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Related to compensating balance: interest
An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided.
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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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.