An earnings credit pays bank fees, not interest, so the question is how much balance to leave in the analysed account and where the rest should sit.
An earnings credit is worth the ECR times one minus the reserve deduction, and only on the balance needed to cover the month's fees: above that level the balance earns nothing. At an illustrative 2.40 per cent ECR with a 10 per cent reserve, the credit is worth 2.16 per cent, and $6,944,444 covers $150,000 of annual fees. Against a money market fund at 3.60 per cent, a company holding $9,000,000 in its analysed account gives up $130,800 a year compared with keeping only its operating minimum there.
Worked in full in Treasury Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
US banks price operating accounts through account analysis. Every service, from wires and ACH files to lockbox items and controlled disbursement, carries a unit price, and the month's total is the service charge. Against it the bank sets an earnings credit: the average collected balance, less a reserve deduction, multiplied by the earnings credit rate. The credit pays fees; it is never paid out in cash. Most analysis statements still apply a reserve deduction, commonly 10 per cent, even though the Federal Reserve's reserve requirement has been zero since March 2020, so the first thing to check is whether the line is still on yours.
Two features make the ECR different from an interest rate. It applies only up to the fees, so any credit beyond them is lost, or carried forward for a limited period if the agreement says so. And it is set by the bank, usually at a level well below short-term market yields. The treasurer's question is therefore not "what does the ECR pay?" but "how much balance is worth leaving in the account, and where should the rest sit?"
| Item | Value |
|---|---|
| Average collected balance | $9,000,000 |
| Monthly analysed service charges | $12,500 |
| Annual service charges | $150,000 |
| Earnings credit rate | 2.40% |
| Reserve deduction | 10% |
| Government money market fund yield | 3.60% |
| Hybrid interest-bearing account rate (fees paid in cash) | 2.90% |
| Operating minimum that must stay in the account | $3,000,000 |
The operating minimum is the float the account needs to settle payments and clear receipts; it would sit there whatever the pricing. Setting it is a separate exercise, worked in how to set a minimum cash balance.
Effective ECR = ECR × (1 − reserve) = 2.40% × 0.90 = 2.16%
Credit capacity on the full balance = 9,000,000 × 2.16% = 194,400 a year, against 150,000 of fees: 44,400 of credit is wasted
Covering balance = annual fees / effective ECR = 150,000 / 2.16% = 6,944,444
Excess balance earning nothing = 9,000,000 − 6,944,444 = 2,055,556
Excel: =Fees/(ECR*(1-Reserve)) for the covering balance; =MAX(0,Balance-CoverBal) for the idle excess
On the full balance the account "earns" 150,000 of fee relief, an effective 1.67 per cent on $9,000,000. That is below the 2.16 per cent the ECR is worth on each covered dollar, because almost a quarter of the balance is earning zero.
Every option pays the same $150,000 of fees, either in balances or in cash, so the comparison is the interest earned less any fees paid in cash.
| Option | Interest | Fees paid in cash | Net | Yield on 9,000,000 |
|---|---|---|---|---|
| A. Everything in the analysed account | 0 | 0 | 0 | 0.00% |
| B. Covering balance stays, 2,055,556 swept to the fund | 74,000 | 0 | 74,000 | 0.82% |
| C. Hybrid account at 2.90%, fees paid in cash | 261,000 | 150,000 | 111,000 | 1.23% |
| D. Operating minimum stays, 6,000,000 to the fund | 216,000 | 85,200 | 130,800 | 1.45% |
Option B is what most treasurers do once they look at the statement: keep exactly enough to cover the fees, sweep the rest. It is better than doing nothing by $74,000. But it is not the best answer, because each dollar of the covering balance above the operating minimum earns 2.16 per cent in credit when it could earn 3.60 per cent in the fund. In option D the $3,000,000 operating minimum still generates $64,800 of credit, the remaining $85,200 of fees is paid in cash, and the $6,000,000 in the fund earns $216,000. Moving the 3,944,444 between the operating minimum and the covering balance gains a spread of 1.44 points, worth $56,800 over option B.
The rule in one line: hold the balance the account needs to operate, and add balances to buy down fees only when ECR × (1 − reserve) is above what the cash would earn elsewhere.
The break-even is the alternative yield equal to the effective ECR, 2.16 per cent. Below it, compensating balances win; above it, paying fees in cash wins.
| Fund yield | B. Cover fees with balances | D. Operating minimum only | D less B |
|---|---|---|---|
| 1.50% | 30,833 | 4,800 | −26,033 |
| 2.16% | 44,400 | 44,400 | 0 |
| 3.00% | 61,667 | 94,800 | 33,133 |
| 3.60% | 74,000 | 130,800 | 56,800 |
| 4.50% | 92,500 | 184,800 | 92,300 |
Negotiating the ECR moves the same line from the other side. At a 3.00 per cent ECR the effective rate is 2.70 per cent, the covering balance falls to 5,555,556, and option B earns $124,000 against $147,000 for option D. At a 4.00 per cent ECR the effective rate reaches 3.60 per cent, the two options are equal at $174,000, and the account is finally priced like the fund. At a 1.50 per cent ECR the full $9,000,000 no longer covers the fees: the account leaves a $28,500 shortfall to pay in cash, while option D still nets $106,500.
The reserve deduction is worth fighting on its own. Without it the covering balance would be 6,250,000; the 10 per cent line costs 694,444 of extra idle balance for the same fees.
Treating the ECR as a deposit rate on the whole balance. On these figures that reading values the account at 2.40 per cent of $9,000,000, or $216,000 a year. The true value is $150,000, capped by the fees, and the marginal dollar above the covering balance earns nothing at all. The second mistake is comparing the hybrid account's 2.90 per cent with the fund's 3.60 per cent and stopping there: the hybrid rate is earned on the operating minimum too, but the fees then come out in cash, which is why option C lands between B and D. Read every option as interest less cash fees on the same total balance, and banks' pricing differences become visible. How the fund compares with deposits and bills on security and liquidity, not only yield, is set out in where a company should park its surplus cash.
The book treats the operating balance as one of five readings of the same cash, and its bank and payments workbook is part of the free workbook set for this case.
Compute the effective ECR, ECR × (1 − reserve), and the covering balance, fees divided by that rate. Keep the operating minimum in the analysed account; add balances above it only when the effective ECR beats the alternative yield. Here it does not: 2.16 against 3.60 per cent, and the difference is $56,800 a year on top of the $74,000 a simple sweep recovers.
Average collected balance, less the reserve deduction, times the earnings credit rate, for the days in the period. On an illustrative $9,000,000 at a 2.40 per cent ECR with a 10 per cent reserve, the annual credit capacity is $194,400. It can only offset analysed fees, so against $150,000 of fees $44,400 of it is wasted unless the agreement allows a carry-forward.
Only when ECR times one minus the reserve is above what the cash earns elsewhere. An illustrative 2.40 per cent ECR with a 10 per cent reserve is worth 2.16 per cent; with a money market fund at 3.60 per cent, every dollar held above the operating minimum to buy down fees costs 1.44 points a year. Below a 2.16 per cent alternative yield, the balances win.
Annual fees divided by the effective ECR. For $150,000 of annual fees at a 2.40 per cent ECR and a 10 per cent reserve deduction, that is 150,000 / 2.16% = $6,944,444. Removing the reserve deduction would bring it down to $6,250,000, which is why the reserve line is worth negotiating.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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