Common Banking VocabulariesATM
ATM is an abreviation of "Automated Teller Machine". A bank account holder can withdraw money out of his/her bank account through an ATM machine using a special ATM card. ATM machines are often located outside of the bank providing offshore banking facility. Today, An ATM not only provides money withdrawal facility but also act as a hub of self banking activities. Bank account can perform various banking activities including money transfer, check account balance, view account statements, send queries to banks, utility bill payments etc.
The term is used for a co-make of an agreement who agrees to sign a note to make a loan, but he/she receives no direct gain from the agreement or the loan.
Absorption is the process of renting up newly build or renovated real estate. The term is generally used by estate lenders and developers. Absorption period is the time used to describe the period of time required for absorption.
Abstract of Title
It is a written report briefing the history of title transactions and also conditions of title which influences a piece of land. It generally is a method to verify the ownership of real estate, parcels etc.
Acceleration clause is a provision in a document of a loan saying that the full amount of unpaid money owed to the lender may get immediately due and payable if the debtor fails to pay.
Actual Delay Days
Actual delay days are known as delay days. They are the actual days of the lag times, which is the time period which starts after the expiry of the last date of repayment.
Article of Agreement
It is a contractual provision where a buyer buys real estate from a seller over a period of time. The buyer pays the amount in instalments. Article of agreement is also known as a land contract.
Account Reconciliation Services
An account reconciliation service is also known as ARPs, Recons or account recs. This is a service that banks provide to a deposit customer in helping reconcile bank account balance. It is a cash management service. Basically, it may be simply a listing of paid checks according to serial number. At a more advanced level, it may combine electronic data provided by the customer with the bankÃ¢â‚¬â„¢s records to reconcile any discrepancies.
Accumulated Benefit Obligation
It is the present value of the pension benefits that a person has earned till date. It uses the historical compensation rates for income-related benefit plans. The accumulated benefit obligations need to be stated in a footnote to the financial statements.
Adjusting trading is to sell securities without identifying any or all of the loss from a sale. An investor, to hide a loss, pays more for a newly bought security in exchange for a brokerÃ¢â‚¬â„¢s or a dealerÃ¢â‚¬â„¢s contract to pay more for a security that an investor intends to sell.
A broker is not at a loss because s/he purchases an investorÃ¢â‚¬â„¢s underwater bond at above market price and sells that investor a new bond at above market price. Such transactions are banned for federally insured financial institutions and may also be termed illegal. They are sometimes referred as free trading.
It is an agreement of security between a debtor and a bank that is acceptable to the borrower. The acceptance process can be done online where the agreement can be downloaded and printed by the parties.
An affinity card is a card that is jointly offered by two companies, one being a credit card company and the other being a special interest group, a professional association, a company etc.
An accommodation maker is a person who signs the note of application and renders his credit history during the process of application of a loan. The accommodation maker gets no direct financial benefit from the loan. This term, accommodation maker, is also used when more than one person help each other by rendering liquidity of a negotiable instrument.
The process of periodic increases in the book value or the balance sheet value of an asset is known as accretion. In banking, accretion is a process where the price of a bond that is bought at a discount is changed to its par value.
Aging is a report of all outstanding accounts payable or receivable. It shows the names of all account debtors or creditors, lists the amount due for each debtor, and also shows the time periods within which the amount to each debtor is due.
Allowance for Double Accounts
It is the reserve for accounts receivable that may not be collectable. These allowances are always presented as a reduction from gross receivables that are used to calculate net receivables.
This is an order that becomes active automatically when a person or an organization files for bankruptcy. Automatic stay prevents a bank or a creditor from taking the pro Arrears
Arrears are the unpaid dividends or bond interest a corporation or the government owes its employees, bond holders or stockholders after the due date of the payment of the interest is over. Party of the debtor.
Attrition analysis is the evaluation of the reduction in the amount of an asset or a liability. For example, there might be a reduction in saving account balance because of many withdrawals over a period of time.
This schedule states when a bank will receive credit after the check clearing process and when the depositor will be able to access or withdraw the funds. A standard time is taken because a bank cannot evaluate every check clearing process.
Ascending Rate Bond
Ascending rate bond is a security that has a coupon rate that increases after certain intervals.
Asset Backed Security
Asset backed security is a security which is backed by a valuable asset. That is why this type of security is also known as monthly rate of repayment of a secured loan.
In banking terms, an assignment is the transfer of a contractual agreement between two or more parties. The assigner is the party that assigns the contract and the assignee is the party that receives the contract.
Average Daily Balance
An average daily balance is a computation of average amount that is held in an account over a specified period of time. It is usually calculated by adding daily balances over a particular period of time and dividing it by the total number of days in that particular period.
It is banking or a financial organization that specialises in the service of acceptance and guarantee of bills of exchange. It specializes in facilitating different negotiable instruments and merchant banking.
Account aggregation is an online facility that is made available by some banks or financial organizations where an account holder can access his/her account. Transactions such as credit facilities, debts and investments etc. can be operated in a single interface or account.
Asset-Backed Security (ABS)
ABS is used to express the rate of pre-payments as a percentage of the original number of loans in securitized loans that created the security. It is expressed as a monthly rate.
