The recent banking turmoil reminds everyone just how important it is to be managing counter party risk. This disarray also demonstrates the strategic nature of deposits for financial institutions. According to Alexandre Bousquenaud, one of the key objectives treasurers should focus on in this environment is negotiating their yield on cash balances to take advantage of ongoing monetary tightening.

– Why should corporate treasurers be thinking about the remuneration of current account balances today?

– Alexandre Bousquenaud, Redbridge : The rise in interest rates has significantly increased the cost of capital for banks. The US Federal Reserve has raised its key rates by 450 basis points since March 2022 and made clear that it is determined to keep monetary policies tight to rein in inflation. Similarly, the European Central Bank has raised rates by 350 basis points over the same period.

The return of short-term rates to positive territory last year removed any justification for banks to charge fees on current account balances. We are back in a normal world, where deposits make loans. This raises the question of how much companies should receive for depositing money with their banks, as this is a very valuable resource for banks today!

– What do the banks have to offer in return for higher rates?

I’m going to talk mainly about the United States, where current account balances offset the cash management bill through the Earnings Credit Rate (ECR) mechanism – a daily calculation of interest that a bank pays on customer deposits.

The level of ECR is determined in negotiations between a company and its bank. The rate also imperfectly follows the path of the Fed funds rate. In the vast majority of cases, US banks increase their customers’ ECRs – with a delay – when rates rise, although they rarely pass on the entire rate increase. This means that the more rates are hiked, the greater the gap between the interest companies receive on their deposits and the Fed funds rate.

– How can the ECR help treasurers reduce their bank fees in the US?

It’s possible to increase deposits to receive more earnings credits from the bank, but this strategy is completely dependent on how much cash you have available! It’s also possible to renegotiate your cash management fees. This requires a structured approach, some knowledge and a little time, but the results can be worth the effort. Finally, it’s possible to renegotiate your ECR with the banks. A Fed rate hike can provide a good opportunity to discuss the matter.

We generally advise our clients to include the remuneration of current account balances in any negotiation on cash management fees.

– Are there mechanisms other than ECR that pay interest on cash balances?

Yes. It’s possible to negotiate a hard interest rate on deposits. The logic here is not to reduce the bank bill, but to generate income. In our opinion, the optimal approach is to negotiate a hybrid structure in which you generate earnings credits up to the amount of the cash management invoice, and once the invoice is completely cleared you automatically generate hard interest.

This hybrid approach enables you to avoid the situation in which a significant portion of your cash deposits lose earning credits at the end of the month: it’s important to remember that these credits cannot be carried over from one month to the next. A hybrid approach also makes it possible to limit the tax you pay compared with a simple interest income formula.

– Which provides a higher return: ECR or hard interest?

ECR is often higher than hard interest rates in a hybrid configuration because hard interest involves a cash payment from the bank instead of a simple compensation, but not all banks follow a particular logic. Bank offers are also evolving in other ways. Some banks now offer rates directly indexed to a market rate such as the Effective Fed Funds rate, the Target Rate High End or Low End. If this is the case, treasurers don’t need to ask for their ECR to be adjusted or for a retrocession of credits after the Fed hikes rates: it happens automatically.

We are also seeing the emergence of a global ECR offering. Some banks are agreeing to waive cash management fees generated outside the US with ECRs on accounts located in the US. Others are also agreeing to waive fees on other products, such as letters of credit or forex transactions. Banks may also include other countries and currencies in their ECR calculation. It’s a rapidly evolving field.

– Why should companies consider using Redbridge to negotiate the remuneration of deposits?

Banks tend to refuse requests from a client if they are asking outside the context of a more overarching renegotiation of bank fees. In order to have the best position and negotiate successfully, it’s essential to work with an advisor who knows the cash management banks, the quality of the services they provide, their appetite for taking on new clients and the current state of play in the market.

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