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