International banking and foreign investment information
January 06, 2011
Though the two are often confused, an international savings account is not the same thing as an offshore account. In many cases, offshore accounts are used for investment or strategic tax purposes. In contrast, the purpose of an international savings account might be to provide better access to your funds globally, to take advantage of higher interest rates, to diversify risk or to bet on a particular currency.
International savings accounts are typically set up with bank-to-bank transfers or by switching currency options within your existing bank. In many cases, the transactions can be done online. Some of the larger global banks can even consolidate your bank statement to show your international savings account right along with your U.S.-based savings account.
International savings rates
When considering international savings rates, it is important to remember that higher is not always better. In many cases, high interest rates are a result or rampant inflation or default risk. For instance, a country in the grips of economic woes may have very high interest rates due to inflation. But a safety-oriented investor would not want to deposit money there for the fear that they could lose principal as their currency continues to devalue.
Banks in the U.S. offer more stability and less currency and default risk than international banks. If current interest rates are still tempting you to go overseas, consider countries with stronger economies like Canada, Australia, some western European countries and some of the major Asian countries. Remember, though, that permanent residency can be a requirement at some foreign banks.
Exchange rates and foreign currency
International trade and investment is dependent upon a determination of the relative values of different currencies. The exchange rate between two currencies is an expression of the rate at which one currency can be converted into the second currency. The exchange rate can be influenced by political and economic factors, including economic growth, inflation, political stability and market trading or psychology. Foreign exchange markets, also called forex or FX, provide open-market trading platforms for commercial or investment activities. Individual investors can trade foreign currency through banks or foreign exchange brokers. The most traded currencies in the world are the U.S. dollar, Euro, Japanese Yen, Pound sterling (UK) and Swiss franc.
Foreign bank accounts
Global CD rates can be higher than those found in the United States, especially in countries with growing economies and booming inflation. But the risks with international savings accounts are significantly higher than the risk associated with banks in the United States that are covered by FDIC insurance. Default risk and currency risk can make opening an international savings accounts more similar to purchasing stocks or mutual funds rather than depositing money in a U.S. bank.
That doesn't mean that every international savings account is as risky as a casino game. International banks in the United Kingdom, Hong Kong and Japan offer online options to U.S. investors that make sense for individuals or companies domiciled abroad. Many of these banks even have branch offices New York, Chicago, Los Angeles and other cities in the U.S. Another option is to use a FDIC-insured bank in the U.S. to purchase a foreign-denominated money market account, savings account or CD without having to wire funds outside the U.S. -- a quick and easy option.
EverBank is an FDIC-insured bank that offers Americans a chance to purchase certificates of deposit denominated in one or more foreign currencies. Investors can open an account online at EverBank.com and choose to buy either a single or multi-currency CD that pay a fixed rate of interest. Investors do face a currency risk when converting funds back into U.S. dollars, though. FDIC-insurance covers the solvency of EverBank, but does not cover any losses from currency fluctuation.
Here are more details on EverBank WorldCurrency CDs.
* An EverBank deposit account is insured by the FDIC for up to $250,000 per depositor. FDIC insurance covers against loss due to the failure of the institution, but not market-related fluctuations including changes in currency prices. The amount of deposit insurance available for funds denominated in foreign currency will be determined and paid in the United States dollar equivalent of the foreign currency on the institution's date of default. As with all investments, investors can lose money, including principal due to currency fluctuations, over the term that you own it. Please only invest with money that you can afford to risk, and as part of a broadly diversified investment strategy.