- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- November 2009
Commercial paper collateralized by a pool of loans, leases, receivables, or structured credit products.
A security that is collateralized by the cash flows from a pool of underlying assets, such as loans, leases, and receivables. Often when the cashflows are collateralized by real estate, an ABS is called a mortgage-backedsecurity.
A government guarantee that partially compensates for potential lossesstemming from a specified pool of assets held by a financial institution. Usually a fee is charged.
The U.K. Treasury program to protect eligible financial institutions from their exposures to losses on defined assets beyond a first lossamount. A fee is charged.
The offer or actual purchase of a specified pool of assets by a governmentor a central bank from a financial institution, for which an activemarket no longer exists. This measure aims to remove impaired assetsfrom the balance sheet of a financial institution.
Financial assets managed by a fund manager on behalf of end-investors. These can be direct loans or securities and may be leveraged (e.g., byhedge funds).
A publicly initiated financial institution that holds nonperforming loans and impaired assets of other financial institutions. The “bad bank” is formed to support troubled financial institutions and typicallyholds the nonperforming assets until they are sold or amortize.
An accord providing a comprehensive revision of the Basel capitaladequacy standards issued by the Basel Committee on Banking Supervision. Pillar I of the accord covers the minimum capital adequacy standards for banks, Pillar II focuses on enhancing the supervisory reviewprocess, and Pillar III encourages market discipline through increaseddisclosure of banks’ financial condition.
The difference between yields on comparable nominal and inflation-indexedbonds that provides a measure of market expectations of thefuture path of the reference inflation index.
The operation by which a firm buys its own shares or hybrid securities, thereby returning capital to securities holders.
A mortgage used to finance the purchase of an investment property that is then rented out.
The ratio, usually shown as a percentage, of a bank’s capital to its assets, generally risk-weighted.
The Spanish version of a covered bond, mainly collateralized with mortgages and public debt.
JPMorgan Corporate Emerging Markets Bond Index, which includes liquid U.S. dollar–denominated bonds issued by emerging market corporateentities.
Provision made by a lender recognizing that an amount of debt it is owed is unlikely to be collected in full.
The flow of a bank’s net charge-offs (gross charge–offs minus recoveries) during a quarter divided by the average level of its loans outstanding overthat quarter.
A structured credit security backed by a pool of credit–sensitive assets, where interests in the security are divided into tranches with differingre payment and interest earning streams. The reference pool of assetstypically includes a diverse range of assets, such as senior secured bankloans, high-yield bonds, and credit default swaps.
A security that is collateralized by the cash flows from a pool of underlying commercial mortgages.
A series of indexes, each referencing 25 tranches of commercial mortabacked securities gage-with differing credit ratings.
A private unsecured promissory note with a short maturity.
Consolidation is assessed at the entity level and a reporting entity prepares a financial statement that consolidates the assets, liabilities, equity, income, expenses and cash flows with those of the entities that it controls(i.e., its subsidiaries). Derecognition entails ceasing to recognize that assetor liability in an entity’s financial statement of financial position.
A debt obligation on which the investor has first recourse to a cover pool of assets that secures the bond. Unlike asset–backed securities, collateralassets underlying covered bonds remain on the issuer’s consolidated balancesheet, thereby providing creditors with a second level of protection(“dual recourse”).
A credit derivative whose payout is triggered by a “credit event,” often adefault. CDS settlements can either be “physical”—whereby the protection seller buys a defaulted reference asset from the protection buyer at its facevalue—or in “cash”—whereby the protection seller pays the protectionbuyer an amount equal to the difference between the reference asset facevalue and the price of the defaulted asset.
A financial contract under which an agent buys or sells risk protection against the credit risk associated with a specific reference entity (orspecified range of entities). For a periodic fee, the protection seller agrees to make a contingent payment to the buyer on the occurrenceof a credit event (usually default in the case of a credit default swap).
