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Glossary
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Z
or
See letter of credit and line of credit.
A maturity pattern within a portfolio in which maturities of the
assets in the portfolio are equally spaced. Over time, the shortening
of the remaining lives of the assets provides a steady source of
liquidity or cash flow.
Contractual arrangement used in some states under which a buyer
purchases real estate from a seller over a period of time, usually
by making periodic installment payments. Title is not conveyed to
the buyer until the final payment is made. Also called an article
of agreement.
A colloquial expression used by some lenders and real estate developers
to describe an abuse intended to overstate the purchase price of
real estate collateral. Typically a land flip involves a sale of
real estate at an inflated price that is not an arm’s length
transaction. An example of this kind of abuse might be a property
purchased by X for $50,000 and one year later sold to a partnership
involving X for $100,000.
A loan document used in a number of different situations. Most often
used when inventory or equipment lenders are secured by collateral
located in premises leased by the borrower. In those cases, the
secured lender may request a landlord’s waiver to establish
the lender’s right to enter the premises and to control or
remove the collateral. May also be used to obtain a landlord’s
permission and waiver of rights when a lender takes a security interest
in leasehold improvements made by a borrower/tenant.
One of the methods for accounting for business inventory permitted
by generally accepted accounting principles (GAAP).
Charges that are assessed for late payments of principal or interest
on a loan. Late charges may be determined as a percentage applied
to the unremitted payment or as a fixed dollar amount. Some states
limit late charges. Federal Regulation AA prohibits a practice called
cascading late charges for consumer loans.
See leveraged buyout.
A contract providing for the use of property in which one party
(the owner, landlord, or lessor) allows another party (the tenant
or lessee) to use the property in exchange for value given to the
lessor. May cover either real or personal property. Long-term, noncancelable
leases, called capital leases, must be carried on the lessee’s
balance sheet as liabilities under GAAP. When they are recorded
on the lessee’s balance sheet, they are said to be capitalized.
Short-term, cancelable leases, sometimes called operating leases,
do not have to be capitalized.
Things such as walls, air conditioners, and shelves that are added
to leased space.
Collateral interests in real property leased by the borrower. For
example, a borrower may own a building located on leased land. In
those cases, a lender will take a leasehold mortgage covering the
borrower’s interest in both the leased land and the building.
A type of secured, working capital lending. See dominion of funds.
The risk to earnings or capital arising from unenforceable contracts,
lawsuits, adverse judgments, or nonconformance with laws, rules,
and regulations. One of six risks defined by the Federal Reserve.
The Office of the Comptroller of the Currency (OCC) uses a slightly
narrower definition for what it calls compliance risk.
A provision in a hazard insurance contract stipulating that in the
event of a loss, proceeds will be paid to a secured party. Usually
used when the insured property is personal property. This is the
personal property version of the standard mortgagee clause. Unlike
a more common loss payable clause, the lender’s loss payable
clause is actually a stronger, much broader type of insurance policy
stipulation. Under the lender’s loss payable clause, the secured
party is protected against any act or neglect of the insured that
may otherwise invalidate the policy for the owner. (Some states
use a different form that also provides broader coverage than the
simple loss payable clause.)
An informal term referring to various manifestations of actual or
potential legal liability arising from the conduct of a financial
institution lender. Generally, lender liability arises from allegations
that a lender has violated a duty (whether implied or contractual)
of good faith and fair dealing owed to the borrower or has assumed
a degree of control over the borrower resulting in the creation
of a fiduciary duty owed to the borrower or its other creditors
or shareholders.
An obligation issued by a bank on behalf of a bank customer to a
third party. There are many different kinds of letters of credit.
The two most common are commercial letters and standby letters.
A commercial or trade letter of credit is a bank promise to pay
the third party for the purchase of goods by the bank’s customer.
A standby letter of credit is a bank promise to pay the third party
in the event of some defined failure by the bank’s customer,
usually, but not always, a failure to pay. Standby letters of credit
are often used as credit enhancements for securities.
A right to payment or performance under a letter of credit whether
or not the beneficiary has demanded or is at the time entitled to
demand payment or performance. The term does not include the right
of a beneficiary to demand payment or performance under a letter
of credit. A category of personal property collateral defined by
the 2000 revisions to Article 9 of the Uniform Commercial Code.
