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Ch. 12, 13, 16
Depository Institutions: Banks and Bank Management, Banking Industry Structure, The Structure of Central Banks: The Federal Reserve and th European Central Bank
50
Finance
Undergraduate 3
12/11/2013

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Term
depository institutions
Definition
a financial institution that accepts deposits and makes loans
Term
nondepository institutions
Definition
a financial intermediary that does not issue deposit liabilities
Term
reserves
Definition
a bank's vault cash plus the balance in its account at the Federal Reserve
Term
vault cash
Definition
currency that is physically held inside a bank's vaults and automated teller machines (ATMs)
Term
discount loans
Definition
a loan from the Federal Reserve, usually to a commercial bank
Term
excess reserves
Definition
reserves in excess of required reserves
Term
federal funds market
Definition
the market where banks lend their excess reserves to other banks; the loans are unsecured
Term
repurchase agreement (repo)
Definition
a short-term collaterized loan in which a security is exchanged for cash, with the agreement that the parties will reverse the transaction on a specific future date, as soon as the next day
Term
bank capital
Definition
bank assets minus bank liabilities. The net worth of the bank. The value of the bank to its owners.
Term
loan loss reserves
Definition
a portion of a bank's capital that is set aside to cover potential losses from defaulted loans
Term
return on assets (ROA)
Definition
bank net profits after taxes divided by total bank assets; a measure of bank profitability
Term
return on equity (ROE)
Definition
bank net profits after taxes divided by bank capital; a measure of the return to the bank's owners
Term
net interest margin
Definition
a bank's interest income minus its interest expenses divided by total bank assets; net interest income as a percentage of total bank assets
Term
interest-rate spread
Definition
the difference between the interest rate a bank recieves on its assets and the interest rate it pays to obtain liabilities; can also be risk spread
Term
off-balance-sheet activities
Definition
bank activies, such as trading in derivatives and issuing loan commitments, that are neither assets nor liabilities on the bank's balance sheet
Term
liquidity risk
Definition
the risk that a financial insitution's liability holders will suddenly seek to cash in their claims; for a bank this is the risk that depositors will unexpectedly withdraw deposit balances
Term
required reserves
Definition
reserves that a bank must hold to meet the requirements set by the regulators, in the US, the Fed
Term
credit risk
Definition
the probability that a borrower will not repay a loan
Term
interest-rate risk
Definition
the risk that changes in interest rates will affect a financial intermediary's net worth; it arises from a mismatch in the maturity of assets and liabilities
Term
trading risk/ market risk
Definition
the risk that traders who works for a bank will create losses on the bank's own acount
Term
operational risk
Definition
the risk a financial institution faces from computer hardware or software failure, natural disaster, terrorist attacks, and the like
Term
bank charter
Definition
the license authorizing the operation of a bank
Term
bank holding compant
Definition
a company that owns one or more banks and possibly other nonbank subsidiaries
Term
defined-benefit pension plan
Definition
a pension plan in which beneficiaries receive a lifetime retirement income based on the number of years they worked at the company and their final salary
Term
defined-contribution pension plan
Definition
a pension plan in which beneficiaries make payments into an account and then receive the accumulation, plus the which time they must decide what to do with the funds. Options include accepting a lump sum, removing small amounts at a time, or converting the balance to a fixed monthly payment for life by purchasing an annuity
Term
dual banking system
Definition
the system in the US in which banks investment income, on retirement, at supervised by federal and state government authorities coexist
Term
economies of scale
Definition
when the average cost of producing a good or service falls as the quantity produced increases
Term
economies of scope
Definition
when the average cost of producing a good or service falls as the number of different types of goods produced increases
Term
eurodollars
Definition
dollar-denominated deposits outside the US
Term
Fannie Mae - the Federal National Mortgage Association
Definition
a government-sponsored entity that aids in the financing of home mortgages
Term
financial holding company
Definition
a company that owns a variety of financial intermediaries
Term
hedge fund
Definition
private, largely unregulated, investment partnerships that bring together small groups of people who meet certain (high) wealth requirements
Term
LIBOR (London Interbank Offered Rate)
Definition
the interest rate at which banks lend eurodollars to other banks
Term
property and casualty insurance
Definition
insurance against damage from events like automobile accidents, fire, and theft
Term
term life insurance
Definition
insurance that provides a payment to the policyholder's beneficiaries in the event of the insured's death at any time during the policy's term
Term
underwriting
Definition
the process through which an investment bank guarantees the price of a new security to a corportation and then sells it to the public
Term
unit bank
Definition
a bank without branches
Term
universal bank
Definition
an institution that engages in all aspects of financial intermediation, including banking, insurance, real estate, brokerage services, and investment banking
Term
vesting
Definition
when the contributions your employer has made to the pension plan on your behalf belong to you
Term
whole life insurance
Definition
a combination of term life insurance and a savings account in which a policyholder pays a fixed premium over his or her lifetime in return for a fixed benefit when the policyholder dies
Term
financial company
Definition
a nondepository financial institution that raises funds directly in financial markets to provide loans to businesses and households
Term
Board of Governors of the Federal Reserve System
Definition
The seven-member board that oversees the Fed system, including participation in both monetary policy and financial regulatory decisions
Term
discount rate
Definition
the interest rate at which the Fed makes discount loans to commercial banks
Term
emergency powers
Definition
the Fed's extraordinary authority to lend to nonbanks when circumstances are deemed "unsual and exigent"
Term
euro area
Definition
the countries in Europe that use the euro as their common currency
Term
federal funds rate
Definition
the interest rate banks charge each other for overnight loans on their excess deposits at the Fed; the interest rate targeted by the FOMC
Term
Federal Open Market Committee
Definition
The 12-member committee that makes monetary polocy decisions in the US. Members include the 7 members of the Board of Governors, the president of the Federal Reserve bank of NY, and the presidents of 4 other Fed Reserve banks
Term
Federal Reserve Banks
Definition
the 12 reginoal banks in the Federal Reserve System
Term
Federal Reserve System
Definition
The central bank responsible for monetary policy in the US
Term
FOMC statement
Definition
The press release that usually follows the FOMC meeting; usually contains an announcement of the federal funds rate target, an evaluation of the current economic environment, and a statement of the risks to the economy
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