A Compensating Balance, Which Is a Required Checking Account Balance

question 56

True/False

A compensating balance, which is a required checking account balance equal to a certain percentage of the borrower's short-term unsecured loan, may not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower, thereby increasing the bank's earnings.

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Definitions:

Absolute Right

A legal right that is complete and not contingent upon external conditions or restrictions.

Sublet

The act of leasing out a rented property by the original tenant to a third party.

Liable

Legally responsible or obligated to make amends for actions, damages, or debts.

Possession

The state or fact of having ownership or control of something, often referring to tangible property.