Compensating Balance

AAA

DEFINITION of 'Compensating Balance'

A minimum balance that must be maintained in an account. The compensating balance is often used to offset a portion of the cost that a bank faces when extending a loan or credit to an individual or business, and is usually calculated as a percentage of the loan outstanding. The account where the funds are held are typically non-interest bearing, and the bank is free to use the money in other investment opportunities.

INVESTOPEDIA EXPLAINS 'Compensating Balance'

By requiring money to be deposited to offset some of a loan's cost the bank is able to extend other loans and pursue other investment opportunities, while the individual or business will generally see a lower interest rate. If the deposit falls below a certain level the interest rate on the loan may adjust upward to compensate.

RELATED TERMS
  1. Nominal Interest Rate

    The interest rate before taking inflation into account. The equation ...
  2. Loan Committee

    The lending or management committee of a bank or other lending ...
  3. Minimum Balance

    The minimum dollar amount that a customer must have in an account ...
  4. Average Balance

    The balance on a loan or depositary account. A simple average ...
  5. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  6. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
RELATED FAQS
  1. What net interest margin is typical for a bank?

    In the United States, the average net interest margin for banks was 3.03% in the first quarter of 2015. However, this was ... Read Full Answer >>
  2. What are the main benchmarks that track the banking sector?

    The appropriate benchmarks for tracking banking sector performance depend on the type of banking. For instance, commercial-only ... Read Full Answer >>
  3. What are the major categories of financial institutions and what are their primary ...

    In today's financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending and ... Read Full Answer >>
  4. What is the difference between an investment and a retail bank?

    The activities and types of clients for an investment bank versus those for a retail bank highlight the primary difference ... Read Full Answer >>
  5. Is the banking sector subject to any seasonal trends?

    The banking industry, including retail and investment banks, is subject to seasonal trends. Seasonality is most commonly ... Read Full Answer >>
  6. What are some of the well-known no-load funds?

    The capital adequacy ratio promotes stability and efficiency of worldwide financial systems and banks. The capital to risk-weighted ... Read Full Answer >>
Related Articles
  1. Retirement

    Tired Of Banks? Try A Credit Union

    These nonprofit organizations can provide a range of services for lower fees.
  2. Options & Futures

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  3. Options & Futures

    Demystification Of Bank Accounts

    Find out which type of account suits your specific needs.
  4. Options & Futures

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  5. Savings

    Bank Lingo: Routing Number Vs. Account Number

    Each consumer bank account has its own personal ID. And so does the bank. How do these numbers function and how do they protect the account holder?
  6. Savings

    5 Things to Look for in a Private Banker

    When putting all your assets into one private banker basket, it pays to proceed with caution.
  7. Investing

    Do You Need A Private Banker?

    They offer well-heeled clients unparalleled convenience, but could be prone to certain conflicts of interest.
  8. Credit & Loans

    What is a Financial Institution?

    A financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
  9. Investing

    Which Are the World's 10 Largest Private Banks?

    Most of the largest private banking providers in the world are headquartered in Europe or the United States.
  10. Savings

    Checking Account Reviews: Chase Premium Platinum

    Which perks and services come with Premier Platinum and is it worth the cost to you?

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!