Foreign Bank CDs - Higher Yield, But Is It Too Risky?

I've been very interested in some of the high yield offers that some of the foreign banks (particularly Caribbean-based banks) have been offering. With rates in the US so much lower (Countrywide Bank is at 4.05%, E*Trade is at 3.01%, Capital One is at 3.2%, etc. - BankRate says the average 6-month CD is 2.76%). But, with some foreign banks such as a whopping 8.0% yield being offered by Millennium Bank, should you trust your hard-earned money in these instruments. Well, I found an interesting article below (Ask the Expert on Money.com) that talks a little bit about this idea. The P2P-Loans.com take on this is simple: don't forget that higher yields almost always (defined as 100% of the time) come with higher risk. Thus, if you are looking for a superior return, you will likely need to take incrementally more risk. If you are looking for safer options, P2P-Loans.com has done some of the homerwork for you on our Best High Interest Savings page. Enjoy the article.

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April 1, 2008
Are foreign bank CDs worth the risk?

With different banking regulations and no FDIC protection, foreign banks bring additional risk that might outweigh the relative safety of CDs.

Question: My wife and I are both unable to work and live on a fixed income. We supplement our income with interest from a 5.5% CD which matures this month. If we let the CD renew, the interest rate will be around 3.5%. I found a 6% CD at a bank in St. Vincent and the Grenadines, but I am somewhat leery of a foreign bank. What are your thoughts? –Alan Brady, Greensboro, North Carolina

Answer: My first thought is of the movie version of “A Man for All Seasons,” which depicts the life of St. Thomas More, the scholar and author of “Utopia” who was beheaded for treason in 1535 for refusing to recognize Henry VIII as the supreme head of the Church of England. I’m thinking specifically of a scene at More’s trial in which More, played by the late actor Paul Scofield, confronts Richard Rich, who has perjured himself and betrayed More to secure the position of Attorney General of Wales. “Why Richard,” says More, “It profiteth not a man to gain the whole world and lose his soul. But for Wales?”

What does this have to do with buying a CD from a bank in the Caribbean island nation of St. Vincent and the Grenadines?

Well, it seems to me that you and your wife could be jeopardizing your financial security by taking extra risk with money that you clearly depend on. And for what? A couple of percentage points of annual return?

I suppose it could all work out fine. But do you really want to subject this money to foreign banking rules and regulations? Do you even know what those regulations are? (I noticed that one bank in St. Vincent and the Grenadines that advertises U.S. dollar-denominated deposits won’t allow early withdrawals from some of its CDs.)

Visit Money.com to read the rest of this article... (here's the link).