Balance Required (8/14)

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.

Balance Required

Sometimes referred to as Collected Balance Required or Balance Equivalent - Total Service Charges, this is the amount required to offset total analyzed service charges for a current period.

This differs from the Balance Required Multiplier which is the amount required to offset $1 of analyzed service charges.

In perfecting my calculations, I was confused as to which definition correctly fits which title.  If you Google, "Collected Balance Required", you may find the definition given isn't truly correct. But let's breakdown the math...

Calculating the Balance Required

Lets assume the following numbers are true:

Analyzed Service Charges (ASC) = $500.00
Earnings Credit Rate (ECR) = 0.2%
Days in Period (DP) = 31
Days in Year (DY) = 365
Reserve Requirement (RR)** = $0

Collected Balances (CB) = (ASC) / [(ECR * DP/DY) * (1 - RR)]

CB = 500 / [(0.002 * 31/365) * (1 - 0)] = $2,943,548.38

To offset the total analyzed charges of $500.00 for the current period, the collected balance required is $2,943,548.38.

That's a sizable balance required just to offset $500 in analyzed service fees!  But imagine (and calculate) how much less that Balance Required would be if, and I'm just dreaming here, the ECR was 2%.

Balance Required to Offset $1

There are 2 ways to calculate this balance:

1. Collected Balance Required / Analyzed Service Charges
2. (1/ECR) / (DP/DY)

Using the 1st option, $2,943,548.38 / $500 = $5,887.09.  This is the simplest way to calculate the Balance Required Multiplier.

However, if you do not already have the Collected Balances Required amount, you will use the 2nd option.

=(1/0.002) / (31/365) = $5,887.09

The "multiplier" part comes in when you multiply this number by Service Charges to get the Collected Balances Required:

$5,887.0968 * $500 = $2,943,548

I added the next two decimal places which would have otherwise skewed the total by $3.  In this example, the balance required to offset $1 in service charges (if the above assumptions still hold true) is $5,887.09.

Auditing your Balance Required and/or Balance Required Multiplier

If you can read the raw data of the EDI 822 file, these balances should be sent by your bank(s). In an ideal world, what is sent on the EDI 822 file would also be sent on the paper statement.

For example, one of the large financial institutions has a dummy Account Analysis statement online which includes the "Service Charge Multiplier".  Using this number, the account holder can multiply it by the total service charges to find their Collected Balances Required.

The best way to audit these balances is still via an Account Analysis system.  It allows one to budget and forecast related service charges to plan future account collected balances required esp. with the current very unappealing ECR offerings.

Remember The Math

In the math thus far, Balance Required is the 8th component on the Compensation side of the Account Analysis equation.  Only 6 more to go! Til then...

Happy Analyzing!


**Most banks no longer deduct 10% as a Reserve Requirement so I've plugged in $0.00

Investable Balance (NIF) (7/14)

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.

Investable Balance (NIF)

The investable balance is the amount available for the bank to invest after the deduction of any reserve requirement so it's the net investable funds (NIF) available.

Investable Balance is one of the numbers used to calculate/audit the Earnings Allowance sent by the bank on an 822 file.  Some calculations call for the Available Balance * (1-RR), where RR is the Reserve Requirement, but the NIF is already that net value.

Lucky Number 7

In the math thus far, Investable Balance is the 7th balance on the Compensation side of the Account Analysis equation referred to as "Remember The Math":

         Average Positive Collected Balance
 less DDA Balance Reserve Requirement
         Investable Balance (NIF)

Because the Investable Balance may be used to calculate the Earnings Allowance and/or determine the minimum account balance needed to offset service charges it is one of the 14 key balances in Account Analysis.

Happy Analyzing!  

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!  

Average POSITIVE Collected Balance (5/14)

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.

Average POSITIVE Collected Balance

This balance may be pretty straightforward since its value is computed as Average Net Collected Balance plus Average Negative Collected Balance.

         Avg NET Collected Balance
plus  Avg NEG Collected Balance
         Avg POS Collected Balance

What is not included in the computation above is Balance Adjustment Prior Period Avg Float.  This balance, as its name states, is for any adjustments made to your Float balance from the prior period.  Since most adjustments from prior periods are sent during the current period, this balance will fall between the Avg Net Collected and the Avg Neg Collected.

        Avg NET Collected Balance
plus Balance Adj Prior Period Avg Float
plus Avg NEG Collected Balance                
        Avg POS Collected Balance

The balance in red because, as with all adjustments, an account may not have any from a prior period so this balance may be zero if it is sent at all.  If sent as a non-zero value, this balance may either be a negative or positive value which determines how its calculation is treated in the above equation.

Happy Analyzing!

**Note: Average NET Collected Balance has been updated**

Average NEGATIVE Collected Balance (4/14)

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.

Average NEGATIVE Collected Balance

This balance is sometimes referred to as Collected Overdraft (OD) Balance.  To compute this balance, the sum of the daily end-of-day uncollected balances (negative collected) in the analysis period is divided by the number of days of the analysis period.  Taking the sum divided by the days in period is what computes the average value for this balance.  Obviously, this balance will equal zero if there were no collected balance overdraws during the analysis period.

