By requiring money to be deposited to offset some of a loan's cost the bank is able to extend other loans and pursue other investment opportunities, while the individual or business will generally see a lower interest rate. If the deposit falls below a certain level the interest rate on the loan may adjust upward to compensate.
Investment dictionary. Academic. 2012.
Look at other dictionaries:
compensating balance — A method of paying the bank for providing services. (1) In lending, compensating balances are minimum balances that the bank requires a borrower to maintain with the bank as partial compensation to the bank for the credit facility. (2) The amount … Financial and business terms
Compensating balance — An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided. The New York Times Financial Glossary * * * compensating balance compensating balance ➔ balance1 * * * compensating balance UK US… … Financial and business terms
compensating balance — noun a minimum credit balance that a bank may require a borrower to keep on deposit as a condition for granting a loan; a common requirement for establishing a line of credit at a bank the compensating balance increases the effective interest… … Useful english dictionary
compensating balance — 1. Also, compensated balance, compensation balance. a balance wheel in a timepiece, designed to compensate for variations in tension in the hair spring caused by changes in temperature. 2. Banking. a deposit balance that is required to be left on … Universalium
compensating balance — The balance a borrower from a bank is required to keep on deposit as a condition of the loan or for continuing line of credit … Black's law dictionary
compensating balance — A sum of money deposited at a bank by a customer as a condition for the bank to lend money to the customer … Accounting dictionary
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compensating balance — /ˌkɒmpənseɪt bæləns/ noun the amount of money which a customer has to keep in a bank account in order to get free services from the bank … Dictionary of banking and finance
compensating balance — Fin 1. the amount of money a bank requires a customer to maintain in a non interest bearing account, in exchange for which the bank provides free services 2. the amount of money a bank requires a customer to maintain in an account in return for… … The ultimate business dictionary
Balance wheel — in a cheap 1950s alarm clock, the Apollo, by Lux Mfg. Co. showing the balance spring (1) and regulator (2) … Wikipedia