Discover the Benefits of Yankee Certificates of Deposit (CDs)
A Yankee certificate of deposit (CD) is a unique type of CD issued in the United States by branches of foreign banks. These CDs are denominated in U.S. dollars and provide a way for foreign banks to raise capital from American investors.
Key Highlights
- Yankee CDs are geared towards larger investors.
- Issued by branches of foreign banks, primarily to raise capital from American depositors.
- Typically have shorter maturity periods, often less than one year. Early withdrawals may incur significant penalties.
How Yankee CDs Operate
Foreign banks operating in the United States sometimes need to access U.S. dollars to extend credit to their customers or to meet U.S. dollar-denominated obligations. To acquire this capital, they offer special certificates of deposit known as Yankee CDs.
Similar to traditional CDs, Yankee CDs are savings accounts that offer interest upon the return of the initial investment at the end of a set period. Although early withdrawal is possible, it often comes with hefty penalties. Generally speaking, these CDs have terms ranging from one month to five years, with longer terms yielding higher interest.
One of the key distinctions between Yankee CDs and traditional U.S. CDs is their high minimum investment amount. Often set at $100,000, they cater mainly to larger investors. Additionally, they have shorter maturity periods of less than a year. As these CDs are issued by foreign banks, they are not protected by the Federal Deposit Insurance Corporation (FDIC), and investors are typically required to lock in their funds for the duration of the investment period.
Real-World Examples and History of Yankee CDs
Yankee CDs are commonly issued in New York by foreign banks with U.S. branches. They can be sold either directly through the banks or indirectly via registered broker-dealers. Typical issuers of Yankee CDs include banks from Japan, Canada, the United Kingdom, and Western European countries. These funds are often used to extend credit to U.S.-based corporate customers.
Yankee CDs emerged in the early 1970s and initially offered higher yields compared to domestic CDs. Due to foreign banks being lesser-known and having limited financial transparency, their credit quality was hard to gauge.
As investor confidence in foreign banks grew, the yield premium on Yankee CDs decreased. Regulatory changes such as exemptions from Federal Reserve reserve requirements until the International Banking Act of 1978 also bolstered the Yankee CD market. Significant growth followed in the early 1980s, with a marked rise in the early 1990s due to further eliminations of reserve requirements on certain deposits.
Related Terms: certificate of deposit, U.S. dollar, early withdrawal penalty, Federal Deposit Insurance Corporation (FDIC), interest, maturity period.
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”.
