Question

Banks often require borrowers to maintain an average amount in their checking accounts as a requirement of getting a loan, which is known as group of answer choices

O a commitment fee.
O commercial paper.
O a compensating balance.
O a general line of credit.
O guaranteed credit.

Answer 1

A requirement by banks to maintain a certain average balance in their checking accounts for loan eligibility is known as a compensating balance, which ensures that the bank has access to funds and reduces loan risk.

Step-by-step explanation:

The requirement by banks for borrowers to maintain a certain average balance in their checking accounts as a part of securing a loan is known as a compensating balance. This is a type of requirement that banks impose to ensure a level of deposit is maintained in the bank, which provides the bank with usable funds while reducing the effective amount of the loan to the borrower.

Banks require a compensating balance to mitigate the risk associated with lending and to compensate for providing the loan by having access to a portion of the borrower's funds. This practice is one among several, including credit checks, collateral requirements, and cosigners, that banks use to manage their risk. The compensating balance is not directly used to earn interest like a loan but instead serves as a safety net for the bank.