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. Co-borrower

    Any additional borrower(s) whose name(s) appear on loan documents ...
  4. Bank

    A financial institution licensed as a receiver of deposits. There ...
  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 ...
Related Articles
  1. Options & Futures

    Demystification Of Bank Accounts

    Find out which type of account suits your specific needs.
  2. Savings

    Opening a Bank Account in Costa Rica as an American

    It shouldn’t be too hard to do, provided you have the appropriate documentation and forms. But be prepared for lots of paperwork!
  3. Credit & Loans

    Personal Loans: Compare the 6 Biggest Banks

    Need a personal loan? You may stop by one of these big banks for help. Their offerings vary in size, rates and loan types, which means you have options.
  4. Retirement

    What Was The Glass-Steagall Act?

    Established in 1933 and repealed in 1999, the Glass-Steagall Act had good intentions but mixed results.
  5. Personal Finance

    Best Ways to Send Money to the Phillipines

    When you need to send funds to friends or family in Metro Manila or elsewhere in the Philippines, these four services make it fast and simple.
  6. Markets

    The Biggest Companies in Silicon Valley

    Understand what types of companies are the most successful in Silicon Valley. Learn about the top six largest Silicon Valley companies by market cap.
  7. Economics

    What is the Cost of Funds?

    Cost of funds is the interest cost financial institutions pay to use the funds they deploy in their business.
  8. Stock Analysis

    JP Morgan Chase & Co. Vs. Bank of America Stock

    Examine two of the big four U.S. money center banks, Bank of America Corporation and JPMorgan Chase & Company, by comparing important equity evaluation metrics.
  9. Active Trading Fundamentals

    How Does Fundera Work and Make Money?

    Learn more about Fundera, the online loan broker service agency, and discover what it offers and how it makes money through its service.
  10. Professionals

    Career Advice: Investment Banking Vs. Commercial Banking

    Read an in-depth review of the differences between a career in investment banking and a career in commercial banking, including how to decide between them.
  1. Are all bank accounts insured by the FDIC?

    The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the U.S. government that protects you against ... Read Full Answer >>
  2. Do banks have working capital?

    The concept of working capital does not apply to banks since financial institutions do not have typical current assets and ... Read Full Answer >>
  3. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  4. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Full Answer >>
  5. What role does a correspondent bank play in an international transaction?

    A correspondent bank is most typically used in international buy, sell or money transfer transactions to facilitate foreign ... Read Full Answer >>
  6. What is the difference between a correspondent bank and intermediary bank?

    Correspondent and intermediary banks serve as third-party banks that coordinate with beneficiary banks to facilitate international ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  2. Bullish Engulfing Pattern

    A chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely eclipses ...
  3. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  4. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  5. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
Trading Center