Adjustable-Rate Mortgages (ARM)
ARM is also known as variable-rate mortgages or tracker mortgage. It is a mortgage loan with an interest rate usually below that of conventional fixed-rate loans. The interest rate may vary according to market conditions or a lender may increase or decrease the interest at their discretion. That is why they are called variable-rate mortgages.
ARM are preferred by the borrowers where unpredictable interest rates makes it difficult to obtain and manage fixed-rate loans.
An annuity is the termination of any stream of fixed payments over a specified period of time. Usually, it is a life insurance contract sold by insurance companies, financial institutions and brokers.
Annuities may be in the form of regular deposits in oneÃ¢â‚¬â„¢s savings account, monthly insurance payments and monthly home mortgage payments. Payments can be weekly, monthly, yearly etc.
An annuity may be of the following types:
Fixed annuities - These are no risk annuities used for low-risk investments such as corporate bonds or government securities. Fixed annuities provide a fixed rate, but are not regulated by the Securities and Exchange Commission.
Annuity-due - Under it, payments are made at the beginning of each period. Some examples of annuity-due are deposits in savings, insurance payments, rent or lease payments etc.
Equity-indexed annuities - Under it, lump sum payments can be made to an insurance company.
Ordinary annuity (also annuity-immediate) - Payments are made by the end of each period.
Variable annuity - These annuities are regulated by the SEC and allows you to invest in portions of money markets.
An application is a written statement that requests a change, a proposal etc. from a financial and is signed by the person giving the application.
Automated Clearing House (ACH)
ACH is an electronic network or a computerized facility used for financial transactions in the U.S. ACH electronically combine, sort and distribute interbank credit and debit in batches.
ACH credit transfers include direct deposit payroll, vendor payments etc. ACH debit transfers include consumer payments on insurance premiums, mortgage loans, new applications etc.
Government and businesses use ACH payments to pay customers instead of using credit cards or debit cards.
Account Reconciliation Services
These are cash management services where a single or multiple bank services are created to aid a depositor in the reconciliation of its bank account balance. It lists paid checks and in some cases combines electronic data given by a customer with the bankÃ¢â‚¬â„¢s records to see whether everything matches.
Account analysis is done to check the profitability of each demand account to the bank. It is usually done by the bank, but can also be done by anybody provided he/she has enough information at hand. The analysis includes net earning that is calculated on the basis of the average daily ledger balance minus reserved requirements and float. Net earnings are then compared to various activity service charges.
Administrated rates are interest rates that a bank or a creditor is contractually allowed to change at any time and by any amount. A bank can anytime change rates on a savings account or a creditor can change the interest rates of the loan anytime s/he wants if not under a binding contract.
All interest rates are categorized into three groups: fixed, administered or floating. As the names suggest, fixed interest rate does not change over a long period of specified time. Administered interest can change anytime depending on the financial markets, the policy etc. Floating rates change at contractually specific times by contractually specific amounts. Variable rates, on the other hand, may change at the creditorÃ¢â‚¬â„¢s discretion.
Administrative float is the total elapsed time for processing checks or other related paperwork. It may range from a day to more than a week. It is also known as payment processing float or internal float.
It is a provision in a creditorÃ¢â‚¬â„¢s document that requires the debtor to do a task such as providing annual audited financial statements to the bank during the term of the loan etc.
Automatic Bill Payment
This is a bill payment method that does not use checks. An authorization statement from a financial institution is used for paying recurring bills. For example, a customer will need to provide a single authorization form or letter to pay for the cable bill each month. Debits and credits are made through an ACH (Automated Clearing House).
An annuity is a life insurance contract usually sold as a retirement investment. It is sold by insurance companies, brokers and other financial institutions. An annuity is a long-term investment and early withdrawals may be charged with heavy penalties.
It is a bond that is purchased at a discount and whose book value is increased to the face value.
Amortization period is the time period that starts from the inception of the investment, credit or negotiable instruments, and ends upon expiry or maturity of the instrument.
Usually, the amortization period is considered to calculate interest rate, timeline of instalments and the amount of installments.
Also known as closed form solutions, analytical solution is simple mathematical techniques and models that are used for calculating projections and interest rates by lenders such as banks and other financial institutions.
Analytical solutions are so simple to calculate that they are many times done orally.
It is simultaneous purchase and sale of an instruments or merchandise in different markets. This is done to take advantage of price variations in two different markets. For example, some purchase gold from a nation where its prices are down or lower than in most places and simultaneously sell it in another nation where its prices are high.
It is a ban that automatically comes into being after a person or an organization files for bankruptcy. The ban prevents the creditors from taking over the property and other assets of the debtor.
As its name suggest, audited statements are considered to be reliable because they have been carefully examined. Audited statements are financial statements whose reliability has been verified, cross-checked and confirmed by auditors. Audit means careful examination.
It is an analysis done to establish the profitability of demand account to the bank or it may be used to establish the profitability of a group of demand accounts of a particular owner. The analysis is done to identify net earnings based on the average daily ledger balance minus reserved requirements and float. Net earnings are then compared with many activity service charges.
Account analysis is usually done by a bank, but it can also be performed by any organization in which the deposits are if they have sufficient information to carry on account analysis.
Account value is the total value of accounts when a person has more than one account within the same bank or financial institutions. It is the total value expressed in monetary terms.
AAA is a grade used to rate individual bonds. AAA is the highest rate a bond can have. It is given to bonds that give maximum returns at the time of maturity. Usually, this highest grade is given to the best debt obligation or a security by a credit rating agency.
