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. Account Balance

    1. The amount of money in a financial repository, such as a checking ...
  5. Interest Rate

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

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

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  4. Options & Futures

    Demystification Of Bank Accounts

    Find out which type of account suits your specific needs.
  5. Just how are bank stress tests performed and what is the logic behind them? And is a stress test useful for evaluating a bank's stock?
    Investing Basics

    An Investor's Guide To Bank Stress-Testing

    Just how are bank stress tests performed and what is the logic behind them? And is a stress test useful for evaluating a bank's stock?
  6. Credit & Loans

    What is the difference between a state and a federally chartered credit union?

    Learn how federal chartered credit unions are regulated by the NCUA, while state chartered unions are regulated by their state's division of financial services.
  7. How does WFC make money? They lend it out at a higher rate than they borrow it at. Simple, right? But the real story is how proficient they are at it.
    Stock Analysis

    How Wells Fargo Became The Biggest Bank In America

    How does WFC make money? They lend it out at a higher rate than they borrow it at. Simple, right? But the real story is how proficient they are at it.
  8. Insurance

    Bag The Best Bank Account

    Take advantage of the deals banks offer, and find the right account for your financial situation.
  9. Personal Finance

    Bank Advisor Blunders And How To Avoid Them

    Unfortunately, this business tends to focus on sales rather than customer service.
  10. Savings

    Are Your Bank Deposits Insured?

    Learn how the FDIC is helping to keep your money in your pockets.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center