Twenty Percent Rule

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Tenured Capital

    Loans offered by the government to key business sectors.
RELATED FAQS
  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. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What are the main benchmarks that track the banking sector?

    The appropriate benchmarks for tracking banking sector performance depend on the type of banking. For instance, commercial-only ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Demystification Of Bank Accounts

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

    Steps to Qualify For a Small Business Loan

    Learn steps to qualify for a small business loan such as identifying financing needs, preparing a business plan and getting required documents.
  3. Credit & Loans

    What's a Bridge Loan?

    A bridge loan is a loan that “bridges” a borrower over a temporary shortage in funds on hand.
  4. Credit & Loans

    What is a Syndicated Loan?

    A syndicated loan is one that involves a group of lenders (called the syndicate) who pool their lending resources to make a loan.
  5. Investing Basics

    What Does a Financial Intermediary Do?

    A financial intermediary is an institution that acts as a go-between in a financial transaction.
  6. Credit & Loans

    What is a Financial Institution?

    A financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
  7. Economics

    What Does Principal Mean?

    For banks, principal refers to the amount due on a loan, and is used to calculate interest payments.
  8. Economics

    Explaining Prime Rate

    Prime rate is the interest rate banks charge their best (e.g. prime) customers.
  9. Economics

    What's a Correspondent Bank?

    A correspondent bank is a bank that acts on behalf of another bank, usually a foreign bank.
  10. Professionals

    What Does Corporate Finance Do?

    Corporate finance is the subset of finance that involves how corporations use leverage to fund their operations and capital purchases.

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!