Introduction to Yankee Certificates of Deposit (CDs)
A Yankee Certificate of Deposit (CD) is a unique savings vehicle still valued today. Issued in the United States by branches of foreign banks, Yankee CDs are nominated in U.S. dollars and remain a popular choice for foreign banks looking to raise capital from U.S. investors.
Why Choose Yankee CDs?
- Exclusive to Larger Investors: Yankee CDs typically market to larger investors thanks to their steep minimum investment requirement of $100,000.
- Capital Raising Tool for Foreign Banks: Foreign banks that need USD capital to serve U.S. clients often issue Yankee CDs.
- Shorter Maturity Periods: Investing in Yankee CDs usually means committing to shorter maturity periods, often less than one year; however, the early withdrawal penalties can be substantial.
The Functionality of Yankee CDs
Foreign banks operating in the U.S. (such as Japanese, Canadian, and European entities) frequently need dollars for extending credit or fulfilling USD obligations. Yankee CDs are an instrument for such banks to gather deposits from American investors.
Much like traditional CDs, Yankee CDs are locked savings accounts that accrue interest, repaying the initial investment at the end of the specified term. While investors might withdraw prior to this date, doing so usually entails facing hefty early withdrawal penalties. Here’s a revisited look at why Yankee CDs work effectively:
- High Minimum Investment: The face value generally starts at $100,000, targeting larger investors.
- Short-Term Duration: Typically available for terms under one year, Yankee CDs exclude FDIC protection, necessitating funds remain locked for their entire duration.
- Yield Considerations: Initially, these products provide appealing yields compared to domestic counterparts but adjust based on market familiarity and available capital.
Real-World Examples of Yankee CDs
Predominantly issued in New York by foreign banks with U.S. branches, Yankee CDs can be sold directly by these banks or through broker-dealers. Historically, banks from Japan, the UK, Canada, and Europe engaged in issuing Yankee CDs, predominantly to raise U.S. dollar capital for corporate credit solutions.
- Historical Reference: Introduced in the 1970s, Yankee CDs initially featured higher yields due to the perseverance of limited evidence of foreign bank creditworthiness and comparatively scarce financial information.
- Market Evolution: Credit consumption grew with lower yield differentials. Following legislative adjustments like the 1978 International Banking Act and changes in reserve requirements in the 1990s, Yankee CDs expanded as a capital-gathering mechanism.
In conclusion, as the global banking market evolved, Yankee CDs provided enduring opportunities for substantial investors seeking short-term, high-yield investments.
Related Terms: Certificate of Deposit, Early Withdrawal Penalty, Federal Deposit Insurance Corporation, Broker-Dealer, Maturity Period, Interest Rate.
References
- Richmond Fed. “Large Negotiable Certificates of Deposit”, Pages 41-42.
- Federal Deposit Insurance Corporation. “International Banking Act of 1978”.
- Board of Governors of the Federal Reserve. “Reserve Requirements”.
