F446 Final

fire-sale price

price received for an asset that has to be liquidated immediately

core deposits

deposits that provide a DI with long-term funding source

net deposit drain

amount by which cash withdrawals exceed additions; net cash outflow

purchased liquidity management

adjustment to a deposit drain that occurs on the liability side of the balance sheet

stored liquidity management

adjustment to a deposit drain that occurs on the asset side of the balance sheet

financing gap

difference between a DI’s average loans and average core deposits

financing requirement

financing gap + DI’s liquid assets

liquidity index

measure of the potential losses an FI could suffer as the result of sudden (or fire-sale) disposal of assets

bank run

sudden and unexpected increase in deposit withdrawals from a DI

bank panic

systematic or contagious run on the deposits of the banking industry as a whole

surrender value

amount received by an insurance policy-holder when cashing in a policy early

mass surrender

temporary and drastic rise of surrender rates

can be regarded as an equivalent “bank run” event in the insurance industry

closed-end fund

investment fund that sells a fixed number of shares in the fund to outside investors

open-end fund

investment fund that sells an elastic/nonfixed number of shares in the fund to outside investors

net asset value

price at which investment fund shares are sold

total market value of the assets of the fund / number of shares in the fund

net worth

measure of an FI’s capital that is equal to the difference between the market value of its assets and the market value of its liabilities

book value

historical cost basis for asset and liability values

market value or mark-to-market basis

allowing balance sheet values to reflect current prices

basel agreement

requirement to impose risk-based capital ratios on banks in major industrialized countries

CET1 risk-based capital ratio

ratio of common equity tier I capital to the risk-weighted assets of the DI

tier I risk-based capital ratio

ratio of the tier I capital to the risk weighted assets of the DI

total risk-based capital ratio

ratio of total capital to risk-weighted assets of DI

tier I leverage ratio

ratio of tier I capital to total exposure of DI

prompt corrective action

mandatory actions that have to be taken by regulators as a DI’s capital ratio falls

risk-weighted assets (RWA)

on- and off-balance-sheet assets whose values are adjusted for approximate credit risk

credit equivalent amount

on-balance-sheet equivalent risk exposure of an off-balance-sheet item

credit conversion factor (CCF)

used to convert OBS items into credit equivalent amounts

counterparty credit risk (CCR)

risk that other side of a contract will default on payment obligations

potential future exposure

risk that a counterparty to a derivative securities contract will default in the future

current exposure

cost of replacing a derivative securities contract at today’s prices

spot contract

agreement involving the immediate exchange of an asset for cash

forward contract

agreement involving the exchange of an asset for cash at a fixed price in the future

futures contract

agreement involving the future exchange of an asset for cash at a price that is determined daily

marking to market

process by which the prices on outstanding futures contacts are adjusted each day to reflect current futures market conditions

naive hedge

cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract

immunized

describes an FI that is fully hedged or protected against adverse movements in interest rates/other asset prices

microhedging

using a futures/forward contract to hedge a specific asset or liability

basis risk

residual risk that arises because the movement in a spot (cash) asset’s price is not perfectly correlated with the movement in the price of the asset delivered under a futures/forward contract

macrohedging

hedging the entire duration gap of an FI

routine hedging

seeking to hedge all interest rate risk exposure

hedging selectively

only partially hedging the gap or individual assets and liabilities

tail the hedge

reducing the number of futures contracts that are needed to hedge a cash position because of the interest income that is generated from reinvesting the marked-to-market cash flows generated by the futures contract

hedging effectiveness

(squared) correlation between past changes in spot asset prices and futures prices

credit forward

agreement that hedges against an increase in default risk on a loan after the loan terms have been determined and the loan has been issued

swap

agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specific interval

interest rate swap

exchange of fixed interest payments for floating interest payments by two counterparties

swap buyer

makes the fixed-rate payments in an interest rate swap transaction

swap seller

makes the floating-rate payments in an interest rate swap

plain vanilla

standard agreement without any special features

off-market swaps

swaps that have non-standard terms that require one party to compensate another

fully amortized mortgages

mortgage portfolio cash flows that have a constant payment

currency swap

swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities

total return swap

swap involving an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a specified amount

pure credit swap

swap by which an FI received the par value of the loan on default in return for paying a periodic swap fee