Foreign Deposits

What Are Foreign Deposits?

The term foreign deposits refers to deposits made by individuals and corporations at or into domestic banks outside the United States. Unlike regular deposits made at domestic branches, these deposits aren't subject to deposit insurance premiums or reserve requirements. The leniency awarded to foreign deposits regarding deposit insurance and reserve requirements is an effort to compete with offshore banking centers.

How Foreign Deposits Work

Deposits are financial transactions. They involve the transfer of money into a bank account for safekeeping. For instance, an individual may decide to put extra money they have on hand into their bank account. The bank agrees to keep the money until such time that the customer decides to withdraw the funds. If it's a savings account, the bank may pay the account holder interest on the balance.

Foreign deposits are any deposits made into accounts at banks that operate outside the United States. These are normally domestic banks even though they do business outside the country. For example, a corporation that has an office in the Caribbean with a bank account at Bank of America may make deposits to a local branch. But there are certain conditions that account holders must consider.

Unlike deposits at domestic branches, these aren't covered by the Federal Deposit Insurance Corporation (FDIC). This means if the bank goes under, the customer loses their money. This was clarified by the FDIC in September 2013. The announcement was made in response to new banking rules in Britain, which called for non-European banks to treat foreign depositors the same way they treat domestic depositors. Foreign branches of U.S. banks hold about $1 trillion in assets, according to data made available from the FDIC in 2013. According to a Reuters report, 40% of these deposits are held in the United Kingdom.

The FDIC covers balances up to $250,000 for single-ownership accounts held at banks that are FDIC insured.

The FDIC clarified that foreign depositors who make deposits in bank branches on U.S. soil enjoy federal deposit insurance but depositors to overseas branches are not subject to the same protection. All deposits made to U.S. bank branches located in the U.S. 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 covers these deposits equally, and gives both foreign and domestic depositors preference over general unsecured creditors.

Special Considerations

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