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Rising Excess ECR Poses Another Risk To NIB Deposits

Earnings credit rate DDA balances, already diminished, could be at further risk given high rates that continue to make interest-bearing alternatives attractive. 

In assessing the risk, banks should start by understanding what portion of their ECR DDA balances are “excess,” meaning above what’s needed to fully offset a client’s treasury management fees.  

When the Fed started hiking rates in 2022, excess ECR DDA was 11% of ECR balances, which earned 29 basis points (see chart). By this January, the excess had ballooned to 21% as ECRs rose to an average of 76 bp. In other words, one out of every five ECR dollars is earning nothing and therefore at risk of flight to alternatives offering higher returns.  

For banks, the best outcome is to do nothing for as long as they can, but they need to be ready to act. The first choice for reducing excess is to raise fees and, if that fails, to have an interest-bearing offer available. There’s risk in being either ahead of or behind the curve, so banks should plan carefully now to be in position to respond with speed later. 

% of Excess ECR DDA vs. Portfolio Average ECR Rates​

With rates high, the increased volume of excess
ECR DDA balances represents a flight risk. ​

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