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What is a Foreign Deposit?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 18 September 2016
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A foreign deposit is a deposit made in an overseas branch of a domestic bank. Under the banking regulations of the United States and many other nations, a foreign deposit made in an overseas branch is treated differently from those made domestically. This differential treatment can have both advantages and disadvantages for banks and customers. In some regions, banks have organized to take advantage of the benefits that accepting foreign deposits can offer.

Many banks have branch offices overseas. These offices are used to extend the reach and abilities of the parent bank. Customers may have need to access their accounts while traveling, and having branches overseas can facilitate transfers both within the bank and between the bank and other financial institutions. Having overseas offices also provides banks with connections to potential new clients. For all of these reasons, a domestic bank commonly establishes a foothold in other nations with one or more branch offices.

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A foreign deposit made in one these branches is not subject to the same regulations as a domestic deposit. Nations cannot force their financial regulations on other countries, so it is not possible to make regulations that will follow banks overseas. As a result, a foreign deposit is not subject to reserve requirements, does not have to be insured like domestic deposits, and is treated differently for regulatory reasons. It should be noted that citizens still have tax liability for foreign deposits, as tax agencies do not care about where the money is and are concerned primarily with the name on the account.

In the United States, a number of businesses and individuals were wooed away from domestic banks by offshore banking companies established in nations with lax financial regulations. People took advantage of these regulations to deposit money in environments where their funds would not be as closely scrutinized. In response, a number of domestic banks began opening branches so that they could accept foreign deposits, providing a way to keep customers.

There can be dangers to making a foreign deposit. The regulations that govern the banking industry are put in place for a reason, to protect banking consumers, and making deposits in regions not subject to regulation can expose people to risk. While banks that want to retain customers are unlikely to mishandle money belonging to their customers, foreign deposits are subject to loss in the event of a bank failure or another problem. Banking with a trusted name is not necessarily a guarantee in periods of economic uncertainty.

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