What Is a Yankee Certificate of Deposit (CD)?
A Yankee certificate of deposit is a CD that is issued in the United States by a branch or agency of a foreign bank. A Yankee CD is a foreign CD denominated in U.S. dollars, issued in the U.S. to American investors. A foreign company can raise capital from U.S. investors by issuing Yankee CDs.
- A Yankee certificate of deposit is a CD that is issued in the United States by a branch or agency of a foreign bank.
- Yankee CDs are negotiable instruments, and most have a minimum face value of $100,000, making them appropriate for large investors.
- Unlike traditional CDs that can be cashed before maturity for a small penalty, Yankee CDs usually cannot be cashed in prior to their date of maturity.
Understanding a Yankee CD
A traditional certificate of deposit (CD) is a savings account that pays interest until it matures, at which point the investor or depositor can access his or her funds. Although it is still possible to withdraw money from a CD prior to the maturity date, this action will often incur a penalty. This penalty is referred to as an early withdrawal penalty, and the total dollar amount depends on the length of the CD as well as the issuing institution. The term of a CD generally ranges from one month to five years.
Yankee CDs are negotiable instruments and most have a minimum face value of $100,000—making them appropriate for large investors—as well as a maturity of less than one year. They are unsecured, meaning they lack collateral backing, and may pay either a fixed or variable interest rate. Yankee CDs have minimal documentation and do not have insurance from the Federal Deposit Insurance Corporation (FDIC). Unlike traditional CDs, Yankee CDs usually cannot be cashed in prior to their date of maturity. Those that do permit cashing in before maturity have penalties that can be substantial.
Yankee CDs are not insured by the Federal Deposit Insurance Corporation (FDIC).
Yankee CDs are usually issued in New York by foreign banks with branches in the U.S. They are sold directly by issuers or through one or more registered broker-dealers that may or may not be affiliated with the issuer. The major issuers of Yankee CDs are the New York branches of the well-known international banks of Japan, Canada, England, and Western Europe, which use the proceeds from the CDs to lend to their corporate customers in the United States.
Yankee CDs generally yield more than issues by domestic banks. However, exchange rates can change quickly and dramatically, which can affect the total return of these investments.
Example of a Yankee CD
In order to raise capital from American investors, a Canadian bank chooses to issue a CD in the United States. The bank in Canada has a branch in the U.S. and partners with an American bank to issue CDs denominated in U.S. dollars in the U.S. The bank has, in effect, issued a Yankee CD. The Canadian bank issuer pays a fixed or floating rate of interest to investors of the CDs and repays the principal of the loan amount at maturity.
When it reaches maturity, the CD is redeemed by presenting the certificate to the issuing bank followed by a payment from the issuing bank to the investor’s custodian bank. By borrowing through this debt instrument, the foreign bank gains access to the American market and investors, as well as the currency and geographic diversification that the U.S. domestic market brings. Investors gain dollar income streams that they may use to pay other dollar-denominated obligations.
History of Yankee CDs
According to the Richmond Fed, Yankee CDs were first issued in the early 1970s and initially paid a higher yield than domestic CDs. Foreign banks at the time were not well known, so their credit quality was difficult to assess due to different accounting rules and scant financial information.
As investor perception and familiarity with foreign banks improved, the premium paid by foreign banks on their Yankee CDs declined. This cost of funds difference was partially offset by the exemption of foreign banks from Federal Reserve reserve requirements, in effect until the International Banking Act of 1978.
The exemption also aided the establishment of the Yankee CD market, which grew steadily in the early 1980s. In the early 1990s, there was rapid growth in Yankee CDs because reserve requirements on nonpersonal time deposits with maturities of less than 18 months were eliminated in Dec. 1990. Previously, there was a 3% Federal Reserve reserve requirement for foreign banks funding dollar loans to U.S. borrowers with Yankee CDs.