bank rates

Earn 12% on a 90-day CD from Mexico?

That’s the extraordinary rate being advertised by CapitalBank of Tijuana, with a minimum deposit of only $5,000.

It’s paying even more on longer certificates of deposit — 14% for 12-months and 16% for 24-months — and says accounts are maintained in dollars so investors don’t have to worry about the peso falling in value.

Yeah, right. A foreign bank with no deposit insurance offering returns that are 10 times better than U.S. banks. This is a risky place to put your money.

How risky?

We decided to ask James Pressler, an associate economist who specializes in international risk analysis at The Northern Trust, a conservative and well-regarded Chicago bank.

Pressler says CapitalBank is a legitimate savings and loan, not a Ponzi scheme like Millennium Bank, the Caribbean scam that also advertised great CD rates.

But CapitalBank has its own, unique set of risks because it works more like a pawnshop than a typical American bank.

It makes lots of small loans backed by hard assets such as jewelry, gold, silver and expensive watches. The rates are reasonable — at least by Mexican standards — and the fixed fees associated with those loans account for a significant part of its income.

“CapitalBank’s microfinancing business structure is rare in the U.S. but has a distinct appeal for Mexican borrowers who have small financing needs but do not have broad access to credit,” Pressler says.

To make more loans, CapitalBank constantly needs more money, which is why it’s offering such attractive CD rates to American investors.

It’s a business model that can support the high rates CapitalBank is offering because it can be more profitable than the mortgages and auto loans American banks typically make.

But this kind of financial churning can lead to significant volatility — and risk.

If CapitalBank stumbles in any way, by loaning too much on the assets it’s holding, or if the demand for new loans falls, it might not earn enough to pay CD holders the interest and principal they are owed.

“Investors have to be aware that CapitalBank has no FDIC insurance and no Mexican equivalent,” Pressler says. “Without this, the investor has no guarantees and would take a complete loss if CapitalBank were to go under.”

So would Pressler buy a CapitalBank CD?

“If I had $5,000 to spare, I wouldn’t put it into a CapitalBank CD,” he says. “If I had $50,000 to invest, I might put $5,000 into a CD and call that the speculative, high-risk, high-return portion of my diversified portfolio that might end up as a total bust.”

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Comments (13)
1 Star2 Stars3 Stars4 Stars5 Stars (9 votes, average: 3.33 out of 5)
13 Existing Comments
  1. lee said:
    on April 10th at 04:18 pm

    Man….. I sure wish they had such rates in U.S.

  2. gortdb said:
    on April 11th at 09:17 am

    Is there any close equivalent in the US?

  3. BloggingBanks said:
    on April 11th at 03:18 pm

    This definitely smells like a scam to me. Only a desperate individual would put $$ in a CD from this bank.

  4. sapy2k said:
    on April 11th at 05:38 pm

    Abroad you can get much better CD rates than in the US… that is –IF you have the stomach to digest the higher risks involved. Proof of it: for past 2 years i’ve been earning a constant 7.1% APR on 12-month CDs held in US Dollars at a well-established local bank in my home country in Central America –note I said from well-established bank and NOT a pawn-shop shady business like the Mexico bank mentioned in this article. Of course the local bank i use abroad is not FDIC insured or anything like that. So what are the Risks? well.. asides form non-FDIC insurance A quick overturn in local government (latin america is infamous for political/economic instability) and PoooF money gone!! Nevertheless I weighed the risks and only invested a 1/3rd of all my savings abroad.. the rest 66% of my savings is still safe here in US getting miserable 1-2% APR CD rates from Chase, Citi, and other behemoth giants getting rich off our hard-earned savings.

  5. Anonymous said:
    on April 14th at 12:47 pm

    What are the US tax consequences — will this be treated the same as if this was a US bank CD? What forms(if any) will neeed to be filled out? Does the amount invested matter? Thank you

  6. dan said:
    on April 21st at 01:58 am

    here’s another risk. MEXICO

  7. ricky said:
    on April 21st at 10:51 am

    sapy2k- would you mind sharing the “well established” bank you’re using. Or any others you know of?


  8. Tru said:
    on April 22nd at 04:02 am

    OK, I’ll say it. It seems like a scam. People are being asked to send their money to a different country, on the account of a legitimate MX bank (Banorte) after which they’ll never see it again. However, if you think Tijuana pawn shops need millions of dollars of liquidity to operate, the lack of common sense will eventually cause you to lose your money anyway.

  9. $$a$$y said:
    on April 22nd at 11:21 am

    If you understood anything reagrding international banking, you’d know that this is not a pawn shop. Capital Bank is a well regarded and recognized bank.

  10. said:
    on April 26th at 09:20 am

    It is true that some international banks offer higher interest rates abroad on US dollar deposits.. But why offer double digit interest rates on deposits, when you could simply get FDIC insured and pay just 4% – 5% instead. It would be much cheaper for them to get money this way.. If you are a bank, would you like to pay the most or the least amount for deposits and still get away with it?

  11. garth "the finance swami" said:
    on May 15th at 02:53 pm

    Rent rate for this risk is waaay too low.

    Your’re putting $5,000 at full risk to make an extra $600 bucks, not enough reward to risk return.

    Better if you can afford full loss of $50,000 to make $6,000 now that makes more cents.

    So smaller speculators should stay away from this one.

  12. Dave7007 said:
    on January 1st at 02:29 pm

    Not enough return for the risk….lets say you could double your money or come close…than it might be worth the risk….there was some Eastern European banks paying very high interest on CDs also and a Brazilian ban…but cannot remember the names…..

  13. Dave7007 said:
    on January 1st at 02:31 pm

    I can do better with stock,..without the risk, and I keep control of my prnicipal…