A compensating balance is a minimum balance that must be maintained in an account. The compensating balance is often used to offset a portion of the cost that a bank faces when extending a loan or credit to an individual or business, and is usually calculated as a percentage of the loan outstanding. The account where the funds are held are typically non-interest bearing, and the bank is free to use the money in other investment opportunities.
Read more: Compensating Balance Definition | Investopedia http://www.investopedia.com/terms/c/compensating-balance.asp#ixzz47rCvLaES
Follow us: Investopedia on Facebook