Stock that bears a restrictive legend on the certificate that limits
the owner's ability to sell. All letter stock is restricted stock.
Perhaps the best method of accounting for MBS premiums and discounts
is the change in factor or level factor amortization method. Under
the change in factor method, the amount of monthly premium amortization
or discount accretion is calculated to be proportionate to the amount
of the monthly principal payments. The alternative amortization
method is called the effective interest method.
The amount of the owners’ or stockholders’ money relative
to the money that lenders, suppliers and others have contributed
to the firm. The ratio of owners' money to other peoples' money.
Corporate acquisitions in which the acquiring company borrows most
or all of the funds needed to finance the purchase. In a typical
leveraged buyout, the buyer intends to repay the finance debt from
funds gained from either the sale of assets owned by the acquired
company or from profits earned by the acquired company. The high
level of debt associated with almost all leveraged buyouts makes
them relatively high-risk transactions. Thus, while some bank financing
is often involved, some form of junior debt is needed. The junior
debt in leveraged buyout may come from a lender willing to take
a subordinate position. This type of financing is often called mezzanine
financing. The funds needed for a leveraged buyout may also be raised
by issuing junk bonds.
A form of lease financing in which the lessor/owner supplies only
a portion of the cost of acquiring the leased property as equity.
The remaining portion of the purchase price of the leased equipment
is borrowed from long-term lenders.
See local government investment pools.
Insurance that protects a party from various types of claims. Typically
liability insurance protects the insured from losses resulting from
property damage claims or from bodily injury claims. Construction
lenders usually require contractors to obtain and carry liability
insurance to protect against claims resulting from the contractor’s
operations.
A term used to describe the general banking strategy of focusing
on the management of the amount, maturity, and cost of core deposits
and purchased funds, with an emphasis on the latter. Under liability
management, bankers make loans and loan commitments to meet market
conditions without concern for funding. Liability managers increase
or decrease the amount of funds obtained by the bank as necessary
to provide whatever funding is needed at any given time.
Describes an entity's position when an increase in interest rates
will hurt the entity and a decrease in interest rates will help
the entity. An entity is liability sensitive when the impact of
the change in its assets is smaller than the impact of the change
in its liabilities after a change in prevailing interest rates.
This occurs when either the timing or the amount of the rate changes
for assets cause interest income to change by more than the change
in interest expense. The impact of a change in prevailing interest
rates may be measured in terms of the change in the value of assets
and liabilities. In that case, a liability sensitive entity’s
economic value of equity decreases when prevailing rates rise or
increase when prevailing rates fall. Alternatively, the impact of
a change in prevailing rates may be measured in terms of the change
in the interest income and expense for assets and liabilities. In
that case, a liability sensitive entity’s earnings or net
income decreases when prevailing rates rise and increases when prevailing
rates fall.
See London Interbank Bid Rate.
See London Interbank Offered Rate.
An interest or encumbrance held by a creditor in a debtor's real
or personal property for the satisfaction of a debt. The lien may
arise as a result of a consensual contract between the debtor and
the creditor such as a security agreement or a mortgage. Alternatively,
liens may be established by courts or by statutes. See consensual
lien, judicial lien, and statutory lien.
The process or the result of investigations into the outstanding
liens in a pledgor’s or potential pledgor’s property.
The lien search not only investigates the existence of all liens
but also the relative priority of those liens. For personal property,
a lien search may be obtained in most states by submitting a standard
form, called a UCC-4, to the appropriate filing office. Secured
lenders often conduct preclosing lien searches prior to loan closings
and postclosing lien searches shortly after loan closings.
A document used to convey title in real estate from one party to
another but only upon the death of the grantor. A life estate allows
the grantor the right to own or possess real estate until his or
her death. Upon the life estate holder’s death, the property
is automatically conveyed to another person or persons who hold
a remainder interest. The holder of a remainder interest is often
called a remainderman because he or she gets the remaining interest
in the property.
The upper limit for increases in the interest rate on a floating-rate
or adjustable-rate instrument.
See last in, first out.
The amount by which the book value of inventory is lower than it
would be if first in, first out (FIFO) rather than LIFO accounting
was applied to value the inventory. Only relevant to firms reporting
inventory on a LIFO basis.
