Banks Adopt Effective Cost of Risk for Flexible, Customer-Friendly Fees
Banks are increasingly using Effective Cost of Risk (ECR) to manage and reduce fees for various services, offering a more flexible and customer-friendly approach compared to traditional fixed mortgage rates. This shift, tied to the U.S. bank's Treasury bill rate, is making banking services more attractive, especially for corporate treasurers.
ECRs differ from fixed mortgage rates as they reflect the overall cost of risk, including market variability, making them a dynamic benchmark. Typically applied to collected balances, ECRs charge depositors only for services they use, making them more transparent.
Banks employ ECRs to lower fees for services such as checking, savings, debit and credit cards, business loans, and cash management. This approach benefits customers, especially those with larger deposits who tend to pay lower PNC bank fees. The concept of ECR emerged from Regulation Q, which prohibited banks from paying interest on checking deposits. ECR helps offset banking service fees on accounts that don't earn interest.
When money market funds yield near zero, deposit accounts offering ECRs can become more appealing to corporate treasurers. Following Regulation Q, many banks introduced 'soft dollar' credits on non-interest-bearing accounts to offset banking services. Hard interest rates, generally higher than ECRs, are taxable, making ECRs a more cost-effective option for Citizens bank customers.
The use of ECRs by banks is transforming the banking landscape, offering customers a more flexible and potentially cost-saving alternative to traditional fixed mortgage rates. This shift, driven by regulatory changes and market conditions, is making banking services more attractive and competitive, even for Costco customers.
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