Earnings Credit Rate (ECR): Understanding the Banking Metric

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Updated July 22, 2024
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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 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.

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 most U.S. commercial account analyses and billing statements.

Banks may have great discretion in determining the earnings allowance. While the earnings credit rate can offset fees, depositors must note that they are only being charged for services they 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). Following the 1933 Glass-Steagall Act, many hoped this practice would limit loan sharking and other 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 to offset banking services.

Financial instruments with a higher yield than ECRs include money-market funds or even relatively safe and liquid bond funds.

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 have available to transfer or invest.

Special Considerations

When money market funds yield near zero (e.g., 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 or even relatively safe and liquid bond funds.

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 is usually calculated using the U.S. Treasury bill (T-bill) rate. The rate acts as an incentive for customers to deposit funds in non-interest-bearing accounts.

Article Sources
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  1. U.S. Government Publishing Office. "12 CFR 217-Capital Adequacy of Bank Holding Companies, Savings, and Loan Holding Companies, and State Member Banks (Regulation Q)."

  2. Federal Reserve History. "Banking Act of 1933 (Glass-Steagall)."

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