Chapter 10 Money and Banking

Liability

Something that an individual or firm owes

Asset

Something that an individual or firm owns

Liquidity Risk

The bank possibility that a bank may not be able to meet its cash needs by selling assets or raising funds at reasonable cost

Net interest Magian

The difference between the interest a bank receives on its loans and securities and the interest it pays on deposits and debt, divided by the total value of its earning asset

Bank Capital

The difference between the value of a banks assets and the value of its liabilities (shareholder equity)

Interest rate risk

The effect of a change in market interest rates on a banks profit or capital

Credit-risk analysis

The process that bank loan officers use to screen loan applications

Bank Leverage

The ratio of the value of a banks assets to the value of its capital, the inverse of which (capital to assets)

Return on equity

The ratio of the value of banks after-tax profit to the value of its capital

Return on assets

The ratio of the value of the banks after-tax profit to the value of its assets

Credit rationing

The restriction of credit by lenders with the result that borrowers cannot obtain all the funds they desire at the given interest rate

Credit Risk

The risk that borrowers might default on their loans

Dual banking system

The system in the United States in which banks are charted by either state government or the federal government

Reserves

A bank asset consisting of vault cash plus bank deposits with the federal reserve.

National Bank

A federally chartered bank

Loan Scale

A financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party

Federal Deposits Insurance

A government guarantee of deposit account balances up to $250,000

Troubled Asset Relief Program

A government program under which the U.S treasury purchased stock in hundreds of banks to increase the banks capital.

Leverage

A measure of how much debt an investor assumes in making an investment

Standby letter of credit

A promise by a bank to lend funds, if necessary, to a seller of commercial paper at the time that the commercial paper matures

Balance Sheet

A statement that shows an individuals or a firms financial position on a particular day

Checkable Deposits

Accounts against which depositors can write checks

Off-balance-sheet activities

Activities that do not affect a banks balance sheet because they do not increase either the banks assets or its liabilities

T-Account

An accounting tool used to show changes in balance sheet items

Loan commitment

An agreement by a bank to provide a borrower with a stated amount of funds during a specified period of time.

Duration analysis

An analysis of how sensitive a banks capital is to changes in market interest rates

Gap analysis

An analysis of the difference, or gap, between the dollar value of a banks valuable-rate assets and the dollar value of its variable-rate liabilities

Required Reserves

Reserves the fed requires banks to hold against demand deposits and NOW account balances

Excess Reserves

Any reserves banks hold above those necessary to meet reserve requirements

Vault Cash

Cash on hand in a bank

Prime rate

Formerly, the interest rate banks charged on six-month loans to high-quanlity borrowers; currently, an interest rate banks charge primarily to smaller borrowers