Due From Banks

International Due from Banks—Time

Foreign banks maintain interest bearing time deposits, known as “due from banks—time,” with other foreign banks and overseas branches of U.S. banks. Those assets may also be referred to as placements, placings, interbank placements (deposits), or redeposits. Unlike “due from banks—demand” (nostro) accounts, due from banks—time deposits are not on demand and may have maturities ranging from overnight to several months or years. Certain examination procedures, internal control considerations, and verification procedures in the domestic “Due From Banks” section are also relevant to international due from banks—time. However, the specialized nature of foreign deposits necessitates additional examination procedures, included later in this section.

Restraints are placed on the amount national banks may deposit with any depository institution not authorized access to Federal Reserve advances under Section 10(b)(12 USC 347b). A national bank must limit its deposits to no more than 10 percent of its paid-up and unimpaired capital and surplus fund. However, under Federal Reserve Interpretation “Deposits in foreign banks” (paragraph 4410), national banks may keep on deposit with foreign banks an amount exceeding that 10 percent limitation.

Due from bank—time deposit activities have become important with the growth of the Eurodollar market. The bulk of due from bank—time deposits now consist of Eurodollars with smaller amounts in other Eurocurrencies. Other foreign currency time deposits are placed in substantially the same manner as Eurodollar deposits, subject to differing exchange control regulations or local customs.

Because Eurodollar interbank deposits are usually linked with foreign exchange transactions and foreign exchange departments are more familiar with the names of banks operating in the market, the bank’s foreign exchange trader or a Eurocurrency deposit trader working closely with that trader places due from bank—time deposits. Such deposits are handled between banks by telephone or teleprinter. Whether or not foreign exchange brokers act as intermediaries in those transactions depends on the market conditions, local customs, the size of the bank, etc.

The practice of placing interbank deposits (and takings on the liability side) was accepted originally in London because, under U.K. regulations, banks were entitled to “accept” deposits in foreign currencies, whereas borrowings (loans) in those currencies required authorization by the Bank of England. Therefore, due from banks—time deposits are “accepted” even though the receiving bank may have instructed its foreign exchange trader, directly or through brokers, to find a bank willing to offer it such deposits.

Although treated as deposits in the report of condition, due from bank—time deposits contain the same credit and country risks as any extension of credit to a bank. Consequently, a prudently managed bank should place deposits only with other sound and well-managed banks. The traders should be provided with a list of approved banks with which funds can be deposited up to prescribed limits for each bank. Due from bank—time deposits differ from other types of credit extensions because they often represent deposits of relative short maturity that normally receive first priority in case of insolvency. Nevertheless, the credit and country exposure exists, and customer limits must be established by credit officers and not by foreign exchange traders. Such limits must be reviewed regularly by credit officers, particularly during periods of money market uncertainty or rapidly changing economic and political conditions.

The examiner also must recognize that credit risks intensify when due from bank—time deposits are placed for longer periods. Furthermore, the credit risks for specialized or smaller banks that have recently entered the interbank deposit market can be far greater than that for larger, long- established banks. Banks that traditionally utilized only regular lines of credit or special facilities also have entered the due from banks—time deposit market to meet their external needs. Those banks could be the first to be caught in a market crunch.

Incoming confirmations from banks must be meticulously checked by the bank to record copies in each instance to protect against fraud and errors. Similarly, a systematic follow-up on non-receipt of incoming confirmations should be carefully monitored by the bank.

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