Q&A: Adjustments

Q&A: Every question deserves an answer...

Balances, charges, and fees are sent on an EDI 822 file.  What happens if something was sent incorrectly or omitted entirely?  Usually, a bank sends a restated 822 file with the mistakes now corrected.  But, when a restated 822 file is not sent, any adjustment is made.

Adjustments (ADJs) are made on the bank's end, sent on the EDI 822 file, and then applied to the appropriate balances.

What is sent on the EDI 822 file?

From my end, I cannot see when the bank has made an adjustment until it is sent on the EDI 822 file.  At that point, I can tell...

1. Which charge/balance the ADJ is for
2. The amount of the ADJ
3. The original charge/balance amount
4. Whether the ADJ is for the current or prior period
5. When the original transaction requiring the ADJ occurred 
6. How the ADJ is being applied

Adjustments can be sent for either a ledger balance, float balance, or service charge.  All three have specific ways in which they must be formatted on the EDI 822 file according to AFP standards to signify to which of the above 3 areas the ADJ is for.  But, banks cannot just send the ADJ information alone.

Application is important...

There are 2 balances in particular whose sole purpose is to apply ADJs for either the ledger or float balances.

• Balance Adjustment – Prior Period Ledger
• Balance Adjustment Prior Period Average Float

Let's say your EDI 822 file has an ADJ for Ledger.  Based on the information sent you can see how ledger was adjusted, by how much it was adjusted, and for which period the adjustment applies.  The same goes for any float adjustment.

For service ADJs, these should be sent as service line items in the account's service detail section of the EDI 822 file.  Some are sent with "credit" or "adjustment" in the service description with the charge sent as a negative or positive to deduct that amount from the total service charges due.  But, each bank is different.

Without sending Balance Adjustment – Prior Period Ledger for a ledger ADJ, Balance Adjustment Prior Period Average Float for a float ADJ, or an adjustment service line item - the ADJs will not apply towards your final balances/charges so the information on the 822 file becomes nothing more than a memo entry.

Happy Analyzing!

*Have an Account Analysis question? Send me an email girlmeetaa@gmail.com

DDA Balance Reserve Requirement (6/14)

Account Analysis consists of balances and fees which comprise a basic math calculation. There are 14 balances that I refer to as "Remember the Math". I will discuss all 14 in 14 different posts.

DDA Balance Reserve Requirement

DDA means Demand Deposit Account.  A DDA is essentially your typical non-interest-bearing checking account you can open at just about any bank.

Prior to the Great Recession, the DDA Reserve Requirement balance for corporate accounts was ~10% of the Balance Subject to Reserve.  Balance Subject to Reserve is the final balance used by financial institutions to compute the balance percentage they will deduct for any reserve requirement.  This deducted amount is not subject to the Earned Credit Rate (ECR) of the account and thus not eligible for Earnings Allowance.

Why is this 10% reserve requirement (RR) deducted at all?

The Federal Reserve (Feds) required financial institutions to place 10% of their total deposits on reserve.  This 10% requirement must be sat aside at the Fed so it is exempt from any interest-bearing activities the bank would have otherwise invested it in. Most financial institutions make money off the deposits of their account holders.  You deposit funds into your account at Bank XYZ.  Bank XYZ then takes those deposited funds and loan them out, at interest, to some other entity thus making money off your money you've allowed the bank to "hold" for you.  If the funds are not loaned out, they are invested in various securities again potentially earning the bank a return off your money.

When the Feds implemented the 10% RR, this left the bank access to only 90% of their total deposited funds since they could no longer invest the other 10%.  The banks were losing out on the investment opportunities and potential earnings for this 10% so instead of absorbing that loss they passed that loss down to their corporate account holders.  Since the bank could not benefit from earning interest on the entire 100% of their deposits then neither would their corporate demand deposit account holders.  This 10% deduction from the account holder's end is shown in the DDA Reserve Requirement balance which is 10% of the Balance Subject to Reserve balance.

So, what changed the 10% RR rules?

For some time, Regulation Q prevented corporate DDA holders from earning interest on their bank account balances.  But, they are allowed an ECR which does not violate Reg Q since it is considered a "soft" interest.  According to Wikipedia, Reg Q was enforced from 1933 following the Glass-Steagall Act to 2010 when it was repealed by the Dodd-Frank Act.  What was also changed during the Great Recession was the Feds now allowing financial institutions to earn interest on their 10% RR.

No longer were financial institutions required to forego earnings on those funds sitting at the Fed.  This now gave 100% of the bank's deposit balances the right to earn interest which made it difficult for those same banks to justify the 10% RR they had passed down to their corporate DDA holders. This change was eventually reflected on the EDI 822 files when the DDA Reserve Requirement balance was sent as $0.00.  When one bank made the RR change there was a "hooray!" heard across the land (the small Account Analysis land).  This resulted in a little nudge to other corporate DDA customers asking them, "why isn't your bank now subjecting 100% of your balances to ECR? Hmm."

Current day Reserve Requirement calculations...

The following balances may play a part in the DDA Reserve Requirement calculation:

• Compensating Bal Req-Credit Facility-Subject to Reserve
• Other Balance Subject to Reserve

Both Compensating Bal Req-Credit Facility-Subject to Reserve and Other Balance Subject to Reserve may be sent but I don't usually check for them unless there's a calculation issue which will cause other subsequent balances to be off.

We have already discussed this balance which, as its name states, is the balance subject to the reserve:

• Balance Subject to Reserve

The balance which displays any reserve requirement deduction is:

• DDA Balance Reserve Requirement

This topic opened the door for both soft and hard interest to be seen on the EDI 822 Account Analysis files.  I have seen only one thus far so not enough data to compile an informative blog post.  We shall see...

Happy Analyzing!