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 force 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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A compensating balance required by a bank may increase the interest cost to the borrower, thus increasing the bank's earnings. It also serves as an incentive for the borrower to maintain a good relationship with the bank.

Compensating Balance, Which Is a Required Checking Account Balance Equal