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Bank failures and rescues/Glossary

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Glossary of terms related to Bank failures and rescues.

(For definitions not shown below, see the economics glossary [1])

  • Agency cost [r]: The cost to the owners (or company shareholders) of an organisation of actions by their agents (or the company management) that are contrary to the owners' interests - and the cost of attempting to prevent such actions. [e]
  • Arbitrage [r]: transactions to take advantage of a price differences of a product in different markets by buying where it is cheap and selling where it is dear. The possibility of arbitrage often prevents the occurrence of price differences. [e]
  • Basel I & Basel II [r]: international banking regulations put forth by the Basel Committee on Bank Supervision of the Bank for International Settlements requiring banks' minimum capital adequacy ratios to be related to the riskiness of their loans. [e]
  • Capital (banking) [r]: A bank's assets minus its liabilities. [e]
  • Capital adequacy ratio [r]: The ratio of a bank's capital to its risk weighted credit exposures. May be defined in terms of tier 1 (core) or tier 2 capital. [e]
  • Central Bank [r]: A government agency that is responsible for monetary policy and the support of the banking system (for example the Federal Reserve Board and the Bank of England). Usually responsible for controlling a country's monetary policy and preserving the value of its currency. [e]
  • Contagion (banking) [r]: the spread of a run, loss or insolvency from one bank to another, or the spread of a banking crisis from one country to another. [e]
  • Credit risk [r]: The risk that the value of a loan-based security will fall as a result of defaults on the part of borrowers (as distinct from interest rate risks and exchange rate risks). [e]
  • Debt_instrument [r]: A formal obligation assumed by a borrower to replay the lender in accordance with the terms of an agreement, including bonds, debentures, promissory notes, leases and mortgages. [e]
  • Derivative [r]: An asset whose value depends upon the expected value of another asset. [e]
  • Financial asset [r]: An asset that derives it value from a legal claim - including stocks, bonds and loans. [e]
  • Financial_Intermediary [r]: A go-between organisation that obtains finance from investors (or savers) and lends it to corporations (or other borrowers). Financial intermediaries include banks, building societies (or savings and loans associations) , life insurance companies and credit unions. [e]
  • Financial_regulator [r]: The United States Securities and Exchange Commission gives as its mission "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation". Financial regulators in other countries have similar responsibilities. [e]
  • Gearing: see Leverage
  • Herding (banking) [r]: A tendency to base decisions upon the actions of others - on the part of bankers, depositors or investors see also Panic (banking). [e]
  • Insolvency [r]: Inability to meet a debt - or other financial - obligation. [e]
  • Interbank market [r]: a market in which a group of banks lend to each other (for example, see LIBOR). [e]
  • Interest rate risk [r]: The risk that the value of a fixed-rate security or loan will fall as a result of a rise in interest rates. [e]
  • Lender of last resort [r]: An institution, that is prepared to lend money to any solvent bank that encounters a serious liquidity risk, or a threatened bank run. (The term has sometimes also been applied to financial assistance to avert insolvency that could occur for other reasons, or to financial assistance to governments). [e]
  • Leverage [r]: (i) The use of borrowing to increase the amount of money that is available for investment or consumption. (ii) A proportional measure of indebtedness, such as the ratio of a company's debt to its shareholders' equity (the same as British "gearing"), or the ratio of the indebtedness of a household to the net value of its assets (ie net of its debts). [e]
  • LIBOR [r]: (London Interbank Offer Rate) the rate of interest at which a group of banks (16 banks from seven countries, including the United States, Switzerland and Germany) are willing to lend to each other for periods ranging from a day to a year . [e]
  • Liquidity [r]: (i) The quantity of available assets in its possession that an organisation could rapidly exchange for cash (assets that cannot be exchanged for cash at a particular time are considered to be "illiquid" at that time); (ii) the funding that is unconditionally available to settle claims through monetary authorities (termed "official liquidity"). [e]
  • Liquidity risk [r]: the risk that assets cannot be sold at time when cash is needed to meet a commitment. [e]
  • Market risk [r]: The risk that the value of an investment in a financial product will fall as a result of a fall in the market for that product. [e]
  • Money market [r]: A market for short-term debt instruments (generally of maturity after less than one year) such as certificates of deposit, commercial paper, and Treasury bills. [e]
  • Moral hazard [r]: Motivation to take an otherwise unwarranted risk because the cost of an unfavourable outcome would be borne by someone other than the risk-taker. [e]
  • Option [r]: A right, but not an obligation, to buy (or to sell) an asset, usually at a stipulated price (termed the "exercise price") and at a stipulated time. An option to buy is called a "call option" and an option to sell is called a "put option". [e]
  • Portfolio insurance [r]: A way of protecting a portfolio against market risk by selling short on the share index futures market, or by buying put options on the share index. [e]
  • Purchase and assumption [r]: The purchase and sale of the assets of a failed financial institution. (A method used by the US Federal Deposit and Insurance Corporation) [e]
  • Prime rate [r]: The interest rate that commercial banks charge for loans involving the lowest risk of default - such as loans to large companies. [e]
  • Run (banking) [r]: An attempt by a large number of investors to withdraw their deposits. [e]
  • Securitisation [r]: The conversion of a cash flow into a marketable security (usually a claim upon debt repayments) and often categorised according to the expected risk of default (examples include collateralised debt obligations and structured investment vehicles.) [e]
  • Systemic failure (finance) [r]: The inability of a large proportion of a country's financial institutions to perform their financial intermediary function. [e]
  • Tier 1 capital [r]: A measure of a bank's financial strength used by the Bank for International Settlements (BIS): shareholders' funds plus irredeemable and non-cumulative preference shares and excluding hybrid forms of capital like goodwill [e]
  • Warrant [r]: A right, but not an obligation, to buy (or to sell) an asset, at a stipulated price and time. (Similar to an option but of longer duration.) [e]