Compensating balances are important for banks because their existence allows them to make loans at lower quoted rates.

Question

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Compensating balances require borrowers to maintain a minimum balance in their accounts, which provides the bank with a source of low-cost funds that it can use to make loans at lower rates. This allows the bank to be more competitive in the marketplace and attract more borrowers.

Compensating Balances Are Important for Banks Because Their Existence Allows