When a bank requires that a borrower deposit some of a loan, the bank is
A) requiring collateral.
B) requiring compensating balances.
C) credit rationing.
D) none of the above.

Question

Quizplus · Accepted Answer

When a bank requires a borrower to deposit some of a loan, it is known as requiring compensating balances. This practice is used to ensure that the borrower maintains a minimum balance in their account, which serves as a form of security for the bank.

When a Bank Requires That a Borrower Deposit Some of a Loan