UPDATE 1-EU banks watchdog urges protection of deposits in case of no deal Brexit

The EU banking watchdog has urged member states to offer deposit account protection for customers of branches of British banks in the rest of the European Union in case Britain crashes out of the bloc this month with no deal. Bank deposits are protected by national deposit guarantee schemes so that if a lender went bust, sums up to 100,000 euros remain safe under EU law - but that does not extend to branches of a bank that would be outside the EU.

The European Banking Authority - itself having to move from London to Paris because of Brexit - said it was calling on the schemes in EU states to ensure that depositors in the branches of UK banks in the bloc are adequately protected in case of a no-deal departure by Britain on March 29. "The withdrawal of the UK from the EU is not likely to have an impact on the protection of deposits in the vast majority of credit institutions operating in the EU," EBA said in an "opinion" published on Friday.

"It may affect branches of UK credit institutions in the EU depending on the decisions taken by the UK authorities on the potential exclusion of such branches from the scope of the UK depositor protection scheme, after the UK’s withdrawal from the EU." EBA said it had to take action in an "unprecedented" situation, given that the EU law on deposit protection does not set out how cross-border payouts involving a non-EU branch should be carried out.

It noted that the Bank of England proposed in October that EU branches of UK banks would no longer be protected by Britain's deposit protection scheme. The BoE has not yet made a definitive statement on this, EBA said.

Britain's intended approach would mean customers of UK banks in the EU would lose protection unless the branches joined the local deposit guarantee scheme, EBA added. (Reporting by Huw Jones; Editing by Alison Williams)