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- Title
THE EFFECT OF COMPENSATING BALANCE REQUIREMENTS ON THE PROFITABILITY OF BORROWERS AND LENDERS.
- Authors
Kolodny, Richard; Seeley, Peter; Polakoff, Murray E.
- Abstract
The rationality of compensating balance requirements has been widely debated in the literature and among participants in the market for loanable funds. Rationality in this context refers to a net gain in interest income for the lending bank in the transaction without, at the same time, an increase in interest cost to the borrowing firm, or, conversely, a decrease in interest expense to the borrower without, simultaneously, a decrease in income derived from interest on the transaction by the bank. The lack of consensus as to whether or not compensating balance requirements are rational is based on the absence of uniform assumptions regarding the imposition of these requirements as well as by their restrictive, if not unrealistic, nature. The foregoing analysis has examined the effects of compensating balance requirements on the behavioral alternatives and profitability of borrowers and lenders. Two systems for determining compensating balance requirements are, system where the compensating balance rate is imposed only on the funds borrowed to meet the firm's needs and other system where the compensating balance rate is applied to the total loan extended to the firm.
- Subjects
COMPENSATORY balances; FINANCIAL statements; LOANS; DEBTOR &; creditor; INTEREST income; PROFITABILITY; BREAK-even analysis
- Publication
Journal of Financial & Quantitative Analysis, 1977, Vol 12, Issue 5, p801
- ISSN
0022-1090
- Publication type
Article
- DOI
10.2307/2330257