Compensating Balance

Last Updated: Jun 6, 2019

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A Compensating Balance is a minimum account balance that a borrower agrees must be maintained with a lender. This allows a bank the freedom to loan the Compensating Balance to other borrowers and profit from the difference between the interest rates. In exchange from the lender, the borrower typically benefits by being granted a lower interest rate on the underlying loan. Compensating Balances typically must be disclosed in a company’s financial statement.