compensating balance


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Related to compensating balance: interest

Compensating balance

An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided.

Compensating Balance

Money from a loan that a borrower keeps in an account with a lender providing some surety that the lender will be repaid. A compensating balance is especially common with corporate loans. It increases the cost of capital to the borrower because he/she is paying interest on more money than he/she is permitted to use.

compensating balance

The funds that a corporate borrower is required to keep on deposit in a financial institution in order to satisfy the terms of a loan agreement. The deposit may be in a checking account, savings account, or certificate of deposit, depending on the nature of the agreement. The net effect of a compensating balance requirement is an increase in the effective cost of the loan because the borrower is unable to use all the funds on which interest is paid.
References in periodicals archive ?
With a compensating balance program, the insured frees up cash and receives current tax deductibility for this amount because "economic performance" has been satisfied by the payment of premium to the insurance company.
Because banks cannot attract demand deposits through the payment of explicit interest, they often try to attract these deposits, aside from compensating balances, through the provision of services at little or no cost.
Banks can optimize the value of these deposits, whereas mortgage bankers typically use them as compensating balances that reduce their cost of financing.
A corn producer that thinks she will produce 15,000 bushels of corn but only sells one corn futures contract as a hedge is severely under-hedged by 10,000 bushels and will not have compensating balances of risk.
The higher the earnings credit rate, the more the compensating balances are worth.
The second and third illustrative letters (not reproduced here) may be used to confirm compensating balances and lines of credit, respectively.
Those funds are used as compensating balances to reduce the rate of interest charged by the warehouse lender for the borrowed funds.
While the Company has agreed to register these escrowed shares, it cautions investors that these shares are being provided as collateral and compensating balances, and are not for immediate resale purposes.
Compensating balances and a sweep account are not requirements, but could be a potential component of improved efficiencies to be considered.
Early in the year, demand deposits surged as lower rates required businesses to build up compensating balances and as mortgage servicers held larger balances during the mortgage refinancing boom.
According to data from an annual survey by the Japan Fair Trade Commission, the reliance on these compensating balances for loans to small businesses declined steadily throughout the 1980s, from 45 percent of surveyed loan contracts in 1980 to 26 percent in 1990.
Even on a fourth-quarter-average to fourth-quarter-average basis, demand deposits increased at a sluggish 3 1/2 percent rate, likely because corporations continued to shift away from compensating balances, and toward fees, to pay for bank services.