An accepting house is banking or a finance organization specializing in the acceptance and guarantee of bills of exchange. An accepting house specializes in two basic functions which are: facilitating the different negotiable instruments and merchant banking.
This facility is made available to customers of some banks or financial organizations where they can handle and operate transactions related to the bank accounts, credit facilities, debt and investments etc. through a single interface or account. It is a form of Internet banking, which is provided to customers for ease of transaction.
It is a process of reconciliation of account balance. Various instruments such as ATM notes, bank statements, receipts etc. are considered. It is done at the end of a week, month, financial year or at the end of any financial period.
A bond is a debt security authorized by an issuer for a specific period of time and at a fixed interest. Think of it as a loan. When a company is in need of money, it issues bonds which people can buy. They are mostly long-term debt securities. What do the buyer of bonds get? They get interest. Interest rate of bonds and their time of maturity differ from issuer to issuer.
Bonds are different from stocks. A bond holder of a company or an organization does not have a stake in it whereas a stockholder has an equity stake in it. A bond has a defined term called maturity after which it is redeemed. Stocks, on the other hand, can have no such deadline.
There are various types of bonds such as government bonds, corporate bonds, municipal bonds, treasury bonds and so on.
A bank account is where a customer of a bank keeps his money. Funds can anytime be withdrawn or deposited in a bank account. There are various kinds of bank accounts such as savings account, current account and so on. It is usually denoted by the figures A/c on a bank check.
A bank statement is a printed summary of all the financial transactions over a period of time for a particular account. It tells an account holder how much money was spent and deposited, and at which particular date it took place. It also calculates the remaining balance in the account.
Bank statements are available to account holders. Typically, it is printed on sheets of paper and is either mailed to the account holder or kept at the local branch for the customer. Some banks also offer a shortened form of a bank statement to be printed at ATMs.
Bankruptcy is a situation when a debtor is unable to return the money of creditors. In some cases, bankruptcy is declared by the debtor himself when he knows that he will be unable to return the money owed to him by creditors. However, in some other cases, the creditors file a petition when a debtor is unable to return their money.
A person or an organization is officially declared bankrupt when during the legal proceedings his/her affairs are turned over to a trustee or a receiver of administration under the bankruptcy laws. In most countries, bankruptcy is imposed by a court order.
A beneficiary is a person who receives the benefits of a will, insurance policy, trust, annuity, retirement plan etc. from a benefactor. In other words, s/he is a person who receives the money or assets of the owner through legal means.
In case of trusts, beneficiaries of a trust share the equitable ownership of the assets of a trust although the legal title is held by the trustee.
In the case of inheritance, the heir or the heiress receives the property of the owner. The beneficiaries of a will are called devises or legatees.
Bank reserves are a bankÃ¢â‚¬â„¢s holding of deposits in accounts with their central bank along with currency that is held in a bankÃ¢â‚¬â„¢s vault. In some countries, the central bank puts a restriction to how much reserve a bank can keep. Even if there are no restrictions, a bank wishes to hold reserves in case of a bank run.
A bank run or run on the bank happens when a large number of customers withdraw their money from the bank because they believe that the bank might become insolvent.
The news of insolvency might be a rumor or it might be true, but it does damage a bank when their customers believe it and take their money out before the bank supposedly becomes insolvent. Because of that, a bankÃ¢â‚¬â„¢s deposits go down drastically and there is greater likelihood of default. This increases withdrawals. If the process does not stop, a bank might face bankruptcy.
A banking panic or bank panic occurs when many banks in a country have a bank run. It can very quickly destabilize an economy.
Billing error can occur when a charge appears regarding the extension of credit, for example credit card, without the knowledge of the cardholder, without the acceptance of the cardholder or when it was not properly identified.
A billing error can also occur due to negligence of accountants or clerks. It may also happen due to a creditorÃ¢â‚¬â„¢s failure to credit a payment etc. to an account.
It is a process of transferring an outstanding balance from one credit card to another. This is generally done to lower interest rate on the outstanding balance. Sometimes, transfers may be charged with a Balance Transfer Fee.
Bridge financing is a kind of loan and is also called gap financing. In bridge financing the time and cash flow between a short-term loan and a long-term loan is bridged. It generally begins at the finish of the time period of the first loan and begins with the beginning of the time period of the second loan. That is how it fills up the gap between two loans.
The final, lump sum payment of a loan after all the previous regular payments is called a balloon loan. It is paid before a loan is fully amortized.
Bank Services Contract
It is a contract with a bank that states the responsibilities of a bank and the bankÃ¢â‚¬â„¢s customer.
Bank Specific Liquidity Risk
It is also known as internal liquidity risk or bank name risk. A bank experiences this risk when it loses the confidence of funds providers in a bank because of internal or external problems. It results in the crisis of funding.
It is a short-term financial instrument that involves transactions of import, export, transit, storage of goods. It also includes domestic and international transit. BankerÃ¢â‚¬â„¢s Acceptance is created when a bank accepts its obligation to pay the holder of the draft. It is done at a later stage and is not relevant to the credit quality or the liquidity of the instrument.
For an investor, a BankerÃ¢â‚¬â„¢s Acceptance has the same credit strength as that of a CD issued by a bank. They are safe and short-term money market investments.
