Definition of Compensating balance

An excess balance that is left in a bank to provide indirect compensation for loans extended or services provided.

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Noun
1. a minimum credit balance that a bank may require a borrower to keep on deposit as a condition for granting a loan; a common requirement for establishing a line of credit at a bank; "the compensating balance increases the effective interest rate to the bank since the net amount loaned is reduced but the interest paid is unchanged"
(synonym) offsetting balance
(hypernym) balance