The purchase by a central bank of certain assets in order to improve conditions in (a) specific market(s). If credit easing is not sterilized, it increases the size of the central bank’s balance sheet and thus theamount of base money (reserve balances of banks and cash).
The spread between benchmark securities and other debt securities that are comparable in all respects except for credit quality (e.g., thedifference between yields on U.S. treasuries and those on single A-ratedcorporate bonds of a certain term to maturity).
A type of pension plan in which an employer promises a specifiedbenefit upon retirement, typically determined by a formula base
A retirement plan in which the amount of the employer’s annual contribution is specified. Typically, individual accounts are set up foreach member, into which the employee and employer contribute. Thecontributions are then invested until retirement and then annuitized.
A financial contract whose value derives from underlying securitiesprices, interest rates, foreign exchange rates, commodity prices, ormarket or other indices.
JPMorgan’s Emerging Market Bond Index Global, which tracks the total returns for traded external debt instruments in 34 emerging marketeconomies with weights roughly proportional to the market supplyof debt.
Developing countries’ financial markets that are less than fully developed, but are nonetheless broadly accessible to foreign investors.
A statistical method to assess the short–term impact of an event, such as an announcement of market intervention, by measuring the reaction ofthe financial markets.
As used in this report, the gap between ex ante projected credit demand and credit capacity. There is no ex post financing gap because changes ininterest rates and/or quantity rationing bring credit demand and supplyinto balance.
An instrument established on March 24, 2009 as part of a package ofreforms to the IMF’s lending facilities. The instrument provides upfrontand automatic access to the IMF’s resources to members with very strongeconomic fundamentals and institutional policy frameworks.
A bank restructuring fund established by the Spanish government in June 2009 in a bid to spur mergers and prevent solvency problems at smallerbanks.
The standard framework of guidelines for financial accounting in a given jurisdiction. In Chapter 1, it typically refers to the standards in the United States.
A financial institution that provides credit to specific groups or areas of the economy, such as farmers or housing. Most enterprises maintain legaland/or financial ties to the government.
An investment pool, typically organized as a private partnership and of tenresident of fshore for tax and regulatory purposes. These funds face fewrestrictions on their portfolios and transactions. Consequently, they arefree to use a variety of investment techniques—including short positions, transactions in derivatives, and leverage—to attempt to raise returns andmanage risk.
Offsetting an existing risk exposure by taking an opposite position in thesame or a similar risk—for example, in related derivatives contracts.
A security that combines the elements of both debt and equity in various measures. It can pay a fixed or floating rate coupon or dividend until a certain date, at which point the holder may have a number of options, including converting the security into the underlying shares at a predeterminedprice. Unlike pure equity, the holder enjoys predetermined cashflow, and, unlike a fixed-income security, the holder has the potential togain if the issuer’s equity price rises. Hybrids are typically subordinate toother debt obligations in the capital structure of the firm.
The expected volatility of a security’s price as implied by the price of options or swaptions (options to enter into swaps) traded on that security. Implied volatility is computed as the expected standard deviation neededto satisfy risk neutral arbitrage conditions, and is calculated by using anoptions pricing model such as Black–-Scholes.
A bank, insurance company, pension fund, mutual fund, hedge fund, brokerage, or other financial group that takes investments from clients orinvests on its own behalf.
A methodology of the Basel Capital Accord that enables banks to use their internal models to generate estimates of risk parameters that areinputs into the calculation of their risk–based capital requirements.
A standard framework of guidelines for financial accounting adopted by the International Accounting Standards Board, basedin London.
A bond or loan is considered investment grade if it is assigned a creditrating in the top four categories. S&P and Fitch classify investment grade obligations as BBB– or higher, and Moody’s classifies investmentgradeobligations as Baa3 or higher.
A bond with a face value of at least ??500 million (or an equivalentamount in other currency) that meets certain minimum liquiditycriteria (e.g., a minimum number of market makers have committed toquote continuous two–way prices).
