treat foreign depositors the same as they treat domestic depositors. Foreign branches of U.S. banks hold about $1 trillion in assets, and about 40 percent of those assets are held by citizens of the U.K.

The FDIC clarified that foreign depositors who make deposits in bank branches on U.S. soil will enjoy federal deposit insurance, but that depositors to overseas branches will not enjoy the same. All deposits made to U.S. bank branches located on U.S. soil are treated equally, regardless of whether or not the depositor is a foreign national. That is to say, in the event of a bank failure, the FDIC will cover these deposits equally, and give both foreign and domestic depositors preference over general unsecured creditors.

Dually payable foreign deposits are foreign deposits that are payable in both the country in which the deposit is initially made, and in the United States. For example, if a U.K. citizen made a deposit in a foreign branch of an American bank located in the U.K., and then was able to travel to the U.S. and withdraw money from that account through a domestic branch of the same bank, that account would be said to be dually payable.

Not all deposits to foreign banks are dually payable; in many cases, foreign deposits are payable only in the country in which the deposit was made. Making foreign deposits dually payable is costly for American banks, because it exposes them to higher reserve balance requirements, increased documentation costs, the possibility of foreign regulatory requirements, foreign sovereign risk and other pitfalls.