Credit rationing Essay example
High school
Essay
Finance & Accounting
Pages 3 (753 words)
Download 0
Surname: Instructor: Course: Date: Credit Rationing Compensating balance is the minimum balance that must be held by an account and qualify an investor whether an individual or a company for the qualifications of a loan. For example, if an investor borrows $100,000 and the bank requires a deposit of $10,000 then that is a compensating balance loan…

Introduction

In cases whereby the compensating balance falls below the minimum required, the interest rate application on the loan will rise accordingly to compensate. A requirement for borrowers by the bank to deposit money is vital to offset part of the loan cost and qualifies it to issue credit to other borrowers and seek alternative investment projects. The individual will only see a low applicable rate of interest on the issued loan. A compensating balance is an account for holding funds and does not generate any interest, and the banks are free to use the money in other investment opportunities. Compensating balance is also known as offsetting balance since its purpose is to offset expenses associated with servicing and the issuing of loans (Mohr 22). The compensating balance thus helps to reduce the cost of provision for loans by the bank, and this generates benefits for both the bank and the borrower from the agreement. In addition to credit, an approach of compensating balances is used to obtain a credit line. The person or corporation taking the credit line just like the loans must agree to maintain a minimum account balance for the loan period. The individual or corporation must have an account already existing with the bank. ...
Download paper
Not exactly what you need?

Related papers

Equilibrium and competition in the banking sector
Literature speaks of limited equilibrium modelling. General equilibrium, according to researchers depends on various market conditions. Further, level of equilibrium in banking industry depends on competition and financial stability, which depends further on banks’ risk-taking initiatives. Literature review discusses the opinions of various authors on the banking products as trade off between…
Commercial and investment banking:General principles of bank management
A bank needs to hold enough excess reserves that can be able to meet all depositors need. This shield the bank from additional cost in meeting the depositors need. Such additional costs include the cost of borrowing from other banks, sale of securities, calling in loans and resulting in borrowing from federal bank. Asset management; a bank need to manage its asset is effectively so as to maximize…
Principles of Finance
The composition and determination of the perfect capital structure has been an integral subject of research in corporate finance. The Nobel Prize winner theorem presented by Modigliani and Miller is the cornerstone of capital structure in today’s world. The crux of the theory is that under an effective market where there are no taxes, insolvency costs, agency costs, and asymmetric information,…
MODIGLIANI AND MILLER’S ADVICE ON DEBTS IGNORED BY COMPANIES
Considering the setting of a perfect market, with the absence of frictions, a seminal research conducted by Modigliani and Miller in 1958 proposed that the value of an organization’s market tends to operate in independence of such an organization’s capital structure. The argument by Modigliani and Miller had the essence, adding on the value of debt tends to lower the value of any outstanding…
state of personal indebtedness in Canada. You may focus on student debt or the society as a whole.
Recent figures suggest that the current level of personal debt in Canada is on the highest level for the past 8 years. The average non-mortgage personal loan of a Canadian is approximately $26,221 in the second quarter of 2012 suggesting that the overall debt levels are on the rise. (Johnson, 2012) There can be various reasons for this including the general trends and preferences of the consumers…
2007 financial crisis
The risks kept building up and through the synergistic effect; they interconnected among the institutions, which in the end undermined the stability of the financial institutions. There were seven main causes that worked together to cause the 2007 financial crisis. Such included the securitization of the mortgages bringing forth to the rise in the shadow banking sector, regulatory arbitrage and…
"Mind the Gap".
Table of contents Abstract 1. Introduction 2. ‘The Small and Medium- sized Enterprises’ 3. Financial crisis on SMEs’ capital structure 4. Sovereign debt crisis which affects the bank’s credit standards, credit margin, and funding conditions 5. Regulatory changes on policies that deal with bank lending activities 6. “The Federation of small Businesses” 7. Recommendation 1) Introduction…