A compensating balance:
A)requirement generally applies to inventory-type loans.
B)is a means of paying for banking services received.
C)requirement is generally set equal to one percent of the amount borrowed.
D)decreases the cost of short-term bank financing.
E)refunds a portion of the borrower's interest if a loan is repaid early.

Question

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A compensating balance is a portion of a loan amount that a borrower is required to keep on deposit in a bank account as a condition of receiving the loan. The bank can use these funds to offset the costs of providing banking services to the borrower, making it a means of paying for banking services received.

A Compensating Balance