A core figures deposit interest on the full balance daily and Reg DD sets the two ways it may do it and the rate floor.

Deposit interest accrual is the daily calculation a core banking system runs to work out how much interest each account has earned. For consumer accounts at US banks, Regulation DD requires interest on the full principal every day, using either the daily balance method or the average daily balance method, with a daily rate of at least 1/365 of the interest rate. Crediting and compounding are separate choices.

This guide is for teams that build or configure interest on deposit accounts: banks choosing a core, fintechs whose program ledger must match the bank’s, and anyone reconciling the two. It covers what the rule requires, the two methods with worked numbers, when accrual starts and stops, and the settings to test. For the system itself, see what is core banking.

What Regulation DD covers

Regulation DD (12 CFR part 1030) implements the Truth in Savings Act. It applies to depository institutions except credit unions, and to accounts held by or offered to a consumer: time, demand, savings and NOW accounts.

Section 1030.7 sets the interest rules:

  • Full principal, every day. Interest is calculated on the full amount of principal in the account for each day.
  • Two permitted methods. The daily balance method or the average daily balance method.
  • Minimum daily rate. At least 1/365 of the interest rate. In a leap year, 1/366 may be used.
  • No set crediting schedule. The section does not require compounding or crediting at any particular frequency.
  • Start and end dates. Interest must start to accrue no later than the business day set by the Expedited Funds Availability Act and Regulation CC (12 CFR 229.14), and it accrues until the day funds are withdrawn.

The two permitted methods

Regulation DD defines both methods in section 1030.2:

Method How the rule defines it What the core stores
Daily balance A daily periodic rate applied to the full principal in the account each day One interest amount per account per day
Average daily balance A periodic rate applied to the average daily balance for the period; the average is the sum of each day’s full principal divided by the days in the period The running sum of daily balances, then one calculation at period end

With a constant rate and no minimum balance, both methods give the same result. Take a 30-day period at 3.00%, with $5,000 on deposit for 20 days and $2,000 for 10 days, using a 1/365 daily rate:

  • Daily balance: $5,000 × 0.03 ÷ 365 × 20 = $8.22, plus $2,000 × 0.03 ÷ 365 × 10 = $1.64, for $9.86.
  • Average daily balance: ($5,000 × 20 + $2,000 × 10) ÷ 30 = $4,000. Then $4,000 × 0.03 ÷ 365 × 30 = $9.86.

The methods split when a minimum balance applies.

Minimum balances change the result

Section 1030.7(a)(2) says a bank must use the same method to decide whether the minimum balance is met as it uses to calculate interest. The official commentary explains the effect:

  • Under the daily balance method, a bank may skip interest for the days the balance is below the minimum.
  • Under the average daily balance method, it may skip interest for the whole period if the average is below the minimum.

Using the example above with a $3,000 minimum: the daily balance method pays interest only on the 20 days at $5,000, so $8.22. The average daily balance is $4,000, which meets the minimum, so the full $9.86 is paid.

The commentary adds rules a core has to enforce:

  • Once the minimum is met, interest is paid on the full balance, not only the amount above the minimum.
  • A negative balance counts as zero, both for interest and for the minimum-balance test.
  • A bank may not require both a minimum daily balance and a minimum average daily balance. It may add a second test only if it is “unequivocally beneficial” to the consumer.

Rates, day counts and leap years

The rule sets a floor of 1/365 of the interest rate per day. The commentary lets a bank use a higher daily rate, such as 1/360, as long as it applies that rate 365 days a year. A 360-day rate applied only 360 days is not allowed. For a leap year in which the account earns interest for February 29, the bank may use 1/366 or 1/365 for 366 days.

The effect on $10,000 at 4.00% for a 365-day year:

Daily rate Daily interest Days applied Year’s interest
1/365 $1.0959 365 $400.00
1/360 $1.1111 365 $405.56

Whichever convention the core uses, the disclosed annual percentage yield (APY) has to match it. Appendix A to part 1030 gives the APY formula, based on the interest earned on the principal over the term. Its example: $61.68 of interest on $1,000 for a 365-day year is an APY of 6.17%.

When accrual starts and stops

Regulation DD points to Regulation CC for the start date. Section 229.14 requires a bank to begin accruing interest on deposited funds no later than the business day it receives credit for them. A bank may rely on the availability schedule of its Federal Reserve Bank, Federal Home Loan Bank or correspondent to decide when credit is received. Interest is not required on a deposited check that is returned unpaid.

The commentary also lets a bank calculate interest on a “ledger” or a “collected” balance, as long as those crediting rules are met. On the other end, interest accrues until funds leave. The commentary’s example: if a check is debited to an account on a Tuesday, interest accrues on those funds through Monday.

For a core, this means the accrual job needs to know which balance it reads. Our guide to ledger balances explains the difference between pending, posted and available balances.

Methods the rule does not allow

The commentary names three calculation methods that fail the full-principal-every-day test:

  • Ending balance: interest on the balance at the end of the period.
  • Low balance: interest on the lowest balance on any day of the period.
  • Investable balance: interest on a share of the balance that excludes reserve requirements.

It also says interest must still be paid on accounts a bank treats as inactive or dormant.

Accrue daily, credit on a schedule

Because section 1030.7(b) sets no crediting frequency, a core can separate two steps. The core accrues interest each day, and it credits (posts) the accrued amount to the account at the end of a cycle, such as monthly. Compounding only happens when credited interest becomes principal.

The commentary allows uniform payments too. On a one-year certificate of deposit, a bank may pay 1/12 of the year’s interest each month, or 11 equal payments and a final one for the remainder, while still earning interest each day.

This split is where a program ledger and the bank’s core can drift apart. Daily accruals, the credited total and the APY earned shown on statements have to agree, and any rounding rule has to be the same on both sides. See account reconciliation ledger vs bank balance for how to set up that check.

What to test before launch

  • Which balance feeds accrual: ledger or collected, and how pending items are treated.
  • The daily rate convention (1/365, 1/366 or 1/360 applied 365 days) and how leap years are handled.
  • Minimum-balance logic, and whether it uses the same method as the interest calculation.
  • Negative balances set to zero for both interest and the minimum test.
  • Start of accrual for checks, ACH credits and wires, and the stop date on withdrawal.
  • Crediting frequency, rounding, and the APY shown in disclosures and on statements.
  • Dormant accounts still accruing.
  • Tiered or stepped rates, which Appendix A treats separately.

More core guides are in the core banking section, including the core banking migration checklist for moving interest settings between systems.