Basel II is a common name used for capital guidelines issued by the Bank for International Settlements. It is located in Switzerland. These guidelines come from an international committee of banking regulators and implemented by rules issued by national regulators.
Basic Indictor Approach
Banks that use basic indictor approach need to hold capital for operational risk that is equal to the average over the last 3 years of fixed percentage of annual gross income. In other words, losses from operational risk are close to the gross income.
Basic swap are a kind of interest rate swap. The net cash flow that the parties agree upon in basic swap is based on the difference between two different interest rate indexes. Basic swaps are used by banks to hedge basic risks by bolting a net interest rate spread between a variable rate cost of funds of one index to a variable rate asset of another index.
A beneficial owner is one who receives all the benefits or rights of an owner of a security when the security is not in his/her name. The security might be in the name of a bank or a broker.
A bounced cheque is a check that cannot withdraw funds from a bank because there are not enough funds in the bank account of the person who signs the cheque. Under these circumstances, the beneficiary of the check does not receive funds. Usually, a fee is charged by the bank for a bounced cheque.
All interest rates do not change by the same amount, but there is a connection between changes in many interest rates. Some rate are sensitive, some are not. In beta-adjusted gap, the volume of assets and liabilities that are subject to re-pricing are investigated to see the sensitivity of their yields or costs of those assets and liabilities to a benchmark yield or cost.
Buckets are the predefined time interval groups in gap reports. They represent the time units a bank wants to see in their gap reports. It can be a month or years. Small buckets such as a month long bucket provide more detail that can be used for getting a more accurate measure of interest rate risk. Small buckets need more number of buckets to reveal the interest rate risk. Usually, a bucket for a month is used for the first six months or so and large buckets are used for later years.
The bridge loan is a real estate loan or a home loan where the current residence or real estate is pledged by a borrower as collateral so that the borrower can buy a new residence.
A check (or cheque in British English) is a document, usually a piece of paper issued by a bank, which orders a payment of money from a bank account. The person whose name appears on the check receives the money and the person who owns the check pays the money through his/her bank account.
On a check, the name of the person receiving the money and the amount of money being paid to the receiver needs to be specified. For authenticity, the signature of the payer is also required on a check along with the date of payment.
A Check can be used to pay someone where cash or draft is not used.
Collateral is the security that a borrower pledges of an owned property or other assets to secure a loan or other credit. It can be an owned house, company, land or other assets. Typically, a bankÃ¢â‚¬â„¢s collateral is your house (only if it is owned by you) for giving a loan. If the money is not repaid according to the agreed specifics, the collateral is seized and the ownership is transferred to the bank. This legal process to obtain real estate from a borrower who defaults on a mortgage loan obligation is called foreclosure.
Credit Bureau is an agency that collects credit information from various sources and provides it to banks, mortgage lenders, credit card companies, individuals etc.
It is an organization that helps lenders know about the ability of a borrower to pay back the loan. Based upon the information provided by a credit bureau, a bank or a lender can vary the rate of interest and other terms of a loan.
A credit bureau is called credit reference agency in the U.K.
Charge-off is the declaration made by a creditor that the amount of money being lent cannot be recovered. The creditor writes if off as bad debt. Such a situation occurs when the borrower is not in a situation to return the money borrowed (as in bankruptcy etc.).
A charge-off is made to give the bank tax exemption on the debt. However, a charge-off does not mean that that debtor is free not to pay the debt or the creditor will not try to collect the money borrowed.
A credit card is a small square card issued to account holders of a bank to use as a convenient system of payment. Credit cards have a number that is unique to a bank account.
While shopping, an electronic verification system allows merchants to verify quickly that the card is authentic. The person who owns the credit card gives his signature to the merchant. A credit card allows a person to remain in a continuing balance of debt, on which s/he will have to pay interest.
Credit cards are of two types: Personal credit cards and business credit cards.
A co-maker is a person who signs a note to guarantee a loan or a promissory note and assumes equal responsibility to return it. A co-maker signs his/her name along with the name of the original borrower and promises to pay the money in full if the other person defaults.
A co-maker is also called co-signer.
A collection agency is an agency that recovers loans or other debts from the borrower when the creditor (typically banks) fails to recover it from the borrower themselves. Usually when a loan is not paid back by the borrower on time, the creditor sends reminders through letters and telephone calls for the recovery of the loan. When that does not affect the borrower, the credit takes the help of collection agencies to recover the loan.
Collection agency charges a fee or takes a percentage of the total amount owed for their services. The rules and regulations for collection of debt by a collection agency differ from country to country.
Credit Card Residual Interest
Residual interest is the interest that continues to pile up on your credit card balance from the time the credit card company sends out a bill to the time when you pay it. The residual interest is added to the next payment.
The biggest drawback of using a credit card is the penalty in interest a user needs to pay when the payment becomes late. Even if payment is made on time, if you carry a balance, you need to pay penalties in the form of accruing interests. In order to avoid paying penalties, a credit card holder needs to pay the bill on the due date and not carry a balance.
CashierÃ¢â‚¬â„¢s Check is a check drawn on the fund of a bank and not against those in a depositorÃ¢â‚¬â„¢s account although the depositor paid for the cashierÃ¢â‚¬â„¢s checks with funds from his/her account. A cashierÃ¢â‚¬â„¢s check is the guarantee that the recipient gets that there are funds available in the account of a person.
