Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution, the actual return to the lender on the usable portion of these loans is higher.

Question

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This statement is true because the compensating balance is not available for the borrower to use, so the lender is effectively earning interest on the total amount of the loan, not just the usable portion. As a result, the actual return to the lender is higher than it would be if there were no compensating balance requirement.

Because a Compensating Balance Is the Proportion of a Loan