HSBC Americas Inc. is dusting off an old idea - the stock index CD - to pump up interest in certificates of deposit.
Its Marine Midland Bank subsidiary is touting a one-year CD whose yield will be tied to the S&P 500 stock index. The CD's principal, however, is guaranteed by the bank and insured by the Federal Deposit Insurance Corp.
This hybrid CD was all the rage in 1993, when banks ranging from Citicorp to Central Fidelity Banks in Richmond, Va., offered it.
But unlike Buffalo-based Marine Midland, many of these banks have quietly stopped selling the product.
"Stock index CDs were promoted across the sky two or three years ago," said Robert K. Heady, publisher of Bank Rate Monitor, North Palm Beach, Fla. "Lately, they're as rare as finding a dime in an oyster."
Many traditional CD investors were lukewarm to the idea, several bankers said.
"It was so hard to explain to customers. And then the market took a plunge, so we discontinued it after six to eight months," said Lois W. Cumber, marketing officer at Central Fidelity Banks.
But positive results during a market test in western New York State last year and rising equity markets encouraged Marine Midland to aggressively promote stock CDs, said Kerry B. Alberti, executive vice president for investment services.
Last year, the hundreds of consumers who forked over the $5,000 minimum investment earned $18.2% returns, he said.
This fall, the $19 billion-asset bank mailed solicitations describing the product to more than 150,000 New Yorkers, many of whom were not bank customers.
About 95% of the CD's assets are placed in guaranteed investment contracts with offshore insurers to fund the return of principal. The remaining assets go into one-month S&P 500 index futures contracts to generate interest.
Because the CD's payout is the sum of returns from 12 monthly S&P 500 index contracts, it lagged behind the S&P 500 in performance last year, Mr. Alberti said. But the method minimizes risk, compared with using a single one-year contract, he said.
Marine Midland will cut off sales for this year's offering on Dec. 29. Bank executives expect the stock market CD to contribute about 10% of the bank's $150 million in CD sales for the two-month offering period.
"Even though it's small relative to the traditional CD business, $15 million is not chicken feed," Mr. Alberti said.
