Twenty Percent Rule

DEFINITION of 'Twenty Percent Rule'

A deposit requirement instituted by commercial banks for corporate lenders. The twenty percent rule stipulates that borrowers must keep deposits at the bank that are at least equal to 20% of their regular borrowings from their line of credit. However, the exact ratio of this rule is often contingent upon current interest rates and other factors.

BREAKING DOWN 'Twenty Percent Rule'

The twenty percent rule is also known as a compensating balance. These balances are not usually fixed at a set percentage, such as 20%, the way they used to be. They now tend to range anywhere from 10-25%, and are sometimes even waived with the payment of bank service charges.