Appendix VII. Glossary of Terms

International Monetary Fund
Published Date:
April 2006
  • ShareShare
Show Summary Details

Part 1. Financial Corporations

1. This appendix provides more detailed definitions of certain types of institutions in the financial corporations sector than is provided in Chapter 2.1

Insurance Corporations and Pension Funds

2. Insurance corporations consist of incorporated, mutual, and other entities whose principal function is to provide life, accident, sickness, fire, and other types of insurance to individual units or groups of units through the pooling of risk. Because of the different risks to be managed, insurance companies can be subdivided into nonlife (casualty) insurance companies and life insurance companies, which include commercially provided pension and annuity services. For nonlife insurance companies, payment to a policyholder depends on an event occurring that triggers a claim. In contrast, for life insurance companies there is a certainty that a claim will occur, and the payment of premiums may be viewed as savings that are withdrawn when claims are made. Usually the expectation is that there is a considerable lapse of time between the initiation of a life insurance policy and the payment of a claim.

3. Pension funds are constituted in such a way that they are separate institutional units from the units that create them. They are established for the purpose of providing benefits on retirement for specific groups of employees and, perhaps, their dependents. These funds have their own assets and liabilities, and engage in financial transactions on the market on their own account. As with life insurance policies, pension fund liabilities tend to be long term in nature.

4. Pension funds are organized and directed by private or government employers, or jointly by individual employers and their employees. They are funded by the employees and/or employers through regular contributions and from income earned from financial assets. In the Guide, pension funds do not include pension arrangements for the employees of private or government entities that do not maintain a separately organized fund, nor do they include arrangements organized by nongovernmental employees and for which the reserves of the fund are simply added to that employer’s own reserves or invested in securities issued by that employer.

5. While maintaining a pool of liquid assets, because of the long-term nature of their liabilities, pension funds and insurance companies (particularly life insurance companies) usually invest in longer-term security market instruments, both bonds and equities, or in real estate. This investment behavior helps support the development of capital markets, both in terms of breadth and depth, and thus contributes to the broadening of the financing base for borrowers.

Securities Dealers

6. Securities dealers include individuals or firms that specialize in security market transactions by (1) assisting firms in issuing new securities through the underwriting and market placement of new security issues and (2) trading in new or outstanding securities on their own account. Only underwriters and dealers that act as financial intermediaries are classified within this category. Security brokers and other units that arrange trades between security buyers and sellers but do not purchase and hold securities on their own account are classified as financial auxiliaries.

7. By their nature, securities dealers facilitate both primary and secondary market activity in securities. In particular, these institutions can help provide liquidity to markets, both by encouraging borrower and investor activity—not least through the provision of information on market conditions—and through their own trading activity.

Investment Funds

8. Investment funds are institutional units, excluding pension funds, that consolidate investor funds for the purpose of acquiring financial assets. Examples are mutual funds, including money market funds; investment trusts; unit trusts; and other collective investment units. Investors usually purchase shares in the fund that represent a fixed proportion of the fund.

9. In investment funds, professional fund managers make the selection of assets, thereby providing individual investors with an opportunity to invest in a diversified and professionally managed portfolio of securities without the need for detailed knowledge of the individual companies issuing the stocks and bonds. Usually, the type(s) of investment undertaken are specified, and the investment funds’ managers must adequately inform investors about the risks and expenses associated with investment in specific funds, not least because the value of some types of funds can be highly variable.

10. The liquidity of investment funds can vary considerably. Some types of funds are illiquid or have limited liquidity. Such funds are more likely to be investing in longer-term securities. In other cases, shares issued by investment funds are as (or nearly as) liquid as deposits and other liabilities issued by depository corporations. Money market funds are included in this latter category. Because of the liquidity of their liabilities, they tend to invest in short-term debt instruments, such as certificates of deposit and commercial paper.

Other Financial Intermediaries

11. Finance companies are primarily engaged in the extension of credit to nonfinancial corporations and households. Many finance companies are captive subsidiaries that raise funds to be used by the parent corporations. Captive finance companies that are separate institutional units and that do not issue deposits or close substitutes for deposits should be classified as other financial intermediaries. Finance companies that are not separate should be included as part of the parent corporations in the appropriate subsector.

12. Financial leasing companies engage in financing the purchase of tangible assets. The leasing company is the legal owner of the goods, but ownership is effectively conveyed de facto to the lessee, who incurs all benefits, costs, and risks associated with ownership of the assets.

13. Vehicle companies are financial entities created to be holders of securitized assets or assets that have been removed from the balance sheets of corporations or government units as part of the restructuring of these units. Many are organized as trusts or special purpose vehicles created solely to hold specific portfolios of assets or liabilities.

