Compensating balances
A) are used by banks as a substitute for charging service fees.
B) are created by having a sweep account.
C) generate returns to customers from interest-bearing accounts.
D) are used to reward new accounts.

Question

Quizplus · Accepted Answer

Compensating balances are funds that a borrower must keep on deposit with a lender as a condition of obtaining a loan or other credit. These balances are typically required by banks as a way to offset the costs associated with providing credit. In other words, the bank is using the money deposited as a compensating balance as a substitute for charging service fees. The higher the compensating balance, the lower the fees the borrower will be charged.

Compensating Balances