What Is a Yankee Certificate of Deposit?

Definition and Examples of Yankee CDs

A certificate of deposit is a type of time deposit account. You deposit money, which earns interest. When the CD matures, you can withdraw your original deposit along with the interest earned.

Yankee CDs operate along the same lines, with one key difference: These are CDs that are issued by U.S. branches of foreign banks. These CDs may be issued to allow the bank to raise capital, which can be used to fund loans or for other purposes. They are negotiable CDs.

For example, Toronto-based Scotiabank offers a variety of Yankee CDs to U.S. investors who meet the minimum opening deposit requirement of at least $50 million. Qualifying investors can open one or more of these CDs and earn interest until maturity.

How Does a Yankee Certificate of Deposit Work?

Many foreign banks have branches that operate in the U.S. For some of these banks, Yankee CDs provide a mechanism for raising capital.

In terms of how a Yankee certificate of deposit works, it isn't that different from other types of CDs. First, an investor has to meet the minimum deposit requirement. But what's different about Yankee CDs is that they tend to be higher than the minimums required for other CDs—generally $1 million to more than $1 billion. Although it's possible to find Yankee CDs with lower minimums in the $100,000 range, it's clear they're primarily designed for higher-net-worth investors.

Once an investor opens a Yankee CD, the CD accrues interest until it reaches its maturity date. The interest rate earned can depend on the issuing bank and the CD term. CDs typically have maturity terms ranging from six months up to five years, although it's possible to find short-term CDs with 28- to 30-day terms or CDs with terms lasting up to 10 years. With Yankee CDs, maturity terms may be closer to three years or less.

While traditional CDs may renew automatically and roll over into a new CD, Yankee CDs may not. If a Yankee CD does not renew, you could withdraw your original deposit along with the interest earned and decide whether to reinvest it in a new Yankee CD or put it work elsewhere.

Yankee CDs were first issued in the 1970s. Initially, they paid a much higher yield to investors compared to domestic CDs issued by U.S. banks. Since then, yields have declined somewhat as investors have become more trusting of foreign banks. Today, Yankee CDs are most often issued by a handful of international banks based in Japan, Canada, the United Kingdom, and various countries in Western Europe.

Special Considerations for Yankee CDs

One of the most important things to note about Yankee CDs is that they're not FDIC-insured. The Federal Deposit Insurance Corporation (FDIC) protects deposits up to $250,000 per depositor, per account ownership type, per financial institution in the rare event that a bank fails.

That means if you open a CD with a U.S. bank and that bank fails for any reason, you could still get your money back up to the allowed limit if it's covered by the FDIC. Since Yankee certificates of deposit are issued by foreign banks that have U.S. branches, they don't fall within the domain of FDIC protection.

For that reason, it's important to consider the credit rating of a Yankee CD's issuing bank before making an investment. Although CDs generally are considered to be safer investments, depositing $100,000 or $1 million investment into a Yankee CD could still be a risk. As a rule of thumb, foreign banks that have a higher credit rating may carry a lower risk of failure.

How To Open a Yankee CD

If you're interested in using Yankee CDs to invest and save, the first step is finding a bank that offers them. Since these are typically intended for higher-net-worth investors, you may need to look for a foreign bank that offers wealth management services to U.S. customers.

Rabobank and Scotiabank are examples of foreign banks that offer Yankee CDs. When choosing where to save, consider the maturity terms offered and how long you're comfortable leaving money in a Yankee CD.

From there, opening a Yankee CD is as simple as making the minimum deposit required. But remember: That minimum deposit could be $100,000 or more, so it's important to consider how much of your portfolio you want to dedicate to Yankee CDs. While they could provide a decent rate of return, you may realize better yields by investing that money elsewhere.