14. Specialized financial intermediaries include financial holding corporations, companies that provide short-term financing for corporate mergers and takeovers (but do not take deposits), export/import finance firms, factors or factoring companies, venture capital and development capital firms, and pawnshops that predominantly engage in lending rather than retailing.

Financial Auxiliaries

15. Financial auxiliaries consist of those resident corporations and quasi corporations that engage primarily in activities closely related to financial intermediation but that do not themselves perform an intermediation role.

16. Public exchanges and securities markets are organized exchanges and entities such as security depository companies, accounting and clearinghouses, and other companies providing exchange-related services. Depositories and electronic clearing systems operated by financial corporations fall into this category, as do national self-regulatory organizations that regulate or supervise exchanges and related units.

17. Brokers and agents are individuals or firms that arrange, execute, or otherwise facilitate client transactions in financial assets. Included are brokers and agents handling the purchase and sale of securities or other financial contracts for clients, and financial advisory services that provide specialized services to brokers and their customers. Because many brokerage firms also trade in financial securities or financial derivatives on the firm’s own account, it can be difficult to distinguish the brokers and agents from the underwriters and dealers (who are classified as financial intermediaries). By convention, this grouping includes only brokers and agents that clearly specialize in brokerage and related activities rather than the intermediation activities generally undertaken by underwriters and dealers.

18. Foreign exchange companies comprise units that buy and sell foreign exchange in retail or wholesale markets.

19. Financial guarantee corporations insure customers against losses to specified financial corporations or against financial loss on specific contracts. Guarantors must have the financial capability to fulfill potential obligations. They also typically agree—usually for a fee—to ensure that investors receive payment on securities or other financial contracts. In addition, the financial guarantee corporations grouping includes specialized corporations that protect depositors and investors against the failure of individual financial corporations. Distinguishing precisely between financial guarantee corporations and insurance corporations is difficult. Guarantee corporations

  • Do not have a definable pool of assets constituting insurance technical reserves,
  • Do not carry positions off balance sheet,
  • May not be regulated as insurance corporations, and
  • May be limited to specific types of financial transactions.

In borderline cases, these units should be classified as insurance corporations.

20. Insurance and pension auxiliaries include agents, adjusters, and salvage administrators. The unique nature and, in some countries, the large scale of activity of these units justify their separate identification.

21. Other financial auxiliaries comprise all other auxiliaries not classified elsewhere. The grouping includes independent units affiliated with the government and established to regulate financial institutions. The System of National Accounts 1993 (1993 SNA) recommends classifying these units as part of the central bank subsector. However, these units are not intermediaries, and the activities of some units (such as securities commissioners or insurance regulators) have little relationship to well-recognized central bank activities. Therefore, the Guide recommends classification of these units in the financial auxiliaries subsector. Also classified in this category are financial units that facilitate issuance and trading in financial derivatives but do not actually issue derivatives, and representative offices of foreign depository corporations that do not accept deposits or extend credit, even though they promote and facilitate transactions of the nonresident parent company.

Part 2. Selected Financial Stability Terms

Basel Capital Accord

Adopted by the Basel Committee on Banking Supervision (BCBS) in 1988 and amended in 1996, the Basel Capital Accord is an internationally agreed set of supervisory regulations governing the capital adequacy of international banks—capital is measured in relation to the perceived credit and market risk of the assets owned by the banks. The objectives behind the Accord are to strengthen the soundness and stability of the international banking system and to diminish sources of competitive inequality among international banks. At the time of writing, a new Accord is being developed.

Basel Committee on Banking Supervision

Established by the Central Bank Governors of the Group of Ten (G–10) countries at the end of 1974, the BCBS formulates broad supervisory standards and guidelines. It also recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements—statutory or otherwise—that are best suited to their own national systems. It encourages convergence toward common approaches and common standards without attempting detailed harmonization of member countries’ supervisory techniques. One of its major objectives is to close gaps in international supervisory coverage in pursuit of the two following basic principles: (1) no foreign banking establishment should escape supervision, and (2) supervision should be adequate.

Basel Concordat

The Basel Concordat refers to the document, “Principles for the Supervision of Banks’ Foreign Establishments” prepared by the Basel Committee in 1983. The Basel Concordat sets out the principles for sharing supervisory responsibility for banks’ foreign branches, subsidiaries, and joint ventures between host and parent (or home) supervisory authorities.