A systemically important financial institution that is involved in a diverse range of financial activities and/or geographical areas. Typicallythey are large and interconnected to other financial institutions.
Formerly a global investment bank, headquartered in the United States, whose failure on September 15, 2008 marked the largest bankruptcyof an investment bank in U.S. history. The bankruptcy was thecatalyst for a level of exceptional turmoil in global financial marketsand prompted an unprecedented, coordinated public sector responseto prevent a catastrophic financial crisis.
The proportion of debt to equity (also assets to equity and assets to capital). Leverage can be built up by borrowing on balance sheet (commonlymeasured by debt–to–equity ratios) or by using off-balance-sheettransactions.
A bank’s leverage ratio typically refers to Tier 1 capital as a ratio of adjusted assets. Assets are adjusted for intangible assets not included in Tier 1 capital.
The London Interbank Offered Rate is an averaged measure of the interest rates at which banks offer to lend unsecured funds to otherbanks in the London wholesale money market.
A security that derives its cash flows from principal and interest pay-ments on pooled mortgage loans. MBSs can be backed by residentialor commercial mortgage loans.
An Irish government agency that is due to be established to assume bad loans from the banking sector’s balance sheets.
Loans that the bank foresees difficulty in collecting. They include nonaccruing loans, reduced rate loans, renegotiated loans, and loanspast due 90 days or more. They exclude assets acquired in foreclosuresand repossessed personal property.
An entitiy that allows financial institutions to transfer risk off their balance sheets, improve the liquidity of loans through securitization, generate fee income, and achieve relief from regulatory capital requirements. They are commonly referred to as special–purpose entities orvariable interest entities in banking and accounting.
A business model for financial intermediation, under which financial institutions originate loans such as mortgages, repackage them into securitized products, and then sell them to investors.
An interest-rate swap whereby the compounded overnight rate in the specified currency is exchanged for some fixed interest rate over a specifiedterm.
A securitization product that passes the underlying portfolio’s net cashflows directly through to investors.
A statutory U.K. insurance fund that compensates members of eligibledefined-benefit pension schemes in the event of a qualifying employer’sinsolvency, in which the pension plan has insufficient assets to pay outabenefit claims fully.
German term (literally “letter of pledge”) for covered bonds, mainly usedto refinance mortgages or public projects.
Covers securitization products not issued or backed by governments andtheir agencies, that is, excluding those of government-sponsored enterprisesand public sector entities.
Loss that the bank expects to take as a result of uncollectible or troubledloans. Includes transfer to bad debt reserves and amortization of loans.
The program jointly sponsored by the U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corporation designed to attract buyers for, andcreate liquidity in, legacy impaired loans and securities held by U.S. banks.U.S. authorities are to provide equity and nonrecourse financing to privateinvestors to purchase bank assets.
An expansion of a central bank’s balance sheet through purchases of government securities, funded through the creation of base money (reservebalances of banks and cash).
Taking advantage of differences in regulatory treatment across countries or different financial sectors, as well as differences between economic riskand that measured by regulatory guidelines, to reduce regulatory capital requirements.
An agreement whereby the seller of securities agrees to buy them back at a specified time and price. The transaction is a means of borrowing cashcollateralized by the securities “repo–ed” at an interest rate implied by the forward repurchase price.
Resecuritization of existing real estate mortgage-backed securities (MBSs) or real estate mortgage investment conduits (Remics).
A financial restructuring strategy that is an alternative to forming an independent “bad bank.” The aim is to provide official support to a financial institution by guaranteeing the losses on certain nonperformingassets of the institution above a first loss amount. These assets aresaid to be “ring–fenced.” The program is typically provided in exchangefor an equity stake on the firm and/or some transaction fee.
The degree to which an investor who, when faced with two investments with the same expected return but different risk characteristics, prefersthe one with the lower risk. That is, it measures an investor’s aversion to uncertain outcomes or payoffs.
