What Is the Earnings Credit Rate (ECR)?
Let me explain the earnings credit rate (ECR) directly: it's a daily interest calculation that banks pay on your deposits. You'll often see it correlated with the U.S. Treasury bill (T-bill) rate.
ECRs are rates that banks impute to offset your service charges. If you leave balances in non-interest-bearing accounts, the bank applies an ECR on those balances and uses it as a credit for services. For instance, if you're a corporate treasurer with a $250,000 collected balance at a 2% ECR, you earn $5,000 to offset services. This is often credited automatically.
Understanding the Earnings Credit Rate
Banks use ECRs to reduce the fees you pay for other banking services. These can include checking and savings accounts, debit and credit cards, business loans, additional merchant services like credit card processing and check collection, reconciliation, and reporting, as well as cash management services such as payroll.
ECRs are paid on your idle funds, which cut down on bank service charges. If you have larger deposits and balances, you tend to pay lower bank fees. You'll find ECRs visible on most U.S. commercial account analyses and billing statements.
Banks have significant discretion in determining the earnings allowance. While the ECR can offset fees, remember that you're only charged for services you use, not in combination with others.
History of the Earnings Credit Rate
The concept of an earnings credit rate started with Regulation Q (Reg Q), which prohibited banks from paying interest on deposits in checking accounts set up for transactional purposes. This followed the 1933 Glass-Steagall Act, with the hope of limiting loan sharking and other predatory actions.
The act later helped consumers by allowing funds to shift from checking accounts to money market funds. After Regulation Q, many banks began offering 'soft dollar' credits on these non-interest-bearing accounts to offset banking services.
Special Considerations
When money market funds yield near zero, like during the 2008 financial crisis, deposit accounts offering ECRs become more attractive to corporate treasurers. But in times of rising rates, you might seek financial instruments with higher yields than ECRs, such as money-market funds or relatively safe and liquid bond funds.
Typically, the ECR applies to 'collected' balances, not 'ledger' or 'floating' balances. Lockbox accounts and other depository accounts have float because it takes time for deposits to clear. While items are 'floating,' the funds aren't available. Collected balances are what you've cleared and can transfer or invest.
Key Differences and Definitions
What is the difference between ECR and hard interest? Hard interest rates are generally higher than ECRs. One reason is that ECRs are not taxable, whereas hard interest rates are.
What is the difference between interest earned and interest rate? The interest rate is a percent of your total deposits, paid to you as interest earned.
What is ECR for banks? The earned credit rate is an interest rate many banks give their institutional customers on their balances.
The Bottom Line
The earnings credit rate (ECR) is a daily interest calculation a bank pays on institutional customer deposits. It's usually based on the U.S. Treasury bill (T-bill) rate. This rate serves as an incentive for you to deposit funds in non-interest-bearing accounts.
Key Takeaways
- The earnings credit rate (ECR) is the imputed interest rate calculated by banks to account for the money they hold in non-interest-bearing accounts.
- ECRs are calculated on a daily basis and are often tied to the price of low-risk government bonds.
- ECRs are often used by banks to credit customers for services, reduce fees, or offer incentives for new depositors.
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