Basel II

The BCBS’s International Convergence of Capital Measurement and Capital Standards: A Revised Framework, released in June 2004, is a comprehensive revision of the Basel capital adequacy standards. It includes three “pillars” for ensuring the strength of banking institutions. The first pillar covers the minimum capital requirements for banks, including changes in the risk weights for assets of banks in order that they better reflect the underlying risk incurred, and it includes alternative methodologies for assessing risk, based on banks’ internal risk assessment procedures. The second pillar focuses on enhancing the supervisory review process. The third pillar focuses on enhancing market discipline over banking institutions through increased disclosures.

Bid-Ask Spread

The bid-ask spread is an indicator of market tightness, a dimension of market liquidity. It is calculated as the difference between the bid and ask (offer) prices of a financial instrument. Bid is the highest price a prospective buyer is prepared to pay at a particular time, and ask is the lowest price acceptable to a prospective seller for trading a unit of a given security.

CAMELS Framework

CAMELS is a commonly used supervisory framework that groups indicators of bank soundness into six categories. The categories are (1) capital adequacy, (2) asset quality, (3) management soundness, (4) earnings, (5) liquidity, and (6) sensitivity to market risk.

Capital Adequacy Ratio

The capital adequacy ratio is the central feature of the Basel Capital Accord. It is an analytical construct in which regulatory capital is the numerator and risk-weighted assets are the denominator. The minimum ratio of regulatory capital to risk-weighted assets is set at 8 percent (the core regulatory capital element should be at least 4 percent). These ratios are considered the minimum necessary to achieve the objective of securing over time soundly based and consistent capital ratios for all international banks.

Capital and Reserves

Capital and reserves is the difference between total assets and total liabilities in the balance sheet. It represents the equity interest of the owners in an entity and is the amount available to absorb unidentified losses.

Committee on Payment and Settlement Systems

Created in 1990, this Committee originally served as a forum for the central banks of the G-10 countries to monitor and analyze developments in domestic payment, settlement, and clearing systems, as well as in cross-border and multicurrency settlement schemes. In recent years, it has extended its work by developing relationships with non-G-10 central banks, particularly those of emerging market economies. The Bank for International Settlements (BIS) hosts the secretariat.


Consolidation is the elimination of positions and flows that occur among institutional units that are grouped together for statistical purposes. For Financial Soundness Indicator (FSI) purposes, reporting on a consolidated group basis preserves the integrity of capital by eliminating its double counting.


Contagion refers to the transmission or spillover of financial shocks or crises across institutions, countries, and/or asset classes.


These are contractual financial arrangements whose principal characteristic is that one or more conditions must be fulfilled before a financial transaction takes place. Contingencies are not recognized as financial assets (liabilities) on balance sheet because they are not actual claims (or obligations). However, these arrangements can potentially affect financial soundness.


Convexity is a measure of the sensitivity of prices of fixed-rate instruments (for example, bonds) to interest rate changes. It is the second derivative of a bond’s price with respect to interest rates—duration is the first derivative. The longer the maturity of an instrument, the greater the convexity; for instruments with the same duration, the more dispersed the cash flows, the greater the convexity. The higher the convexity, the greater the price gain or price loss for a given change in interest rates. Used together with duration, convexity provides a more accurate approximation of the gains and losses on a fixed-rate instrument portfolio from a given change in interest rates than does duration alone.

Credit Risk

This is the risk that one party to a financial contract will fail to discharge an obligation and thus cause the other party to incur a financial loss. Because of deposit takers’ role as financial intermediaries, monitoring the credit risk of their assets through FSIs (such as nonperforming loans to total loans) is central to any assessment of financial soundness.

Deposit Insurance Scheme

This refers to a formal scheme normally established by law that is designed to limit the losses of depositors in the event of bank failure(s). Typically, the scheme is intended to support the confidence in the financial system of small-scale depositors and thus reduce the risk of systemic crises being caused by panic withdrawals of deposits. The scheme can be privately or government operated and funded.

Double Leveraging of Capital

These are situations where related entities share capital. For example, if a deposit taker owns equity in another deposit taker in the group, capital is said to be double leveraged because both entities are resting activity on the same pool of capital. When capital is double leveraged, the capital actually available to the group to meet unanticipated losses is less than the data imply.

Financial Sector Assessment Program (FSAP)

A joint IMF and World Bank program introduced in May 1999, the FSAP aims to increase the effectiveness of efforts to promote the soundness of financial systems in member countries. Supported by experts from a range of national agencies and standard-setting bodies, work under the program seeks to identify the strengths and vulnerabilities of a country’s financial system, to determine how key sources of risk are being managed, to ascertain the sector’s developmental and technical assistance needs, and to help prioritize policy responses. It also forms the basis of Financial System Stability Assessments, in which IMF staff address financial sector issues of relevance to IMF surveillance, including risks to macroeconomic stability stemming from the capacity of the financial sector to absorb macroeconomic shocks.