Collective Investment Funds (CIFs)
CIF is a trust managed and created by a bank or a trust that pool assets from many clients. In the United States, the Federal securities laws requires institutions that pool securities to register them with the SEC, but the Congress exempted the CIFs from these rules as long as the institution offering funds is a bank or an authorized entity and the customers participating are covered by the exemption. As far as these limitations are met, CIFs are exempt from SEC registration and reporting.
Consumer Reporting Agency (CRA)
The CRA is an agency that collects and evaluates an individualÃ¢â‚¬â„¢s credit information or other information about consumers for the purpose of selling consumer reports to creditors for a fee. Usual clients of the CPA are banks, credit card companies, mortgage lenders and other financial companies.
Conventional Fixed Rate Mortgage
Conventional fixed rate mortgage is fixed rate and offers you a fixed interest rate and payments that do not change throughout life or the term of the loan. Fixed rate loan is to be paid back with the same interest after 15, 20 or 30 years, as specified in the terms of the loan.
The cardholderÃ¢â‚¬â„¢s agreement includes many elements such as billing dispute remedies, rate of service charges, communications with service providers etc. It is a written statement showing all the terms and conditions of a credit card agreement.
Credit counselling is done by credit counsellors where they suggest debt relief solutions and debt management solutions to those who seek consultation.
Closing an account is the final state of transaction with the bank holder where both the bank and the account holder mutually agree to close an account. To close an account, both debit and credit sides need to be equal.
As an offer, many stores, restaurants etc. let you have cashback when you use your debit card to pay, so that you do not have to go to an ATM machine for cash. For example, if you buy something for $15 and get $30 cashback, a total of $45 will be deducted from your account.
A cap is the upper limit that regulates the increase or decrease in the interest rates and instalments of an adjustable rate mortgage.
Foreign Currency Surcharge
It is a charge that is put by some banks and credit card companies when a credit card or a debit card or an ATM is used in a foreign country.
Cash Advance Fee
When a person uses a credit card to get cash, a basic fee is charged for it, then it is known as cash advance fee. Mostly, the fee is fixed as the percentage to the cash advance.
Cash letter is the letter that accompanies the checks and other financial items with specific amounts and directions regarding the transactions etc. Cash letters are sent to a bank for transfer to other banks for clearing checks drawn on other banks.
A bankÃ¢â‚¬â„¢s equity accounts are common and preferred stock, surplus and undivided profits.
Capital Markets Disruptions
It is a risk of funding problems that arises from problems in secondary markets for financial tools. For a bank, capital market disruptions come into being when a bank is only able to sell investment assets at undesirable prices.
Cash and Due from Banks
This is a banking expression that describes the total sum of assets in cash, funds on deposit with other banks, funds on deposit with the Federal Reserve Bank and items in transit with those banks.
Cash instruments are financial instruments/commodities whose value is dependent upon the coupon rate, the term or other characteristics. Its value is partly reliant upon prices of an underlying cash instrument.
Some of the cash instruments are municipal securities, corporate securities, government sponsored enterprise securities, syndicated loans, credit card receivables, bankerÃ¢â‚¬â„¢s acceptances and negotiable certificates.
A clearing bank is one that can clear funds between banks. Any bank or a provider of banking services can fulfil this purpose.
Cash management includes many techniques that are used for accelerating cash receipts, utilization of banking services effectively, delaying of cash payments, increasing the amount of cash for investing purposes, management and expansion of liquidity, increase in return from liquid investments.
Certificate of Deposit
It is a deposit of funds in a bank that earns interest at a specific rate. Certificate of deposit can be secured or unsecured, can be for short-term (a week) or long-term (10 years), and may have fixed or floating rates.
Certificate of deposit can also be issued in non-negotiable or negotiable form in book entry form or physical form.
Charges are the money paid to the bank for the services is gives. These include overdraft fee, charges for bounced cheques, interest on overdrafts and other similar charges.
Also called dealer paper, it is a document that has a monetary obligation and a security interest. It can be for goods or a lease. An sales contracts that is to be paid in instalments and includes a retail purchaserÃ¢â‚¬â„¢s promise to pay along with a security interest becomes a chattel paper for a bank when the seller transfers it to another party.
Collected balances are also called good funds, available balances or usable funds. These are bank ledger balances without any checks in the process of collection.
It is a guaranty in which a signer agrees to pay the bank only if the bank is not able to get repayment through other means.
Commercial Letter of Credit
It is also known as trade letter of credit. Commercial letter of credit is issued by a bank on behalf of their customer to a third party. It is a bank promise that payment will be made to the third party for the purchase of goods by their customer. If the bank is not paying immediately, then the transaction can later lead to bankÃ¢â‚¬â„¢s acceptance.
Compensating balance is a way of paying the bank for providing services. A bank asks a customer to maintain a minimum balance in their account to facilitate the bankÃ¢â‚¬â„¢s credit facility. These minimum balances are known as compensating balance.
Compensating balance is also the amount of deposit balances required to counterbalance the cost of deposit, cash management or other bank services. The bank service charges for services used by a customer are used to determine the level of balances to be left with a bank. Modifications are made to reduce the total deposit for reserve requirements and float.
Consideration in legal terms means the benefit that a borrower gets in exchange of a repayment, a guarantee or a pledge security to a bank. More often than not, the consideration is the proceeds of a loan. The value of the consideration needs to be directly or indirectly beneficial and meaningful.
