Yankee Certificate of Deposit

Foreign banks sell Yankee certificates of deposit (Yankee CDs) in the United States. They are products which have underlying foreign corporations and are denominated in U.S. dollars. Yankee CDs usually have a minimum face value of $100,000 and maturity of less than one year and may pay either a fixed or variable interest.

Yankee CDs have minimal documentation, are unsecured and not Federal Deposit Insurance Corporation (FDIC) insured. 

Yankee certificates of deposit are attractive to investors because they provide geographic and currency diversification as well as lower risk. However, they tend to pay low rates. Investors gain dollar income streams which they may use to pay other dollar-denominated obligations. However, exchange rates can change quickly and dramatically, which can affect the total return of these investments.

However, investors must assume additional risk when holding these products. The unsecured Yankee certificate of deposit means the funds, lent to underlying corporations, is without collateral backing. The lender gives the money based on qualifying factors, such as credit history, income, and other existing debts. Also, unlike traditional CDs, they do not have FDIC insurance.

Investors are required to apply for a bank account and make a minimum cash deposit before purchasing these investment products. The major issuers of Yankee CDs are the New York branches of the well-known international banks including Japan, Canada, England, and Western Europe, which use these funds to lend to their corporate customers in the United States.

The foreign banks require the issuer to pay interest on the principal amount according to the terms of the indenture. They are advantageous to foreign banks if they make borrowing cheaper than other forms of debt and enable foreign banks to invest in the U.S. market.

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 due to the December 1990 elimination of reserve requirements on nonpersonal time deposits with maturities of less than 18 months. Previously, there was a 3 percent Federal Reserve reserve requirement for foreign banks funding dollar loans to U.S. borrowers with Yankee CDs.

Foreign banks could avoid the reserve requirement by booking loans to U.S. borrowers at their offshore branches and funding the loans by issuing CDs in the euro market. But U.S. banks were prevented by Federal Reserve regulations from taking advantage of this reserve requirement loophole. As a result, borrowing in the euro market was encouraged. The December 1990 elimination of the reserve requirement erased the euro market’s cost advantage to foreign banks and encouraged these banks to issue Yankee CDs.