Financial Stability Forum (FSF)

The FSF was created in February 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. The FSF brings together, on a regular basis, national authorities responsible for financial stability in significant international financial centers, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSF is serviced by a secretariat housed at the BIS.

Global Financial Stability Report

Launched in March 2002, this semiannual IMF publication focuses on current conditions in global financial markets, highlighting issues of financial imbalances and structural problems that could pose risks to financial market stability and sustained market access by emerging market borrowers.

Hedonic Price Indices

Hedonic price indices are quality-adjusted price indices. Using regression analysis, a hedonic price index measures the underlying price changes of goods and/or other assets, unaffected by changes in price due to quality changes. In the Guide, the hedonic regression method is one approach to compiling real estate price indices.

Herfindahl Index

This index is a measure of industry concentration. The value of the index is the sum of the squares of the market shares of all firms in an industry. Higher values indicate greater concentration.

Hui-Heubel Ratio

This ratio is a measure of resilience and depth in financial markets. The ratio relates the volume of trades (as a proportion of the outstanding stock of the instrument) to its impact on prices. The larger the volume of trades relative to the price changes, the deeper and more resilient the market is.

Internal Ratings Based (IRB) Approach

The IRB approach of the Basel Capital Accord provides a single framework by which a given set of risk components or “inputs” are translated into minimum capital requirements. The framework allows for both a foundation method and more advanced methodologies. In the foundation method, banks estimate the probability of default associated with each borrower, and the bank supervisors supply the other inputs. In the advanced methodology, a bank with a sufficiently developed internal capital allocation process is permitted to supply other necessary inputs as well.

International Accounting Standards (IASs)

These are a series of standards, developed by the London-based International Accounting Standards Board, that provide the underlying conceptual framework and specific standards for the preparation and presentation of financial statements of commercial, industrial, and business reporting enterprises, whether in the public or the private sector.

International Banking Statistics (IBS)

These data cover international banking business and are compiled and disseminated by the BIS on a quarterly basis. The IBS system has two main data sets: locational banking statistics, which provide data on a residence basis, and consolidated banking statistics, for which reporting banking institutions provide data on a worldwide consolidated basis.

International Financial Reporting Standards 2004 (IFRS)

The IFRS is the new title for the International Accounts Standards, indicating the body of standards in effect as of March 31, 2004 and applicable beginning on January 1, 2005. The IFRS incorporate many changes to the standards, but among the most important are those relating to the recognition, measurement, and disclosure of financial instruments.

Islamic Financial Services Board

Established in Malaysia in November 2002, the Board is an association of central banks and monetary authorities, as well as other institutions, that are responsible for the regulation and supervision of the Islamic financial services industry.


This is a measure of dispersion that can be used in peer group analysis. It measures the extent to which observed data fall near the center of a distribution or toward its tails. The kurtosis of a normal distribution equals three; a kurtosis value greater than three indicates a high peak, a thin midrange, and fat tails; and a value less than three denotes a distribution with a fat midrange on either side of the mean and a low peak. An alternative formulation subtracts three from the calculated value, so that the normal distribution has a value of zero; positive values indicate a high peak and negative values a low peak.

Laspeyres Index

This index is a method of calculating a price index using fixed weights drawn from a specified base period. One common use for the Laspeyres method is to compile real estate price indices for the assessment of the soundness of the financial system.


Leverage refers to having access to the full benefits arising from holding a position in a financial asset without having to fully fund the position with own funds. Leverage can magnify the rate of return (positive and negative) on a position or investment beyond the rate obtained by direct investment of own funds. It can be built up by borrowing (on-balance-sheet leverage, commonly measured by debt-to-equity ratios) and/or by using financial derivatives. The buildup of leverage positions can be associated with rising asset prices and risk exposures.


In terms of markets, liquidity generally refers to the ability to buy and sell assets quickly and in large volume without substantially affecting the asset’s price. In terms of instruments, liquidity generally refers to those assets that can be converted into cash quickly without a significant loss in value.

Liquidity Risk

This is the risk that assets may not be readily available to meet a demand for cash. Because deposit takers’ assets are typically of longer maturity than their liabilities, monitoring deposit takers’ liquidity risk through FSIs (such as liquid assets to total assets and liquid assets to short-term liabilities) is important for financial soundness analysis.

Loan Loss Provisions

These are net allowances that deposit takers make against bad or impaired loans, based on their judgment as to the likelihood of losses occurring. Loan loss provisioning affects both income and, depending on the type of provisions made, capital.

