Explain banks circumtances to impose compensating balances, Financial Management

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What are compensating balances and why do banks require them from some customers?  Under what circumstances would banks be most likely to impose compensating balances?

Compensating balances are funds that a bank needs a customer to maintain in a non-interest bearing account until the loan is retired.Banks occasionally impose compensating balance requirements so as to increase the bank's return on a loan.  Compensating balances are the majorly likely to be used when the stated interest rate on a loan is below the bank's required rate of return.

 

 


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