DEFINITION of Commercial Account
Regulation Q of the U.S. Federal Reserve prohibits banks from paying interest on this type of account. Banks instead pay earnings credits, which they base upon the average account balance.
BREAKING DOWN Commercial Account
Commercial accounts usually have higher monthly service charges and other related fees than retail accounts. (Retail banking is also known as consumer banking or personal banking and is the visible face of banking to the general public.)
Commercial or corporate banking products and services include but are not limited to the following:
- Loans and other credit products – both one of the largest sources of profit, as well as risk;
- Treasury and cash management services, which many companies use for managing their working capital and currency conversion requirements;
- Equipment lending (i.e. customized loans and leases for a range of equipment, which companies in diverse sectors such as manufacturing, transportation and information technology use);
- Commercial real estate services such as real asset analysis, portfolio evaluation, and debt and equity structuring.
- Trade finance, including letters of credit, bill collection, and factoring.; and
- Employer services such as payroll and group retirement plans.
Many commercial banks also have affiliate investment banking arms, which can offer commercial accounts related services, such as asset management and securities underwriters.
Still, commercial banking is distinct from investment banking in that investment banking entails the creation of capital for other companies, governments and other entities via underwriting new debt and equity securities, aiding in their sales, and helping to facilitate mergers, acquisitions, and reorganizations.
Commercial Accounts and the Earnings Credit Rate (ECR)
As noted above most commercial accounts pay earnings credits instead of interest although in 2010 the Dodd-Frank Act rolled back Regulation Q and allowed for some banks to offer interest on checking accounts for its corporate customers. The goal of this change was to increase banking reserves, ideally militating against credit illiquidity.
The earnings credit rate (or ECR) is a daily calculation of interest, often correlated with the U.S. Treasury bill (T-bill) rate. Banks will pay ECRs on idle funds, which reduce bank service charges overall. Essentially, customers with larger deposits and balances tend to pay lower bank fees. Anyone can view ECRs on the majority of U.S. commercial account analyses and billing statements.