Macroprudential Analysis

This is the assessment and monitoring of the strengths and vulnerabilities of financial systems. It encompasses quantitative information from both FSIs and macroeconomic indicators that provide (1) a broader picture of economic and financial circumstances such as GDP growth and inflation, along with information on the structure of the financial system, and (2) qualitative information on the institutional and regulatory framework—particularly through assessments of compliance with international financial sector standards and codes—and the outcome of stress tests.

Market Depth

Market depth is a dimension of market liquidity and refers to the ability of a market to handle large trade volumes without a significant impact on prices.

Market Risk

This is the risk of losses on financial instruments arising from changes in market prices. Market risk covers interest rate, foreign exchange, equity price, and commodity price risk. As financial intermediaries that take positions in financial instruments, such losses in value affect the income and capital of deposit takers. The duration of assets and liabilities can be used to estimate potential losses arising from changes in market interest rates. Another approach is through the use of stress tests.

Market Tightness

Market tightness is a dimension of market liquidity. It is measured by the general cost incurred in a transaction irrespective of market price.

Notional Amount

Sometimes described as the nominal amount, the notional amount is the amount underlying a financial derivative contract that is used for calculating payments or receipts on the contract. It provides an indication of the potential risk exposure associated with the financial derivative contact. For instance, if a bond is issued and the amount raised is swapped into another currency, the notional value of the derivative is equal to the amount swapped.

Price Discovery

Price discovery is the process of establishing a market price at which demand and supply for an item are matched. By bringing buyers and sellers together and making the process transparent, financial markets facilitate price discovery.

Red Book (Committee on Payment and Settlement Systems)

The Red Book is a publication on payment systems, produced by the BIS’s Committee on Payment and Settlement Systems. Its objective is to provide a comprehensive description of a country’s payment systems. The Red Book is revised periodically.

Regulatory Capital

Regulatory capital refers to a specific definition of capital developed by the BCBS and used as the numerator in the BCBS’s capital adequacy ratio. The definition includes, beyond the traditional capital and reserve account items, several specified types of subordinated debt instruments that need not be repaid if the funds are needed to maintain minimum capital levels.


Resilience is a dimension of financial market liquidity and is the speed with which price fluctuations arising from trades are dissipated or the speed with which imbalances in orders (such as more buy than sell orders) are reversed with new orders. It can be measured using the Hui-Heubel Ratio.

Risk Exposures

In terms of financial stability analysis, among the types of risk exposures faced by a deposit taker that require monitoring are included credit risk, market risk, liquidity risk, foreign exchange risk, large exposures risk, equity price risk, and real estate price risk.

Risk-Weighted Assets

In the Guide, risk-weighted assets refer to a concept developed by the BCBS for the capital adequacy ratio. Assets are weighted by factors representing their riskiness and potential for default.


Skewness is a measure of dispersion that can be used in peer group analysis. It indicates the extent to which data are asymmetrically distributed around the mean. Symmetrical distributions have a skewness value of zero. A distribution with negative skewness has more observations in the left tail (left of the peak), and a distribution with positive skewness has more observations in the right tail.

Triennial Central Bank Survey

The Triennial Central Bank Survey is a survey of foreign exchange and derivatives markets coordinated by the BIS. The objective is to obtain reasonably comprehensive and internationally consistent information on the size and structure of foreign exchange and over-the-counter derivatives markets.2 The purpose of these statistics is to increase market transparency and thereby help central banks, other authorities, and market participants to better monitor activity in the global financial system.

Turnover Ratio

The turnover ratio is an indicator of market depth, a dimension of market liquidity. It is calculated as the number of securities bought and sold during a trading period, divided by the average of the number of securities outstanding at the beginning and the end of the trading period.


Variance is a measure of dispersion around the mean calculated as the sum of squared deviations of each observation from the mean, divided by the number of observations (for population variance) or the number of observations minus one (for sample variance).


Volatility is the tendency of quantities or prices to vary over time. Usually measured by the variance or annualized standard deviation of changes, volatility is said to be high if quantities or prices move significantly both up and down. The higher the volatility, usually the higher the risk, as the ability to convert an asset into cash quickly without a significant loss in value is less certain.


These definitions are drawn from national accounts sources. For instance, see paragraphs 96 to 101 of the Monetary and Financial Statistics Manual (MFSM) (IMF, 2000a).


The BIS also produces semi-annual data on the over-the-counter (off-exchange) derivatives market. These data are collected on a global consolidated basis from major banks and dealers in G-10 countries and cover notional and market values (see

    Other Resources Citing This Publication