Contagion is the risk of a crisis in a bank, market, currency spread or a country. Both upward contagion and downward contagion are worrying for regulators. In upward contagion, problems in a single financial institution spread to others to create problems in the entire system. In downward contagion, the systemic problems go down to individual banks, accelerating the problem because individual banks are relatively more vulnerable to such crisis.
In this type of guaranty, a guarantor agrees to guarantee all future loans made to the borrower of a bank. There are not only loans that are part of the transaction under which the guarantee is given, but all loans.
Continuous Repo, also known as open repo, is a series of overnight repos that are renewed everyday. It does not have a specified term and is terminated whenever either party requests a termination. Continuous repos are generally used with bank sweep accounts.
It is a written statement that depicts all the terms and conditions of a credit card agreement. The cardholder agreement has many elements like billing dispute remedies, rate of service charges, communications with credit card companies/service providers etc.
Controlled Disbursement Bank
This kind of bank is usually located outside the local area and provides better management control over checks being presented.
Covenants are also known as indenture covenants or protective covenants. They are restrictions placed upon a debtor through a bank loan agreement or bond indenture agreement. It is created to protect creditors from unsecured credits. There are four common covenants namely issuing new debt, merging with another company, selling corporate assets and paying dividends if some minimum financial standards are not maintained.
Credit counselling is a counselling session where the counsellor advises on debt relief solutions and debt management solutions.
Current liabilities are liabilities that are considered for the shortest period. They are accounts payable, bank overdrafts, short-term accounts, short-term bank debt and other items of short duration.
A custodial account is a bank account that is opened by a guardian or a parent of a child who is not yet of legal age. The account is maintained by the adult until the child reaches the legal age of holding a bank account.
A central back, reserve bank or monetary authority is a public institution that manages a nationÃ¢â‚¬â„¢s currency, money supply and interest rates. Usually, central banks also watch over the commercial banking systems of their country.
Unlike commercial banks, a central bank creates the nationÃ¢â‚¬â„¢s money, prints the national currency, sets the reserve requirement, acts as a lender of last resort to the banking sector at the time of crisis etc.
Central banks also keep a watch on the behaviour of commercial banks to prevent them from reckless or fraudulent behaviour. In most countries, central banks are independent from political interference.
Some of the examples of central banks around the world are: The Federal Reserve of the United States, European Central Bank, Reserve Bank of India and the PeopleÃ¢â‚¬â„¢s Bank of China.
A commercial bank is also called a business bank. It is a financial mediator that provides facilities to the businesses such as instalment loans, business loans, issue bank checks and bank drafts. They, like other banks, provide transactions through internet banking, telegraphic transfer and other similar means.
Other than that, commercial banks also provide standby and documentation letter of credit, private equity financing, cash management, safekeeping of documents, insurance, brokerage, unit trusts, performance bonds etc. Large commercial banks have their own investment bank arms. Commercial banks also offer their services to the general public.
Compound interest is interest paid on the principal amount and on the interest built up over the years. Interest compounds when the original amount and the interest earned on that are reinvested. You earn more money on compound interest than you would with simple interest.
For example, if you have the original amount of $50,000 and the interest rate is 5%, compounded over 3 years. During the first year, you will receive $50,000 x .05, which is $2,500 in interest. In the second year, your original amount would have increased to $52,500. So, $52,500 x .05, which is $2625 in interest. In the last year, your original amount has increased to 55,125 x .05 or 2756 in interest.
It is the liquid balance of cash and the bank balance available with an organization or a corporation. Sometimes, the cash flow is also defined as the net amount of cash generated by the net income generated by a company or an organization during a particular duration of time.
A debt is something, usually money, which is owed and shall be returned. In simple words, it is borrowed money.
When a person or an organization lending the money (called the creditor), gives a certain amount of money to another person or organization (called the debtor), it is called debt. The creditor usually asks for an interest on his money and fixes a deadline for the entire amount to be returned.
Debt can be taken from banks in the form of loan, and from friends, contacts or family on mutual understanding. Companies take debt for expansion and growth mostly through shares and bonds. Debt allows people to do what they would not be able to do through personal savings.
Debts can be monetary, of good and services, or even of moral obligations.
Debit is the amount of money that a person borrows from another to be returned back at a specified date. It indicates the amount that needs to be returned along with the interest to the lender. The term originated from the concept of debit side of a ledger account.
Debt Consolidation Loan
It is a kind of loan where a bank or a lending institution provides the borrower with a loan that helps him/her to pay off debts.
In banking terms, the word Ã¢â‚¬ËœdiscountÃ¢â‚¬â„¢ means that any negotiable instrument is converted into cash. For instance, a person can exchange a bearer check for cash with the amount being less than its face value. This method is only used by those who are in an instant need for cash.
Debt recovery is a process through which debt is collected when its due date has expired. It is initiated by the banks or lending institutions to recover the debt by various procedures such as debt settlement or selling of collaterals.
Direct debit is a method of paying regular bills directly from your account on a regular basis. If you give the payee permission to take money from your account directly, it is called direct debit.
A deposit account can be a current account, a saving account or other types of bank accounts at a bank where money can be deposited and withdrawn by the account holder. Every financial transaction is recorded with the bank and is available to the account holder.
