Interest Compensation Account

An interest compensation account is an arrangement, known mainly in German-speaking and other continental European banking, in which a bank offsets the credit and debit balances of linked accounts when it calculates interest. The money stays where it is, but interest is charged or paid on the net position, so a surplus in one account reduces the interest due on an overdraft in another. For companies the idea is close to notional cash pooling, and for households it resembles a mortgage offset account. Terms differ by bank: some offset fully, others only partly, and the bank may require a right of set-off across the accounts and limit the arrangement to one customer or group. Because the term is not standardised, the precise mechanics should be read from the bank's own conditions. Also see interest income.