South American bank interest rates question

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PJR202
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South American bank interest rates question

Post by PJR202 » Tue Dec 12, 2017 11:05 am

I am not getting into a South American bank. This is a question for someone else who is a resident and naturalized citizen of Ecuador.

They claim to give crazy interest rates for savings accounts. I've searched a lot on this and it's a legitimate return, provided the bank is accredited properly. They've had a few bad eggs management-wise but overall it's a legitimate aspect of the banking industry there.

So for example, a bank says they average 9-10%. What I can't seem to figure out is...how does the bank fund that interest? Are they investing it somewhere? Pulling it from high interest loan returns (literally just thought of that as I was typing and maybe that's the answer)? From what I can tell through searching, they not only consistently deposit this interest monthly, but they also have the Ecuadorian equivalent of FDIC to insure up to a certain amount.

The part that makes me scratch my head is, savings accounts in the US are terrible for interest and a MMA is averaging like..less than 2% I think?

How does a Ecuadorian bank pay out 10%?

If you know the answer to this question, please keep in mind that I don't know much about banking so the more detail the better. :)

123
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Re: South American bank interest rates question

Post by 123 » Tue Dec 12, 2017 11:36 am

Not a direct response to your question but some web research indicates there is a 5% government tax on funds transferred out of Ecuador (there may be bank fees as well). So for every $100 deposited you only get $95 (or less) of principal back, transfer tax would also apply on interest. Their government deposit insurance is significantly lower than in the US and may have extra hoops to jump through for coverage, instead of being pretty much automatic as in the US.

Banking in other countries can add excitement in lots of ways.
The closest helping hand is at the end of your own arm.

PJR202
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Re: South American bank interest rates question

Post by PJR202 » Tue Dec 12, 2017 12:15 pm

123 wrote:
Tue Dec 12, 2017 11:36 am
Not a direct response to your question but some web research indicates there is a 5% government tax on funds transferred out of Ecuador (there may be bank fees as well). So for every $100 deposited you only get $95 (or less) of principal back, transfer tax would also apply on interest. Their government deposit insurance is significantly lower than in the US and may have extra hoops to jump through for coverage, instead of being pretty much automatic as in the US.

Banking in other countries can add excitement in lots of ways.
I saw that as well and was thinking it wouldn't apply to a resident/citizen but if they return to the US permanently maybe it would? Or they'd have to bring back a briefcase full of cash, or dump it into an investment they can withdraw it all from when they get back to the US...if that's possible/legal. Bitcoin maybe ..haha (I would never actually recommend that)

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Pajamas
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Re: South American bank interest rates question

Post by Pajamas » Tue Dec 12, 2017 3:29 pm

I don't know about Ecuadorian banks in particular, but when banks in South American countries pay a high rate of interest, it is usually because there is a high inflation rate and interest rates are high in general. Sometimes outstanding loan balances are even adjusted on a regular basis to reflect inflation.

Inflation rates in Ecuador were running 1% monthly earlier this year.

https://tradingeconomics.com/ecuador/inflation-cpi

Current rates in Ecuador have moderated over the past few years, to just under 8%.

https://countryeconomy.com/key-rates/ecuador

PJR202
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Re: South American bank interest rates question

Post by PJR202 » Tue Dec 12, 2017 7:02 pm

Interesting! Thanks!

Thesaints
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Re: South American bank interest rates question

Post by Thesaints » Tue Dec 12, 2017 7:03 pm

But Ecuador's official currency is the USD...

talzara
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Re: South American bank interest rates question

Post by talzara » Tue Dec 12, 2017 10:09 pm

Pajamas wrote:
Tue Dec 12, 2017 3:29 pm
Inflation rates in Ecuador were running 1% monthly earlier this year.

https://tradingeconomics.com/ecuador/inflation-cpi
Those are annual inflation rates. It says "year-on-year."

The rates are reported monthly, which mean they compare December 2017 to December 2016, November 2017 to November 2016, etc. The rates are still annual, not monthly.

The bank can pay 10% because the benchmark interest rate is 7.79%: https://tradingeconomics.com/ecuador/interest-rate

AlohaJoe
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Re: South American bank interest rates question

Post by AlohaJoe » Tue Dec 12, 2017 10:21 pm

PJR202 wrote:
Tue Dec 12, 2017 11:05 am
Pulling it from high interest loan returns (literally just thought of that as I was typing and maybe that's the answer)?
Yes. Here in Vietnam I have a 12-month CD that pays 7.8%. But if you want to borrow money from the bank they charge you (at least) 8.2%. That leaves 0.4% of profit/covering losses/etc.