One of two types of appraisals defined by the Uniform Standards
of Professional Appraisal Practice (USPAP). Under USPAP, a limited
appraisal may be performed when the appraiser invokes a USPAP provision
that it calls the departure provision. Limited appraisals may only
deviate from the requirements set forth for complete appraisals
in specifically identified areas. See appraisal, complete appraisal,
and evaluation.
A guaranty agreement that includes a statement that limits the guarantor's
liability to the bank to a defined amount.
Legal entity that is a special kind of corporation. A limited liability
company offers shareholders the limitations on personal liability
that are available to stockholders in C or S corporations. At the
same time, limited liability companies are taxed very much like
partnerships; that is, the income is allocated to the stockholders
for tax purposes. Generally, limited liability companies offer owners
the same advantages of the more familiar S corporations but have
fewer restrictions.
A partnership with at least one general partner and at least one,
often more, limited partner(s). The general partner has unlimited
liability for the debts of the partnership, but the limited partners
are only liable to the extent of their investment in the partnership.
The simple process of "drawing" straight lines to connect
the knot points. The simplest but least accurate technique for yield
curve smoothing. See smoothing.
A type of credit facility. The specific meaning of the term varies
from bank to bank. Since the various uses often cause confusion,
two definitions are presented here. In this book, the second definition
is used.
(1) A type of loan that permits a borrower to draw
funds, up to a specified maximum, for a defined period of time.
Sometimes called a nonrevolving line of credit.
(2) Any loan that permits the borrower to borrow
funds up to a specified maximum, make repayments in any amount at
any time, and obtain any number of readvances so long as the maximum
is not exceeded. Sometimes called a revolving line of credit. The
distinguishing feature of a line of credit is that it rebounds,
which means that the amount borrowed can be paid down and reborrowed,
or readvanced, as the borrower's needs change.
Both the capacity and the perceived capacity to meet all obligations
whenever due and to take advantage of business opportunities important
to the future of the enterprise. The capacity and the perceived
ability to meet known near-term and projected long-term funding
commitments while supporting selective business expansion.
The risk that future events may require a materially larger amount
of liquidity than the financial institution currently requires.
One of the three primary components of liquidity risk along with
mismatch liquidity risk and market liquidity risk. Also called prudential
liquidity risk, funding risk or stand-by liquidity risk. Contingency
risk arises from two closely related elements. See liquidity franchise
risk and liquidity option risk.
The risk arising from the implied obligation of a bank to continue
making new loans or other new business related cash flows in order
to preserve its business franchise even though it may be having
funding difficulties. One of two types of liquidity contingency
risk. Also called liquidity-implied option risk. See liquidity contingency
risk and liquidity option risk.
or
See liquidity mismatch.
One of the three main types of liquidity-need environments. An institution's
"going concern" need for liquidity. Funding required for
the normal ebb and flow of cash in the course of conducting bank
business. Includes seasonal funding fluctuations. See bank-specific
liquidity risk and systemic liquidity risk.
or
The expected amount of liquidity risk based on the mismatch between
contractual amounts and dates for inflows and outflows. Also called
funding gap, liquidity gap, or term liquidity risk. One of the three
primary components of liquidity risk along with contingency risk
and market liquidity risk.
The risk that actual cash flows will occur on dates or in amounts
different from the contractual maturity dates and amounts. Put option
risk includes the rights of saving, checking, and money market depositors
to withdraw funds. It also includes the right of certificate of
deposit (CD) holders to make early withdrawals. Call option risk
includes the rights of line of credit borrowers to draw down on
their committed lines of credit. One of the two types of liquidity
contingency risk. See liquidity contingency risk and liquidity franchise
risk.
(1) A desire among some holders of financial instruments to keep
some or all of their funds in liquid instruments, that is, instruments
that either mature in a short period of time or that can be readily
sold with small risk of loss.
(2) A theory that attempts to explain the shape
of yield curves. Under the liquidity preference hypothesis, the
shape of yield curves is determined by the collective expectations
of investors (the expectations hypothesis and implied forward rates)
but with an upward bias at least for short- term rates caused by
investors' preferences for liquidity.
(1) The portion of a security's yield that is attributable to investors'
desire to hold liquidity.
(2) The difference or spread paid for liquidity.
The amount of unused capacity to meet unexpected reductions in funding
or unexpected new funding requirements in the future. For much of
the twentieth century, liquidity reserves were defined as primary
reserves (cash and deposits due from banks) and secondary reserves
(short-term, marketable investment securities). However, the term
is used more broadly today.
