What Is a Yankee Certificate of Deposit (CD)?
Let me explain what a Yankee certificate of deposit, or CD, really is. It's a type of CD issued right here in the United States by a branch of a foreign bank. These are denominated in U.S. dollars, and foreign banks use them to pull in capital from U.S. investors.
Key Takeaways
- Yankee CDs are a savings vehicle marketed to larger investors.
- They are issued by foreign banks seeking to raise capital from U.S. depositors.
- Yankee CDs contain shorter maturity periods than regular CDs, often for less than one year. During that timeframe, customers may be unable to withdraw their funds without facing steep early withdrawal penalties.
How Yankee CDs Work
You need to understand how these work in practice. Foreign banks operating in the United States often require dollars for things like extending credit to U.S. customers or meeting USD-denominated obligations. To raise this USD capital, they accept deposits from American customers through these special CDs, which are sometimes mistakenly called Yankee bonds—but they're CDs.
Just like traditional CDs, Yankee CDs function as savings accounts that pay interest and return the initial investment at the end of a specified period. You might be able to withdraw funds early, but expect a hefty penalty if you do. CDs generally have terms from one month to five years, with higher interest for longer maturities.
The big differences? They're offered by foreign banks, and they require a minimum investment of typically $100,000, so they're for larger investors. Plus, Yankee CDs are only for short periods under one year. Since they're not from U.S.-based institutions, they don't get FDIC protection, and you have to lock in your funds for the full term.
Real World Example of a Yankee CD
In the real world, Yankee CDs are usually issued in New York by foreign banks with U.S. branches. You can buy them directly from the banks or through registered broker-dealers. The banks often come from Japan, Canada, the United Kingdom, or Western Europe, and they use the funds to lend to their U.S. corporate customers.
According to the Richmond Fed, these started in the early 1970s and initially paid higher yields than domestic CDs because foreign banks weren't well-known, with different accounting and limited info making credit quality hard to judge.
As investors got more comfortable with foreign banks, the premium on Yankee CDs dropped. This was partly offset by foreign banks being exempt from Federal Reserve reserve requirements until the International Banking Act of 1978.
That exemption helped the market grow in the early 1980s. Then, in the early 1990s, Yankee CDs boomed when reserve requirements on nonpersonal time deposits under 18 months were eliminated in December 1990. Before that, foreign banks faced a 3% reserve requirement for funding dollar loans to U.S. borrowers with these CDs.