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Pajamas
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Re: South American bank interest rates question

Post by Pajamas » Wed Dec 13, 2017 1:21 am

talzara wrote:
Tue Dec 12, 2017 10:09 pm
Those are annual inflation rates. It says "year-on-year."
:oops: :oops: :oops: :D

Valuethinker
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Re: South American bank interest rates question

Post by Valuethinker » Wed Dec 13, 2017 6:41 am

PJR202 wrote:
Tue Dec 12, 2017 11:05 am
I am not getting into a South American bank. This is a question for someone else who is a resident and naturalized citizen of Ecuador.

They claim to give crazy interest rates for savings accounts. I've searched a lot on this and it's a legitimate return, provided the bank is accredited properly. They've had a few bad eggs management-wise but overall it's a legitimate aspect of the banking industry there.

So for example, a bank says they average 9-10%. What I can't seem to figure out is...how does the bank fund that interest? Are they investing it somewhere? Pulling it from high interest loan returns (literally just thought of that as I was typing and maybe that's the answer)? From what I can tell through searching, they not only consistently deposit this interest monthly, but they also have the Ecuadorian equivalent of FDIC to insure up to a certain amount.

The part that makes me scratch my head is, savings accounts in the US are terrible for interest and a MMA is averaging like..less than 2% I think?

How does a Ecuadorian bank pay out 10%?

If you know the answer to this question, please keep in mind that I don't know much about banking so the more detail the better. :)
Although Ecuador has dollarized, it is possible for it to have a higher inflation rate than the US of A. Perhaps due to supply shortages, rises in key prices etc.

After all the US inflation rate is hardly uniform. The price of fruit and vegetables is much higher in some places than others. Ditto gasoline. Housing rents are very different (and that is a component of CPI). What people pay for utilities can differ by 2x or even 3x.

The Ecuadorian bank has to pay a higher rate on its deposits because it is less safe. There is government deposit insurance (you say?) but if there is a financial crisis (think Iceland in 2008, or Greece more recently) the government will slap on exchange controls, devalue the currency and may have to freeze bank accounts. This happened in Cyprus even though it is a member of the Eurozone. Bank depositors did not get all their money back (60% of funds over 100k Euros was "bailed in" converted to equity in the bank bailouts). BTW Cypriot banks were paying 8% on deposits when German banks were paying 0%-- same currency, in principle no restrictions on moving money (before it hit the fan). If a financial crisis is big enough, a government cannot afford to pay out all the deposit insurance, and so it has to fudge it-- there's a systemic risk in holding money in banks in high financial risk countries.

In a country like Ecuador with few exports plus tourism, dollars are always going to be in short supply (bitcoin! They should use bitcoin ;-) ; and kidding aside one of bitcoins advantages is that it can be infinitely sliced so it can be used, in principle, for micro transactions). Thus dollar deposits are valuable because they can be lent out at relatively high rates of interest.

There are always borrowers in the economy who pay 8, 10, 12 per cent or higher. Either because they are poor credit risks or because the banking system is just not as well advanced as it is in the US.

As long as the Ecuadorian bank makes a "spread" (technically, a margin) over its deposit rate, in its lending rate, then it will be profitable if it covers fixed costs. If domestic loan rates in Ecuador fall, so will deposit rates.

Valuethinker
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Re: South American bank interest rates question

Post by Valuethinker » Wed Dec 13, 2017 9:28 am

If not clear, there has to be some limit to arbitrage.

Something prevents Americans, say, from depositing their savings in Ecuadorian banks at 8% interest rates v 1% at home.

(arguing against that, there was no such barrier within the Eurozone. A Cypriot bank account could easily be opened in London (they have branches, and a lot of Cypriots have family in London, it's a substantial community) or flights are cheap and easy from all over Europe. And Cyprus banks were paying 8% rates, when German ones were paying 0% in the same currency)

So at the end of the day, it's a risk story (more than a barrier to arbitrage story). Ecuadorian banks are more risky (there may also be barriers to arbitrage).

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