Matt Blogs!

Account Balances

Any idle balances in bank DDAs are assigned an earnings credit allowance or rate (ECR) in lieu of the direct payment of interest (due to Reg Q), based on the three-month U.S. Treasury Bill rate. The ECR calculation that follows in Exhibit 8.5 assumes an ECR of 2.5 percent, which was typical during the late 1990s. Although each bank uses its own account analysis format, the top portion of the account analysis is often organized as described in the following subsections.

Description
Definition
Illustrative Amount

——————————————————————————–

Average ledger balance
Average daily balance based on the ledger sum of debits and credits; does not reflect funds that can be used immediately by the account holder.
$230,110

Less: Average float
Average funds in the process of collection through assigned availability.
-$208,173

Equals: Average collected balance
Average funds that are usable for transactions or investments, the bank having received funds settlement.
$21,937

Less: Reserve requirement (currently 10%)
The amount set by the Federal Reserve to support the banking system’s liquidity. This amount cannot be lent to borrowers and does not earn an ECR credit.
-$2,194

Equals: Average earning balance
The amount on which the corporate customer earns an ECR credit.
$19,743

ECR (earnings credit rate)
An interest allowance against positive balances in a corporate DDA, often pegged to the 91-day U.S. Treasury Bill rate.
2.5%

ECR allowance
The calculated dollar earnings credit amount.
[*] $41

[*]Using an ECR allowance of 2.5 percent, calculated as ($19,743) x (.025) ÷ (12)

Exhibit 8.5: Illustrative Balance Presentation in Bank Account Analysis Statement

Taken From : Essentials of Managing Corporate Cash

Posted in General
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.