Higher CD Interest Rate on USD in European Banks

[Trek]

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?

[CybrMike]

CD rates here are like 6%....so not sure where your getting 4%.

[Trek]

Quote:

Originally Posted by CybrMike 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]

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.

[OAG]

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.

[Trek]

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?

[FinanceGeek]

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!!

[Arif]

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.

[Trek]

Quote:

Originally Posted by FinanceGeek 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.

[FinanceGeek]

Quote:

Originally Posted by Trek 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.

[Trek]

Quote:

Originally Posted by FinanceGeek 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.

[AltaRed]

Quote:

Originally Posted by Trek 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!

[FinanceGeek]

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.