Corporates search for alternatives in the low interest-rate environment
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Corporates search for alternatives in the low interest-rate environment

Corporates can make their excess cash holdings pay despite low rates, through the earnings credit rate scheme – together with cash pooling – which cap banking fees.

Amid the prolonged era of low interest rates, corporates have been looking at how they can offset banking fees for cash-management services using their excess cash pools held at the given bank.

Earnings credit rate (ECR) is one solution. ECR is the calculation of interest from corporates' idle funds in bank accounts, which is then used to pay for banking fees. The bigger the deposit, in theory, the bigger the offset for banking fees, other things being equal.

Jose Franco-160x186

 Clients looking to multi-currency notional pooling are interlinking ECR into that discussion

Jose Franco,

Jose Franco, head of liquidity solutions in EMEA, JPMorgan, says: “The one commonality across the regions is that over the last year the central banks have been racing to get to zero on interest rates.” 

Corporate treasurers have a challenge to meet the returns year-on-year, making ECR a natural solution to move towards.”

ECR, which originated in the US, is becoming more common in Europe and Asia, boosted by the tendency for corporates to tap a small number of global banks across its geographical footprint. However, adoption of ECR is not restricted to the multinational corporations – and they can be the most complex of clients to move to the system. 

Franco says: “It is a benefit to any corporate that is paying fees. The largest ones can see the greatest benefits but due to their size can be the hardest to implement.”

ECR yields benefit both banks and corporates. Banks might see corporates opt to hold higher balances with them to cover the costs of the fees, while corporates can benefit from better pricing. 

“If using ECR, we would negotiate the pricing terms, which can mean a reduction or better pricing being introduced,” says Amit Agarwal, EMEA head of liquidity management services, TTS, Citi.

The use of ECR feeds into the trend for cash pooling – the process of consolidating cash across multiple accounts into a consolidated header account – as the more money that a corporate holds with a bank, the more they can offset.

John Grout-65x65

A lot of banks will make it clear to their clients
they do not want to hold short cash

John Grout, ACT

JPMorgan's Franco says: “Clients looking to multi-currency notional pooling are interlinking ECR into that discussion. Solutions are modular and will fit with each other to drive an optimal solution, be it local, regional or global.”

The linking of ECR with cash pooling simplifies banking for corporates operating across Europe. 

Citi's Agarwal says: “Clients can manage together their liquidity and sweeping platforms. They can centralize the liquidity into London and offset all the fees in Paris.”

Pooling can also bring in currencies that provide a higher rate of interest – especially beneficial to those holding cash in more currencies than the US dollar.

“Corporates need to link their structure together in phases – they may look at adopting ECR and multi-currency pooling to benefit from lower fees whilst offsetting currency positions,” says Franco.

Amit Agarwal-160x186

Amit Agarwal, Citi

Agarwal adds: “We will tell the client to bring in currencies that are offering a higher interest rate to earn more credits. The credit rates on the dollar are low so you need a lot to cover all the costs. But Turkish lira, for example, is bringing in rates of 8% to 9%.” The size of the balance needed to cover the cost of the fees will often not match exactly, but there are solutions in place.

“Sometimes the client will not have enough fees or balance, and the volatility is on the client,” says Agarwal. “Any credit that has not been utilized in a month can keep being pushed forward in the same calendar year to offset future credit.”

Irrespective of efforts to efficiently deploy cash to reduce banking fees, corporates, given their historically high cash piles, are still faced with the question about how best to invest their excess liquidity. 

John Grout, policy and technical director, Association of Corporate Treasurers (ACT), says: “A lot of banks will make it clear to their clients they do not want to hold short cash.”

Tri-party repos

Grout adds that tri-party repos are emerging as an investment option. Tri-party repos involve the short-term lending of funds by an institution to another. The custodian bank sits at the centre of the tri-party repo transaction and links the investor to the recipient of the funds borrowing the cash.

Grout says: “We’re seeing more corporates using tri-party repos. It started off as the larger corporates using these, but it is moving down the scale. It is interesting to see that some banks will offer a higher interest rate on the repo than on the corresponding deposit.”

Franco concludes: “If the client still has some surplus liquidity, then we would advise them that they don’t need so much to offset the fees. Instead, they can invest into 31-day accounts or a tri-party repo. 

"All of the cash is being deployed in the most optimal manner with the ECR sitting at the centre."

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