Compensating Balance

Summary of Compensating Balance

A non-interest- bearing deposit that a commercial borrower is obliged to maintain as condition of receiving a bank loan. The effect of this balance is to increase the net cost of the loan; while the amount to be held as a compensating balance is negotiable between the borrower and the bank, a balance of 20 percent of the loan was common in the 1980s.

(Main Author: William J. Miller)