Compensating Balance

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Dictionary Says

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 Says

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.
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