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Why I Don’t Trust High Yield International Banks

Posted By Jim On 08/28/2008 @ 11:40 am In Personal Finance | 5 Comments

Ben at The Consumerist [3] sent me this article about high yield interest rates in Iceland, [4] after Sedlabanki, the central bank of Iceland, bumped borrowing interest rates to 15.5% to battle inflation. That puts interest rates for regular savings accounts betwee 11.65% and 15.55% – that’s pretty amazing. But I’m not biting.

No FDIC

As IndyMac went into the conservatorship of the FDIC, people lined for hours to withdraw their money. The FDIC gives you $100,000 of coverage… Icelandic insurance covers the first $20,731 and if you want to actually physically run on the bank, you have to haul yourself to Iceland.

How important is this? That depends on how risk averse you are and how comfortable you are sending your money abroad. One of the benefits of the FDIC is that if you put your savings in an insured bank in the US, you have a backstop against the worst of the worst. Even if the bank itself imploded, you knew your money was safe and that’s something we often take for granted. Many people are apprehensive about putting their funds in an online high yield savings account [5], this is easily ten times riskier because it lacks FDIC insurance. (though all the banks listed in the article are huge, almost “too big to fail” huge )

Exchange Risk

Not knowing the solvency of banks in Iceland, I think the biggest risk has to do with currency exchange risk. That’s the risk that your money will lose value as the dollar strengthens against the Icelandic Króna. One mitigating factor is that there’s inflation in Iceland, which means they will likely stand pat or increase rate (strengthens the króna against the dollar), but the dollar is coming off historic lows against a lot of other currencies.

Check out the list of top diversified emerging market funds [6] according to Yahoo Finance. The funds that are the top performers over 5 years are not the ones that are top performers over 3 years. None of the top performers of the last year were top formers over the last 3 (Lazard funds appear in the 5 year list though). Emerging markets are volatile in part because of exchange risk and those funds are diversified. You’d be putting all your eggs in the Icelandic bucket.

Is It Worth It?

How much do you really have to save and is it worth opening an account in an international country? If you were to put $20k, the insurance limit, then the difference between a 15% APY and a 3.5% APY (FNBO Direct offers this) is 11.5% or $2,300. After you take 25% off for taxes, you’re left with $1,725 on $20k. $1,725 is a lot… but let’s see what you have to do to open an account abroad.

I went to Kaupthing Edge [7], the high yield online deposit product of the first bank listed in the Barron’s article, and the United States wasn’t listed. Strike one.

I then went to Glitnir Bank [8], the second listed bank. After poking around and finding some information on individual banking [9], I learned that you’d have to go to their Iceland or Norway websites (which aren’t in English) to open a regular account. They have a Save & Save product [10], which is linked to sustainability efforts, but again you have to go to an Iceland or Norway site. Strike two.

Last one left is SPRON, or the Reykjavík Savings Bank, and they actually have an internet bank [11] link on their homepage… but I can’t figure out how to sign up for an account. Strike three.

I’m out.

Summary

15.55% is sooooo appealing. But with risk comes reward, you never get rewards without putting your neck on the line and there’s a reason why you can get 15.55% in Iceland when you can only get 3.50% here in the United States. If there wasn’t a reason, the big money would’ve already gone to Iceland and depressed the yields on those accounts… it’s simple market economics.

There are also a bunch of reasons I don’t even know about, because I’m not a foreign exchange expert. In fact, the only thing I know about foreign exchange is that it’s like high quality kitchen knife. A trained chef can use it to butterfly a chicken breast, I’d probably cut myself. If you’re like me, go the safe route and keep it here in the States. If you don’t mind the risk, go for it.

No reward comes without some risk.

(Photo: 100 Krona by sippeangelo [12])


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/why-i-dont-trust-high-yield-international-banks.html

[3] Ben at The Consumerist: http://www.consumerist.com/

[4] high yield interest rates in Iceland,: http://online.barrons.com/article/SB121944473934264881.html?mod=googlenews_barrons

[5] online high yield savings account: http://www.bargaineering.com/articles/top-5-online-banks-savings-or-checking-accounts.html

[6] top diversified emerging market funds: http://biz.yahoo.com/p/tops/em.html

[7] Kaupthing Edge: http://www.kaupthing-edge.com/

[8] Glitnir Bank: http://www.glitnirbank.com/

[9] individual banking: http://www.glitnirbank.com/services/individuals/

[10] Save & Save product: http://www.saveandsave.com/

[11] internet bank: https://heimabanki.spar.is/alscripts/alspar.dll?setjasnidmat&snidmat=305

[12] sippeangelo: http://www.flickr.com/photos/sippeangelo/2373830938/sizes/l/

Thank you for reading!