Compensating balances
A) are used by banks as a substitute for charging service fees.
B) are created by having a sweep account.
C) lower the effective rate.
D) are used to reward new accounts.

Question

Quizplus · Accepted Answer

Compensating balances are a requirement by banks for borrowers to maintain a certain minimum balance in their accounts. This minimum balance serves as collateral and allows the bank to offset the cost of not charging service fees. Therefore, it is a substitute for charging service fees.

Compensating Balances