Some of the types of deposit accounts are: saving accounts, time deposits, money market deposits and checking accounts.
When a debt is not paid when it is due, then it is called delinquency. A person who fails to pay a debt or other financial obligation is called a delinquent.
The discount window is a facility through which eligible institutions can borrow money from the central bank to meet temporary shortages in liquidity due to internal or external disruptions.
The interest charged on such loans by a central bank is called discount rate, repo rate or base rate. The discount window functions as a safety measure to relieve the pressure in reserve markets. It helps to ensure that financial markets remain stable.
The term Ã¢â‚¬Ëœdiscount windowÃ¢â‚¬â„¢ originated because of the practice of sending a bank representative to a reserve bank teller window to borrow money.
Debt instrument allows the transfer of debt obligations between parties who are involved and between markets. Transfer of debt obligations improves liquidity and makes it possible for creditors to sell debt obligations to others in the market.
Generally, debts are bought and sold to raise funding. Debt transferability makes it possible for a party to buy a debt and a party to sell a debt. Debt obligations are electronic or paper obligations that promise that the obligation will be repaid to creditors according to the contractÃ¢â‚¬â„¢s terms and conditions.
There are many kinds of debt instruments such as mortgages, bonds, certificates, leases, notes etc. Municipal bonds, treasury bills, certificates of deposit and commercial paper also fall into the category of debt instruments.
A bank that accepts cash receipts is known as depository bank.
Deposit notes are issued for two to five years. They are issued at specific rates or specific rate formulas. Deposit notes are similar to a deposit, but they are sold in pre-determined amount for a pre-determined period of time.
Interest rates for deposit notes are calculated using accrual methods that take the number of days in a year as 360 with every month being of 30 days each. This is the difference an investor takes into account when choosing between a bank CDs and a bank deposits.
Depreciation is the degradation or wear and tear of a fixed asset such as a house, a car etc. in the course of time. It reduces the principal price of the asset at which it was bought. The cost of old assets is calculated after reducing the depreciation from the original price at which it was bought.
It is a bill that includes the amount of paper money, check numbers or coins being deposited into a bank account.
Direct lease is a kind of lease financing where a bank acquires property from a supplier and leases it directly to a user.
Discount securities do not pay periodic interest. They earn the difference between the discount issue price and the full face value that is paid at the time of maturity. Some of the discount securities are zero coupon bonds, treasury bills, bankerÃ¢â‚¬â„¢s acceptances etc.
It is the investment of funds into investment instruments by bypassing banks and other financial institutions. Mostly, funds are placed in a bank or other financial intermediaries, but when investors and borrowers do financial business directly without the banks and other financial institutions, it is called disintermediation.
Dominion of Funds
Dominion of funds is also called ledgering or detail method financing. The word dominion means control. In dominion of funds, a bank needs that the borrower give the bank control over his/her accounts receivable collections when lending from that bank.
Double leverage is the leverage in bank holding companies that utilize borrowed funds to finance the holding companyÃ¢â‚¬â„¢s equity investments in its subsidiaries.
Downstream funding is the practice of borrowing funds at the level of bank holding company. The bank holding company then lent out these funds to a subsidiary.
Duration of Equity
Duration of equity is seen by a bankÃ¢â‚¬â„¢s equity as a bond. It measures the interest rate sensitivity of the bank and has obligation for future cash inflows from the bankÃ¢â‚¬â„¢s assets.
The present value for asset cash flows is reduced by the total present value cash flows from the liabilities, then the duration of the equity Ã¢â‚¬ËœbondÃ¢â‚¬â„¢ is calculated.
Decay analysis is the statistical analysis of the rate of attrition. It is used for analyzing unpredicted core deposit volumes that specifically includes rates for withdrawals and account closures. Deposit decay rates are calculated by studying a sample of accounts over a period of time that includes at least one interest rate cycle.
This analysis has been used by banks to determine effective maturity assumptions that are used for calculated core deposit value for bank acquisitions, branch acquisitions and deposit purchases.
Data warehouse is a database that is composed of data extracted from data processing and accounting systems that is computerized. Data is taken from many product systems and is balanced and converted into a standardized format. It is used for loan, bank deposits etc.
Deed is an important document that reveals the ownership of an asset, mostly real estate.
A debenture is a long-term unsecured corporate bond. A debenture holder is not protected by collateral and is treated like an ordinary creditor.
Debt Service Coverage Ratio
This is a simple comparison of the cash available to make principal and interest payments to the bank or to bond holders. The ratio of debt service coverage is calculated by taking the annual net income divided by annual debt service requirement.
Debt Service Coverage
Debt service coverage is the margin by which all principal payment of a borrower or a bond issuer are exceeded by the total of a firmÃ¢â‚¬â„¢s cash flow, and all principal repayments and interest expense deducted in the process of making the calculation of that cash flow.
A digital wallet is a software program that stores the financial information of a customer such as bank account number, social security number and credit card number in a secure and encrypted program. It is also called e-wallet. The user enjoys a safe and fast transaction in the cloud. Paypal is a digital wallet. Many job platforms such as vworker and odesk also have digital wallets for their users.
Data warehouse is a computerized database for data processing, accounting systems etc. It is used by bank deposits, loans and other services. In data warehouse, data is balanced and converted into an accessible format.
