Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Higher CD Interest Rate on USD in European Banks
Old 08-10-2007, 03:31 PM   #1
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 886
Higher CD Interest Rate on USD in European Banks

So, I was just wondering why I can get such a better interest rate on a CD (known as a Term Deposit here) in my local bank in USD than I can in my U.S. bank.

Example: $50K 12 month CD here in USD gets me 4.85% but my bank in the States is only 4.11%.

And it's not just my bank, but other European Banks as well pay higher rates on USD. So how does setting of interest rates by banks (domestic and international) on CD's actually work?
__________________

__________________

Trek is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-10-2007, 03:34 PM   #2
Recycles dryer sheets
 
Join Date: Oct 2005
Posts: 325
CD rates here are like 6%....so not sure where your getting 4%.
__________________

__________________
CybrMike is offline   Reply With Quote
Old 08-10-2007, 03:42 PM   #3
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 886
Quote:
Originally Posted by CybrMike View Post
CD rates here are like 6%....so not sure where your getting 4%.
Looking at the big bank websites in the States I'm seeing upper 3's and low 4's. I see BofA has a special 8 month CD for 5.20 (APY), but a regular 12 month is 3.70 for example.
__________________

Trek is offline   Reply With Quote
Old 08-11-2007, 03:55 AM   #4
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 886
Bankrate.com shows a national overnight average in the U.S. on a 1-year CD of 4.81%.

So I was just wondering why I can get a better rate here in USD. How do the banks set their rates since they all differ so much? Why wouldn't more people wire some USD to a Euro bank to invest? Only costs me $20 (each way) for the wire and no exchange rate issues.
__________________

Trek is offline   Reply With Quote
Old 08-11-2007, 07:19 AM   #5
Thinks s/he gets paid by the post
OAG's Avatar
 
Join Date: Jun 2006
Location: Central, Ohio, USA
Posts: 2,598
Search the CREDIT Unions - They are not as high as they used to be but last month (July 07) I purchased a couple of 24 month CDs with APY of 5.40.
__________________
Vietnam Veteran, CW4 USA, Retired 1979
OAG is offline   Reply With Quote
Old 08-11-2007, 07:52 AM   #6
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 886
My question really is about how the banks set the rates. Some are really low like they don't care if anyone buys a CD and some are much higher as if they're looking for business. What drives the way the different banks (or credit unions) set their rates?
__________________

Trek is offline   Reply With Quote
Old 08-11-2007, 11:16 AM   #7
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 359
Its possible that Estonia wants to build up US $ as a reserve currency so they offer a slightly higher interest rate to attract such deposits? Just a wild guess.

I must say, Estonia is not a place I hear much about, welcome to the forum!!
__________________
FinanceGeek is offline   Reply With Quote
Old 08-11-2007, 11:16 AM   #8
Full time employment: Posting here.
Arif's Avatar
 
Join Date: Jun 2005
Posts: 761
I read once that banks set deposit rates according to their desire for increased account and deposit growth. For instance some banks like FNBO were paying a 6% teaser rate that ends next month. The effect of that high rate was a large uptick in deposits and new accounts. I think it is more of an advertising tool than actual market rate related.
Not sure of the disconnect between Europe and the US rates though.
__________________
You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes.
Arif is offline   Reply With Quote
Old 08-11-2007, 11:34 AM   #9
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 886
Quote:
Originally Posted by FinanceGeek View Post
Its possible that Estonia wants to build up US $ as a reserve currency so they offer a slightly higher interest rate to attract such deposits? Just a wild guess.

I must say, Estonia is not a place I hear much about, welcome to the forum!!
Thanks. However, it's not just Estonia. Banks in Sweden, Denmark, Finland, etc all offer higher CD rates in USD.
__________________

Trek is offline   Reply With Quote
Old 08-11-2007, 11:52 AM   #10
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 359
Quote:
Originally Posted by Trek View Post
Thanks. However, it's not just Estonia. Banks in Sweden, Denmark, Finland, etc all offer higher CD rates in USD.
Golly, I'm surprised this hasn't been arbitraged away by US banks taking the proceeds from US CD's and investing abroad. This class of investing has a formal name, e.g. the eurodollar market. Undoubtedly the spread narrows for higher amounts to the point where transactional costs overwhelm any advantage.
__________________
FinanceGeek is offline   Reply With Quote
Old 08-11-2007, 12:26 PM   #11
Full time employment: Posting here.
 
Join Date: Dec 2006
Posts: 886
Quote:
Originally Posted by FinanceGeek View Post
Golly, I'm surprised this hasn't been arbitraged away by US banks taking the proceeds from US CD's and investing abroad. This class of investing has a formal name, e.g. the eurodollar market. Undoubtedly the spread narrows for higher amounts to the point where transactional costs overwhelm any advantage.
Well, I'm talking for amounts of $50k or more. So,for example, it cost me $20 to wire any amount of USD from my US bank to my European Bank. So if I were to do that and then deposit my principal + interest back into my US bank, the entire transactional cost would be $20 plus a similar fee charged by my local bank to send it back, regardless of the amount transferred. So it does seem advantageous unless there are some excessive tax implications in the U.S. for doing so. By the way, our local currency isn't the Euro, but it is tied to the Euro.

But nonetheless, I still wonder how the banks determine what rate they will set for their CD's.
__________________

Trek is offline   Reply With Quote
Old 08-11-2007, 02:19 PM   #12
Full time employment: Posting here.
 
Join Date: Feb 2004
Location: Okanagan Valley
Posts: 805
Quote:
Originally Posted by Trek View Post
But nonetheless, I still wonder how the banks determine what rate they will set for their CD's.
I believe it was already mentioned once upthread. Banks pay as little as they can get away with for the amount of deposits they need. The average citizen is not yet computer savvy, doesn't do online banking, and relies on his/her great long standing relationship with their contact at their local bank. You might be surprised at how much money an established retail bank branch can attract with non-competitive interest rates. My now deceased FIL would never put his money in anything other than a bank savings account... never mind CDs or their equivalents!
__________________
AltaRed is offline   Reply With Quote
Old 08-11-2007, 02:34 PM   #13
Recycles dryer sheets
 
Join Date: Jun 2007
Posts: 359
Well, it sounds like you may have indeed found a good deal. I don't think that there are any unusual tax complications - if you are a US citizen you do have to report foreign bank accounts and pay taxes on worldwide income.

The only other thing I would check into is whether or not the local bank is insured against failure. Perhaps US banks pay a bit lower rates because of the FDIC assurance?

As to how banks determine what to pay on CDs I'm guessing its supply and demand, they offer enough to get the funds they need to loan out. Of course they consider other sources of funds besides shareholder deposits, but that's part of it.
__________________

__________________
FinanceGeek is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Interest Rate Lock retire@40 FIRE and Money 13 08-04-2005 03:55 PM
EmigrantDirect Interest Rate Up MJ FIRE and Money 5 07-25-2005 10:57 AM
Low Interest Rates Here To Stay? Donner FIRE and Money 23 02-13-2005 03:02 PM
High interest rates paid in turkish banks. garry FIRE and Money 8 11-25-2003 04:42 AM
The Interest Rate Dilemma DFW_M5 FIRE and Money 11 10-08-2003 09:33 AM

 

 
All times are GMT -6. The time now is 01:22 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.