Chapter 10: the Economics of Banking
Checkable Deposits
(or transaction deposits) are accounts against which depositors can write checks.
Trouble Asset Relief Program (TARP)
A gov program under which the US Treasury purchased stock in hundreds of banks to increase the banks capital
Off-Balance-Sheet Transaction
are activities that do not affect a bank's balance sheet because they do not increase either the bank's assets or its liabilities.
Reserves
are bank assets consisting of vault cash plus bank deposits with the Federal Reserve.
Excess Reserves
are reserves banks hold above those necessary to meet reserve requirements.
Required Reserves
are reserves the Fed requires banks to hold against demand deposit and NOW account balances.
National Bank
is a federally chartered bank
Loan Sale
is 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
is a government guarantee of deposit account balances up to $250,000.
Leverage
is a measure of how much debt an investor assumes in making an investment.
Standby Letter of Credit
is 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
is a statement that shows an individual's or a firm's financial position on a particular day.
T-Account
is an accounting tool used to show changes in balance sheet items
Loan commitment
is an agreement by a bank to provide a borrower with a stated amount of funds during some specified period of time.
Duration Analysis
is an analysis of how sensitive a bank's capital is to changes in market interest rates.
Gap Analysis
is an analysis of the gap between the dollar value of a bank's variable-rate assets and the dollar value of its variable-rate liabilities.
Vault Cash
is cash on hand in a bank (including currency in ATMs and deposits with other banks).
Asset
is something of value that an individual or a firm owns; in particular, a financial claim.
Liability
is something that an individual or a firm owes, particularly a financial claim on an individual or a firm.
Net Interest Margin
is 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
is the difference between the value of a bank's assets and the value of its liabilities; also called shareholders' equity
Interest-Rate Risk
is the effect of a change in market interest rates on a bank's profit or capital.
Liquidity Risk
is 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
is the process that bank loan officers use to screen loan applicants.
Return on Assets (ROA)
is the ratio of the value of a bank's after-tax profit to the value of its assets.
Return of Equity (ROE)
is the ratio of the value of a bank's after-tax profit to the value of its capital.
Bank Leverage
is the ratio of the value of a bank's assets to the value of its capital.
Credit Rationing
is the restriction of credit by lenders such that borrowers cannot obtain the funds they desire at the given interest rate.
Credit Risk
is the risk that borrowers might default on their loans.
Dual Banking System
is the system in the United States in which banks are chartered by either a state government or the federal government.
Prime Rate
was formerly the interest rate banks charged on six-month loans to high-quality borrowers (now an interest rate banks charge primarily to smaller borrowers).