Chapter 10

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 bank's capital is to changes in market interest rates

Gap Analysis

an analysis of the difference, or gap, between the dollar value of a bank's variable-rate assets and the dollar value of its variable-rate liabilities

Excess Reserves

any reserves banks hold above those necessary to meet reserve requirements

Required Reserves

reserves the Fed requires banks to hold against demand deposit and NOW account balances

Reserves

a bank asset consisting of vault cash plus bank deposits with the Federal Reserve

National Bank

a federally chartered bank

Loan Sale

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

Federal Deposit Insurance

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

Troubled Asset Relief Program (TARP)

a government program Congress passed in 2008 under which the U.S. Treasury purchased stock in hundreds of banks to increase the bank's' 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 lists an individual's or a firm's assets and liabilities to indicate the individual's or firm's 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 bank's balance sheet because they do not increase either the bank's assets or its liabilities

Vault Cash

cash on hand in a bank; includes currency in ATMs and deposits with other banks

Prime Rate

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

Asset

something of value that an individual or a firm owns; in particular, a financial claim

Liability

something that an individual or a firm owes; a claim on an individual or a firm

Net Interest Margin

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

Bank Capital

the difference between the value of a bank's assets and the value of its liabilities; also called shareholders' equity

Interest-Rate Risk

the effect of a change in market interest rates on a bank's profit or capital

Liquidity Risk

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

Credit-Risk Analysis

the process that bank loan officers use to screen loan applicants

Return on Assets (ROA)

the ratio of the value of a bank's after-tax profit to the value of its assets

Return on Equity (ROE)

the ratio of the value of a bank's after-tax profit to the value of its capital

Bank Leverage

the ratio of the value of bank's assets to the value of its capital, the inverse of which is called a bank's leverage ratio

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 chartered by either a state government or federal government