DEFINITION of 'Earnings Credit Rate (ECR)'

The earnings credit rate (ECR) is a daily calculation of interest that a bank pays on customer deposits. The earnings credit rate is often correlated with the U.S. Treasury bill (T-bill) rate.

BREAKING DOWN 'Earnings Credit Rate (ECR)'

Banks may use ECRs to reduce fees customers pay for other banking services. These might include checking and savings accounts, debit and credit cards, business loans, additional merchant services (such as credit card processing and check collection, reconciliation, and reporting), and cash management services (e.g. payroll).

ECRs are paid on idle funds, which reduce bank service charges. Customers with larger deposits and balances tend to pay lower bank fees. ECRs are visible on nearly the majority of U.S. commercial account analyses and billing statements.

Banks may have great discretion for determining the earnings allowance. While the earnings credit rate can offset fees, it is important for depositors to note that they are only being charged for services you use, not in combination with others.

History of the Earnings Credit Rate

The notion of an earnings credit rate originated with Regulation Q (Reg Q), which prohibited banks from paying interest on deposits in checking accounts (set up for transactional purposes). In accordance with the 1933 Glass-Steagall Act, many hoped this practice would limit loan sharking and other such predatory actions. The act subsequently supported consumers in releasing funds from checking accounts and shifting them to money market funds. Following Regulation Q, many banks decided to offer “soft dollar” credits on these non-interest bearing accounts in order to offset banking services.

Earnings Credit Rate and Rising Interest Rates

As of 2018, Interest rates in the United States are projected to rise gradually. In contrast, the pace of earnings credit rate growth is not expected to keep the same pace.

When money market funds yield near zero (e.g. as occurred during the 2008 financial crisis), deposit accounts, offering ECRs, can become more attractive to corporate treasurers. Yet in times of rising rates, these treasurers may look for financial instruments with a higher yield than ECRs. These could include money-market funds (once more) or even relatively safe and liquid bond funds.

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