The extra expected return on an asset that investors demand in exchange for accepting its higher risk.
The assets of a financial institution multiplied by a weighting established by the regulatory authorities, reflecting the relative risk ofthese assets.
Return on assets, which equals (net income before preferred dividends plus ((interest expense on debt–interest capitalized) multiplied by (1minus tax rate))) divided by last year’s total assets multiplied by 100.
Return on equity, which equals total income minus preferred dividendsdivided by total common equity multiplied by 100.
The creation of securities from a reference portfolio of preexisting assets or future receivables that are placed under the legal control ofinvestors through a special intermediary created for this purpose (a “special–purpose vehicle” [SPV] or “special-purpose entity” [SPE]). Inthe case of “synthetic” securitizations, the securities are created from aportfolio of derivative instruments.
See “credit spread” above. Other definitions include (1) the gap between the market bid and ask price of a financial instrument; and(2) the difference between the price at which an underwriter buys anew security from the issuer and the price at which the underwritersells it to investors.
A methodology of the Basel Capital Accord that enables banks to measure credit risk in a standardized manner, supported by external creditassessments, to generate estimates of risk parameters that are inputs into the calculation of their risk–based capital requirement.
An instrument that pools and tranches credit risk exposure, including mortgage-backed securities and collateralized debt obligations.
A legal entity, whose assets consist of asset–backed securities and various types of loans and receivables. An SIV’s funding liabilities are usually tranched and include short– and medium–term debt; the solvency of the SIV is put at risk if the value of the assets of the SIV falls below the valueof the maturing liabilities.
A mortgage loan to a borrower with an impaired or limited credit history, and who typically has a low credit score.
A stress test conducted in early 2009 by U.S. banking supervisors and regu– lators of the country’s 19 largest bank holding companies to assess additionalcapital needs, if any, for each institution to have sufficient capital if the economy weakened in line with a hypothetical stress scenario.
A program according to which the U.S Treasury issues bills on behalf of the U.S. Federal Reserve and deposits the proceeds at the FederalReserve. The program is designed to drain excess reserves for monetary policy purposes in the absence of the Federal Reserve’s legal authority toissue central bank bills.
An agreement between counterparties to exchange periodic interest payments based on different reference financial instruments or indices on apredetermined notional amount.
Total assets less intangible assets (such as good–will and deferred taxassets).
Total common equity minus intangible assets.
A U.S. Federal Reserve funding program designed to support liquidity in, and the origination of, asset–backed securities collateralized by studentloans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The program was expanded to include new issueand legacy commercial mortgage–backed securities.
The core capital supporting the lending and deposit activities of a bank. It consists primarily of common stock, retained earnings, and perpetualpreferred stock.
The supplemental capital supporting the lending and deposit activities of a bank. It includes limited life preferred stock, subordinated debt, andloan loss reserves.
The sum of cash on hand and due from banks, total investments, net loans, customer liability on acceptances, investment in unconsolidatedsubsidiaries, real estate assets, net property, plant and equipment, and other assets.
The sum of cash, total investments, premium balance receivables, investments in unconsolidated subsidiaries, net property, plant andequipment, and other assets.
The sum of cash and equivalents, receivables, securities inventory, custody securities, total investments, net loans, net property, plant and equipment, investments in unconsolidated subsidiaries, and other assets.
The total investment in a company. It is the sum of common equity, preferred stock, minority interests, long–term debt, nonequity reserves, and deferred tax liability on untaxed reserves. For insurance companies, policyholders’ equity is also included.
All interest–bearing and capitalized lease obligations.
The value of money held by the bank or financial company on behalfof its customers.
The total amount of money loaned to customers before reserves for loan losses but after unearned income. It includes lease financing andfinance receivables.
The relationship between the interest rates (or yields) and time to maturity for debt securities of equivalent credit risk.