What Is the 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.

ECRs are rates that banks impute to offset service charges. Because depositors leave balances in non-interest bearing accounts, the bank will apply an ECR on those balances and use that as a credit for services. For example, a corporate treasurer with a $250,000 collected balance receiving a 2% ECR would earn $5,000 to offset services. ECR is often credited automatically.

Key Takeaways

  • The earnings credit rate (ECR) is the imputed interest rate calculated by banks too account for money that they hold in non-interest bearing accounts.
  • ECRs are calculated on a daily basis and is 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.

Understanding the Earnings Credit Rate

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.

Typically, the ECR is applied against "collected" balances, not "ledger" or "floating" balances. Lockbox accounts and other depository accounts have float since it takes time for the deposits to clear. While these items are "floating," the funds are not available. Collected balances are what you have cleared and available to transfer or invest.

Historically, banks set their earnings credit rate to approximate the 90-day T-bill rate. Commercial banks also deducted a reserve requirement of up to 13%. In the mid-2000s, when the Fed lowered the reserve requirement to zero, many banks eliminated this haircut.

The Earnings Credit Rate and Rising Interest Rates

As of 2019, interest rates in the United States are projected to decline modestly. 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., what 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.