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.

  1. Deposit

    1. A transaction involving a transfer of funds to another party ...
  2. Security Deposit

    A monetary deposit given to a lender, seller or landlord as proof ...
  3. Bank

    A financial institution licensed as a receiver of deposits. There ...
  4. Co-borrower

    Any additional borrower(s) whose name(s) appear on loan documents ...
  5. Line Of Credit - LOC

    An arrangement between a financial institution, usually a bank, ...
  6. Cost Of Funds

    The interest rate paid by financial institutions for the funds ...
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