Money and Banking: Chapter 10
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; increasing market interest rates are typically good news for banks because they will increase bank profits and the value of bank captial
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; calculates the vulnerability of a bank's profits to changes in market interest rates
excess reserves
any reserve 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
repurchase agreements (repos)
securities sold by the bank, such as Treasury bills, and agree to repurchase them, typically the next day
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
prime rate
Formerly, the interest rate banks charged on sic-month loans to high-quality borrowers; currently, an interest rate banks charge primarily to smaller borrowers
reserves
a bank asset consisting of vault cash plus bank deposits with the Federal Reserve
loan sale (secondary loan participations)
a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party
leverage
a measure of how much debt an investor assumes in making an investment
value-at-risk (VAR) approach
a model which uses statistical models to estimate the maximum losses a portfolio's value is likely to sustain over a particular time period
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
compensating balance
a required minimum amount that the business taking the loan must maintain in a checking account with the lending bank
balance sheet
a statement that shows an individual's or a firm's financial position on a particular day
checkable deposits (transaction 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
plain-vanilla demand deposits
bank deposits which pay no interest
interest-rate swaps
banks agree to exchange, or swap, the payments form a fixed-rate loan for the payments on an adjustable-rate loan owned by a corporation or another financial firm
Vault cash
cash on hand in a bank; includes currency in ATMs and deposits with other banks
large-denomination time deposits
certificates of deposits more than $100,000, which are negotiable to sell in the secondary markets
small- denomination time deposits
certificates of deposits of less than $100,000
cash items in the process of collection
claims banks have on other banks for uncollected funds
reverse repurchase agreements
involve a bank buying Treasury securities owned by a business or another bank while at the same time agreeing to sell the securities back at a later date
capital requirements
limits on the value of the assets commercial banks can acquire relative to their capital
marketable securities
liquid assets that banks trade in financial markets
correspondent banking
small banks often maintain deposits at other banks to obtain foreign-exchange transactions, check collection, or other services
asset
something of value that an individual or a firm owns; particularly, a financial claim
bank's spread
the difference between the average interest rate banks receive on their assets and the average interest rate they pay on their liabilities
net interest margin
the difference between the interest a bank receives on its securities and oans and the interest it pays on deposits and debt, divided by the total value of its earning assets
shareholder's equity (net worth)
the difference between the value of a firm's assets and the value of its liabilities
interest- rate risk
the effect of a change in a market interest rates on a bank's profit or capital
bank capital
the funds contributed by the shareholders through their purchases of the bank's stock plus the bank's accumulated, retained profits
federal funds rate
the interest rate of the interbank loans
federal funds market
the market in which banks make short-term loans to other bansks
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 a bank's assets to the value of its capital, the inverse of which (capital to assets) is called a bank's leverage ratio; high leverage increases the degree of risk financial firms are exposed to by magnifying swings in profits as measured by ROE
economies of scale
the reduction in average cost that results from an increase in volume
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
counterparty risk
the risk that the other party to the transaction will default on its obligation
dual banking system
the system in the United States in which banks are charted by wither a state government or the federal government