This balance should always be sent as a positive value (no negative sign).

Since this balance directly corresponds to any account ODs which occurred during the analysis period, you can expect to see corresponding service line items on the account statement.  Some example OD-related service descriptions are:

• Negative Collected Balance Fee
• Daily Overdraft Occurrence Fee
• Overdraft Interest
• Drafts Handling Charge
• Daily Ledger Overdraft
• NSF Items Paid/Returned

Happy Analyzing!

Average NET Collected Balance (3/14)

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.

Average NET Collected Balance

This balance may be pretty straightforward since its value is computed as Average Net Ledger Balance less Average Float Balance.
  
    Avg NET Ledger Balance
less         Avg Float Balance
Avg NET Collected Balance

The Average Net Collected Balance is the sum of the daily collected balance over the number of days in the period.  This is the net balance because it doesn't include any pending yet-to-clear transactions so it's an accurate reflection of the account's available balance. 

What is not included in the computation above is Balance Adjustment Prior Period Ledger. This balance, as its name states, is for any adjustments made to your ledger balance from the prior period. Since most adjustments from prior periods are sent during the current period, this balance will fall between the Avg Net Ledger and the Avg Float.

        Avg NET Ledger Balance
+/-- Balance Adj Prior Period Ledger
less   Avg Float Balance                         
       Avg NET Collected Balance

The balance in red, as with all adjustments, may not be on an account statement from a prior period so this balance may be zero if it is sent at all. If sent as a non-zero value, this balance may be either a negative or positive value which determines its calculation in the above equation.

The important thing is know about the Avg Net Collected Balance is that some financial institutions may use this balance to calculate your account's Earnings Allowance.  Suddenly, this simple balance becomes very important to watch out for.

Happy Analyzing!

Average Float Balance (2/14)

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.

Average Float Balance

When I think of how to explain what is Float I think of banking.  On my bank statements, I usually see a line titled "Current Balance" and another line titled "Available Balance".  The "Current Balance" shows the amount of funds in my account plus any pending cash inflows or outflows in the form of debits or credits.  Since these are pending transactions, they have not cleared my account yet but will soon (usually in the next 1 or 2 business days).

So, since the money is still technically "in" my account it is accounted for in "Current Balance".  However, since that money is "reserved" for a pending transaction(s), it is not available for me to use so it is not accounted for in the "Available Balance" field.

For example, below are a list of transactions which occurred on 01/15/2013:

Beginning Balance: $305.67

Deep Dish Pizzeria ~ $26.99 (Pending Debit)
Hot Yoga Class Package ~ $52.00 (Pending Debit)

Current Balance*: $305.67
Available Balance: $226.68

Where is the $78.99?  It is "floating"...

The two pending debit transactions which amount to $78.99 are still included in the Current Balance but are excluded from the Available Balance because the Available Balance indicates the amount of funds the account holder has "available" to withdraw, invest, transfer, etc.

The Float Balance is the daily recorded balance for all pending transactions while the Average Float Balance is the sum of those daily float balances over the period divided by the number of days in that period.  

Since the Average Float Balance follows the Average Net Ledger Balance in the "Remember The Math" calculation, the Average Float Balance is that part of the ledger balance that is not available (pending) to the bank for its use and thus not available to the account holder for their use.

In some explanations, Ledger Balance is the "Current Balance" from my example above.  Ledger is the total sum of all transactions posted to an account but Float are those transactions subtracted from Ledger to arrive at your Available Balance; which is balance #3 of the 14 in my Remember The Math series.

This is how I grasped the concept of Average Float Balance.

Happy Analyzing!

*Many financial institutions have varying titles for this balance.

Average NET Ledger Balance (1/14)

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.

Average NET Ledger Balance

The ledger balance is derived from Accounting. Here is where all debits and credits for an account are posted; to the ledger. This balance will include all debits and credits whether or not they have cleared the account (debit) or posted to the account (credit). In simple terms, a debit to an account is a subtraction of funds from the account while a credit to an account is an addition of funds to the account. 

The ledger balance is recorded per account on a daily basis.  At the end of a reporting period, the sum of those daily balances is computed and divided by the number of days in that period to arrive at the average.  That final balance, negative or positive, determines its net balance.

In some instances, there may be both an average positive ledger balance and an average negative ledger balance.  The Average POSITIVE Ledger Balance less Average NEGATIVE Ledger Balance is then the net balance of the ledger for that account.  And, in some instances, you will only see the Average NET Ledger Balance so no further computing is necessary.

Once both the Average POSITIVE Ledger Balance and the Average NEGATIVE Ledger Balance have been computed, you will arrive at the Average NET Ledger Balance as follows:

    Avg POSITIVE Ledger Balance

+  Avg NEGATIVE Ledger Balance

    Avg NET Ledger Balance            

This is usually the first balance you will see on your Account Analysis statement from your financial institution.  If you know how the bank arrives at this number, you have gained a better understanding of the balance itself and its relationship with Accounting.

Happy Analyzing!