E-cash is digital cash or electronic cash and is an equivalent of paper currency notes. E-cash came into being because of the Internet. It is a technology where banks use electronics, computers and other electronic networks to execute transactions. It is also used for transfer of funds.
The handing over the rights of a legal document or a financial document or a negotiable instrument to another individual is known as endorsement. An endorser is the one who hands over the rights to another person. The person who receives the rights is known as the endorsee.
Earning assets are called so because they generate returns either in the form of returns, in cash or in the form of interest. In the case of earning assets, the owner does not have to make any daily effort to get returns.
An education loan provides the borrower with funds for his/her education. Therefore, it is also known as education loan. In many countries, education loans have lower rate of interest. Moreover, the payment of repayment of the loan starts after the completion of the period of the loan.
Exchange rate is the rate at which the currency of one country is exchanged with the currency of another country.
It is a process used to ensure the privacy and security of a personÃ¢â‚¬â„¢s personal and financial information. The process of encryption is used for any sensitive data that needs to be kept secret such as bank account numbers, credit card numbers, passwords, certain documents etc.
The process involves scrambling of a personÃ¢â‚¬â„¢s data so that it can only be viewed by him/her. Many online websites that needs to keep their customerÃ¢â‚¬â„¢s personal and financial information use encryption to keep it safe.
Equity is the balance left after taking the market value of a property and the outstanding property debt that is yet to be paid. It is a risk that the lender has to bear.
When funds are held by a third-party on behalf of the payer and the payee in a financial transaction than it is called escrow. The funds are held safely in escrow by the third-party till it receives appropriate oral or written instructions or until some obligations have been fulfilled. Apart from money, securities and other assets can also be held in escrow.
Encoding is a process that is used to inscribe MICR (Magnetic Ink Character Recognition) characters on deposits, checks and other such financial mediums. MICR is a technology that recognizes unique characters and is mainly used by banks to facilitate the processing of checks.
Electronic Check Conversion
It is a process through which a check is used to identify information such as your account number, your bankÃ¢â‚¬â„¢s name, your check number etc. This information is then used to make a one-time electronic payment from your account. The electronic check itself is not used in the payment, but is only used to gather information regarding the legitimacy of the person and the bank.
Electronic Fund Transfer
Electronic funds transfer is the exchange or transfer of funds between accounts across different institutions or within a single institution. Electronic funds transfers are always made through an online payment system. Electronic benefit transfers, wire transfers and direct deposit payroll payments are kinds of electronic funds transfer.
Wire transfers are carried out through international banking networks where funds of an individual are transferred from one bank in a country to a bank in another country using a special code of the bank.
Electronic Benefit Transfer is used in the United States to allow governments to provide material and financial benefits through a debit card. Cash and food benefits are allowed through electronic benefit transfer.
In electronic funds transfer, funds are transferred directly from one bank account to another. Direct deposit is used to directly deposit funds into the bank account of employees.
Equity is the remaining balance between the market value of a property and the outstanding real estate debt that is still to be paid. The risk of equity is usually borne by the lender.
An endorsement is the handing over of rights of a financial/legal document or a negotiable instrument to another person. The endorser is the person who hands over his/her rights and the endorsee is the person to whom the rights have been transferred.
Efficiency ratio is a ratio that states the entire operating expenses as a percentage of the total income of the bankÃ¢â‚¬â„¢s operations.
An emergency fund is one where money is kept liquid so that the customer can make withdrawals when necessary. They are usually savings account.
An embedded option is a provision in a financial contract or instrument that gives the freedom to a party to change the timing or the amount of one of more cash flows that are connected to that contract or instrument.
Embedded option is also known as hidden option, not because there is anything secret about them, but because they can only be used as a part/a feature of a transaction, not independently. Prepayment choice on loans, early withdrawal options on certificates of deposit, call options in bonds are some of the examples of embedded option.
Earnings Credit Rate
Earning credit rate is also known as allowance rate. It is the interest rate that is applied to account balances that are investable to determine how expense for bank services is utilized by a depositor and how much of it is compensated by the deposits maintained by a depositor.
Earnings credit rate is expressed as an annual rate. The calculations might be done monthly.
Enterprise-Wide Risk Management (ERM)
ERM is used for measuring and managing risks within a financial institution. It sees risks as inter-related with common driving forces.
Event of Default
Event of default is an event that is described in a promissory note, a loan agreement or a security agreement
Event of Default
An event of default is an event stated in a promissory note, loan agreement or security agreement that activates the rights of the lender to make alterations in the documents. Usually, when a debtor fails to pay the interest or the principal amount to the bank when it becomes due, the bank can, in the event of default, declare the debt to be payable in entirety. Loan agreements have many events of default.
A financial institution is an organization where financial transactions are carried out. It includes commercial banks, investment banks, supranational and development banks, pension funds, insurance companies, asset management firms etc.
Float is the funds generated because of timing difference in check clearing system. For banks, float happens when debits given by the Federal Reserve to a bankÃ¢â‚¬â„¢s reserve account for the clearing of checks are received before the time the bank allows a customer to use the funds presented by the check of that customer.
When depositing, float occurs when credits may be given for checks deposited in a bank before the depositing customerÃ¢â‚¬â„¢s account is debited.
A float analysis is the analysis of an organizationÃ¢â‚¬â„¢s payment to find out the number of days between the issuance of a check and the presentation of the check for payment at a bank.