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Yankee Certificate of Deposit (CD): What it Means, How it Works

File Photo: Yankee Certificate of Deposit (CD): What it Means, How it Works
File Photo: Yankee Certificate of Deposit (CD): What it Means, How it Works File Photo: Yankee Certificate of Deposit (CD): What it Means, How it Works

What is a Yankee Certificate of Deposit (CD)?

A Yankee CD is one kind of certificate of deposit (CD) that a foreign bank branch issues in the United States. Foreign banks employ Yankee CDs valued in U.S. dollars to raise money from American investors.

How to Use Yankee C.D.s

When foreign banks operate in the U.S., they often require access to dollars for things like paying off debt denominated in U.S. dollars (USD) or giving credit to U.S. consumers. Foreign banks sometimes accept deposits from American clients using unique C.D.s known as Yankee bonds to assist in raising this USD cash.

Yankee C.D.s are savings accounts that, like regular C.D.s, pay interest and then refund the original investment at the end of a specific period. Investors may often take their money out before this date, which may result in an early withdrawal penalty. CD periods generally range from one month to five years, with longer maturities yielding more excellent interest rates.

The primary distinction between Yankee C.D.s and standard C.D.s, apart from their availability via international banks, is the amount required as an initial investment. Since Yankee C.D.s typically have a $100,000 minimum face value, more prominent investors may find them suitable. Yankee C.D.s are only available for limited maturity periods—less than a year. Yankee CDs often require investors to “lock in” their money for maturity. Since American banks do not issue them, the Federal Deposit Insurance Corporation (FDIC) does not cover them.

Actual Case Study of a Yankee CD

International banks with U.S. branch offices typically issue Yankee CDs in New York. The foreign banks sell them directly or indirectly via one or more registered broker-dealers. Foreign banks that provide Yankee C.D.s most often originate from Japan, Canada, the United Kingdom, and Western European nations. Usually, these banks provide credit to their business clients in the United States using the money they generate from Yankee C.D.s.

According to the Richmond Fed, Yankee C.D.s were originally released in the early 1970s and initially provided a greater return than domestic C.D.s. Because foreign banks were relatively unknown at the time, it was difficult to evaluate their credit quality because of disparate accounting standards and a lack of readily available financial data.

Foreign banks’ premiums on their Yankee CDs decreased as investor perception and familiarity increased. The exemption of foreign banks from Federal Reserve reserve requirements, which was in place until the International Banking Act of 1978, helped somewhat offset this cost of funds disparity.

The exemption also helped the Yankee CD market, and it expanded significantly in the first part of the 1980s. Yankee C.D.s sharply increased in the early 1990s because of the December 1990 elimination of reserve requirements for nonpersonal time deposits with maturities of less than 18 months. Previously, foreign banks providing dollar loans to U.S. borrowers using Yankee C.D.s had to maintain a 3% Federal Reserve reserve requirement.

conclusion

  • More prominent investors are the target market for Yankee C.D.s, a savings option.
  • Foreign banks are the ones issuing these in an attempt to obtain money from American depositors.
  • Yankee C.D.s frequently have maturation spans of less than a year, less than that of ordinary C.D.s. Customers may be unable to take their money out during that period, incurring heavy early withdrawal charges.

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