(1) For a financial institution, the risk that not enough cash will
be generated from either assets or liabilities to meet cash requirements.
For a bank, cash requirements are primarily made up of deposit withdrawals
or contractual loan fundings. One of six risks defined by the Federal
Reserve and one of nine risks defined by the Office of the Comptroller
of the Currency (OCC). The OCC defines liquidity risk as the risk
to earnings and capital arising from a bank’s inability to
meet its obligations when they become due, without incurring unacceptable
losses. The Federal Reserve uses a broad definition of liquidity
risk as the potential that an institution (a) will be unable to
meet its obligations as they come due because of an inability to
liquidate assets or obtain adequate funding (referred to as "funding
liquidity risk") or (b) cannot easily unwind or offset specific
exposures without significantly lowering market prices because of
inadequate market depth or market disruptions ("market liquidity
risk").
(2) For a security, the risk that not enough interested
buyers will be available to permit a sale at or near the currently
prevailing market price.
See liquidity reserves.
A sales charge paid by an investor in some mutual fund shares or
annuities. The sales charge may be a front-end charge, a back-end
charge, or a 12b-1 charge. Also, an expression used to describe
a mutual fund that imposes sales charges on investors. The opposite
of a no load mutual fund. See 12b-1, back-end load, and front-end
load.
An arrangement in which two or more lenders share in a loan to one
borrower.
The name used to refer to a credit analysis ratio that measures
collateral coverage. To calculate the LTV ratio, the total amount
of the borrower's obligations to the bank is divided by the total
calculated value for the collateral. For example, if the total collateral
value is estimated to be $1,000,000 and the total amount of the
borrower's obligations to the bank is $800,000, then the LTV ratio
is 0.80 or 80percent.
See letter of credit and line of credit.
An organization established by the banks in a local area to facilitate
the presentment and exchange of checks between those banks.
Commingled investment pools. The public sector equivalent of money
market mutual funds. LGIPs are usually but not always created by
states for the benefit of their local governments. Sometimes these
pools are managed by the states.
(1) A cash management arrangement designed to reduce delays in depositing
funds into the payee’s bank accounts. A post office box that
is established by a bank to receive checks for its cash management
customers. Lockboxes are utilized to accelerate deposits to the
bank by eliminating internal processing by the payee organization.
The bank need not maintain a separate post office box for each lockbox
customer. Instead, it can sort mail received in a common box.
(2) A secured lending control arrangement. Under
this arrangement, the borrower's account debtors mail their payments
into a post office box that is controlled by the bank. The funds
are then applied by the bank to reduce a loan to the borrower that
is secured by those accounts receivable. The bank need not maintain
a separate post office box for each lockbox customer. Instead, it
can sort mail received in a common box.
See call protection.
(1) A prohibition, usually, but not always, for a specified period
of time. For example, a prohibition against prepayment of a loan.
(2) The period of time before a REMIC investor
will begin receiving principal payments.
See lower of cost or market.
The rate that a bank is willing to pay to acquire funds in the international
interbank market.
The rate the highest quality banks pay for Eurodollar deposits.
There is a different LIBOR for each deposit maturity. LIBOR is commonly
used as an index that represents short-term rates.
The position of an investor who owns, or commits to buy, a security
in either the cash or futures markets. For example, the purchase
of an interest rate future is a commitment to take delivery of securities
at an agreed-on price on some future date. This is called a long
futures position. Owning an investment security is a long cash position.
The term used to describe the most recent 30-year bond issue. Once
the Treasury sells a new 30-year bond issue, that issue remains
the long bond until the Treasury sells a subsequent issue.
Sometimes bonds are issued with a bond date of greater than six
months from the issue date. Coupons after the initial, long coupon
are every six months. A long coupon reduces the effective yield-to-maturity
by reducing the income that can be earned from reinvestment of the
coupon.
The interval of time, or lag, between the date when an index value
is established and the date when the payment rate and/or accrual
rate is changed.
A secured party to whom insurance proceeds are paid as stipulated
in a loss payee clause of an insurance policy obtained by a debtor
and covering property owned by a debtor and pledged to the secured
party. Generally applies to personal property.
The accounting practice of reflecting the value of an asset at the
lower of its historical cost or market value. |
