A Boston Globe article published in yesterday's Business section misstated the amount of deposits at a foreign branch of Bank of New England Corp. The Branch had deposits of $55 million that have been, in effect, protected by the Federal Deposit Insurance Corp. (Published 1/10/91)

Federal regulators who seized the Bank of New England Sunday have agreed to protect $600 million in uninsured deposits at the bank's foreign branch in the Bahamas -- even though the coverage is not authorized by law and the bank did not pay for insurance on the funds.

Regulators acted despite the fact that some government and industry officials object to the practice, and the regulators themselves refuse to protect deposits over the $100,000 insurance limit at small, failed institutions inside the United States, most recently at Capitol Bank & Trust Co. in Boston and Freedom National Bank in New York.

"It's outrageous, totally unfair," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association, a Washington-based group representing smaller banks. "How can banks across the country be paying higher and higher {deposit insurance} assessments, and depositors in foreign branches of U.S. banks who don't pay for deposit insurance at all are fully covered?"

A top U.S. banking regulator conceded the unfairness of the government's decision yesterday, but bluntly warned that failure to act otherwise would have been courting disaster.

Asked to explain why regulators decided to protect offshore depositors while refusing to do the same for some onshore ones at other banks, L. William Seidman, chairman of the Federal Deposit Insurance Corp., said, "because I love my brothers in Massachusetts and I didn't want to see their whole financial system go down the tube."

Seidman said that if the government had not agreed to protect offshore depositors, many of them large corporations and foreign banks, they might have withdrawn their funds from both the Bank of New England and other major U.S. banks with foreign branches, setting off a financial chain reaction.

"Even if that didn't happen," Seidman warned, "there was such a great possibility of it happening that I did not want to experiment."

The deposits in the New Bank of New England's foreign branch do not necessarily all belong to foreign individuals or companies; the money may include funds kept offshore by a U.S. company.

But U.S. law does not allow for insurance premiums to be charged against offshore funds; nor does it provide for them to be covered by the FDIC.

Seidman asserted that the FDIC routinely protects uninsured deposits at foreign branches of U.S. banks when it decides that it must protect similar domestic funds. But the last time the agency did so, in its seizure of the National Bank of Washington last August, the move set off a furor.

In that case, FDIC staff urged that foreign depositors not be fully protected, but Seidman overruled the recommendation. Key members of Congress also objected and sought to change the law to prohibit coverage or force banks to pay premiums on their overseas deposits, but both moves failed.