The insured would then agree with its bank that the funds deposited by the insurance company would be applied toward reducing the insured's
compensating balance requirement.
In order to compete for the liquid assets of businesses, banks set up complicated procedures to pay implicit interest on
compensating balance accounts.
Small banks, unlike their larger counterparts, lack the systems to offer
compensating balance schemes and sweep accounts that allow these banks to offer businesses credit for or interest on excess demand balances.
"if the insurance transaction is timed with credit extension," he noted, "there is a strong probability that impressions will be made or perceptions will arise that they are dependent one on the other, that credit will not be granted unless insurance is purchased and
compensating balances maintained.
Float from escrows and reserves provided
compensating balances to support their corporate bank financing and warehouse lines.
A corn producer is concerned with the actual price of corn per bushel but is even more concerned that the total value of corn production be compensated by a risk management tool of like balance--the idea of
compensating balances.
Traditional sources of commercial financing are not always accessible to small businesses, or may contain restrictive covenants like
compensating balances or terms that are less than the economic life of the capital asset being purchased or constructed.
Clearing balances held at Reserve Banks are similar to
compensating balances held at correspondent banks.
Logically, companies get a better return on their cash when they can consolidate it, rather than let it sit at various subsidiaries; if they do cash management through a bank, they can use higher
compensating balances as leverage for better terms or more services.
* Provide a choice of receiving an invoice and paying directly for services or does it insist on payment through earned credit on
compensating balances through account analysis?
Clearing balances held at Reserve Banks are similar to
compensating balances held by respondent banks at correspondent banks.
Keep in mind that some banks may charge a different rate for service fees than for
compensating balances. Inquire about your bank's policy in this regard.
