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.”