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Glossary
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Z
(1) A steady, noninstantaneous change in rates. Usually a projected
change in rates with small, equal, incremental changes in each time
period over a series of time periods until the full amount of the
projected change is achieved.
(2) A term used in residential lending and in the
analysis of mortgage backed securities to describe projections of
monthly prepayment speeds which increase from a low initial rate
over a series of time periods until the full amount of the expected,
final prepayment speed is reached. See PSA model for an example.
See revenue anticipation note.
See accrual bonds.
See risk-adjusted return on capital.
The cost of debt service paid by a borrower or issuer to a lender
or investor. The rate is expressed as an annual percentage of the
amount borrowed. For some notes and bonds that pay interest semiannually,
the semiannual interest due to the investor used to be evidenced
by a coupon that could be detached and sent for collection. Thus
the cost to the issuer for notes and bonds paying semiannual interest
is often called the coupon rate. Lenders or investors may receive
a yield that is higher or lower than the rate.
A provision in the bond agreement or resolution that addresses the
rate or method used to establish the fee(s) charged to users of
the facility financed by the securities. Typically, a rate covenant
promises that the fees will be adjusted when necessary to support
the timely payment of interest and principal on the bonds.
The risk that the entity's earnings and/or its capital may be reduced
by an adverse change in prevailing interest rates.
The exposure of either the bank's earnings or its market value to
fluctuations caused by changes in prevailing interest rates.
The quantity of assets subject to repricing within a defined time
period. Usually related to rate-sensitive liabilities in the ratio:
RSA divided by RSL.
The quantity of liabilities subject to repricing within a defined
time period. Usually related to rate-sensitive assets in the ratio:
RSA divided by RSL.
An arbitrarily selected change in prevailing interest rates used
to quantify either a change in profits or a change in capital associated
with that size of a rate change.
See commercial loan theory of liquidity.
See real property.
The name of a type of mortgage-backed pass-through security. REMICs
can take many forms. REMICs are typically multiclass securities.
Unlike simple, non-REMIC CMOs, REMICs can separate mortgage pools
into different risk classes as well as different maturity classes.
Some of the most common forms of REMICs are sequential pay CMOs,
planned amortization class (PAC) tranches, targeted amortization
class (TAC) tranches, and companion tranches. REMICs may also have
interest-only tranches, principal-only tranches, and residual tranches.
Today almost all CMOs are issued in REMIC form to take advantage
of provisions in the Tax Reform Act of 1986. However, even though
REMICs are overwhelmingly dominant in the CMO market, the term "REMIC"
is used far less often than the term "CMO." CMO is used
to refer to all forms of MBSs other than simple pass-through MBS
pools.
A Federal statute that requires lenders and persons who conduct
real estate loan closings (settlements) to make certain disclosures.
The law also prohibits certain practices such as kickbacks. The
Department of Housing and Urban Development (HUD) has adopted Regulation
X to implement this statute.
Informally used to refer to land or buildings. As defined by Federal
banking regulations governing appraisals, real property is: an identified
parcel or tract of land including improvements, easements, rights
of way, undivided or future interests, and similar rights but excluding
mineral rights, timber rights, or growing crops. Note that under
state law in many states, growing crops, timber, and minerals that
have not been separated from the land are also included in the definition
of real property.
Name used by bankers to describe moneys owed to a business and yet
to be received. Usually the amounts due from trade creditors who
purchased goods or services on credit. Functionally equivalent to
accounts or accounts receivable except that accounts is the only
legally acceptable way to describe these assets for purposes of
Article 9 of the Uniform Commercial Code.
or
REMICs are created when tranches of existing CMO REMICs are combined
and used to collateralize new securities. When this is done, the
new securities are called re-REMICs, re-CMOs, or structured collateral.
These may be more or less risky than the underlying tranches. See
kitchen sink bonds.
See discharge.
The date set to determine the owner entitled to the next dividend,
interest, or principal payment. The payment is due to the owner
who owned the security on the record date.
The right to seek repayment of debt. Usually used to describe the
right to seek repayment from an originator or prior endorser who
sold or assigned debt to another party.
Term used to describe the illegal practice of refusing to lend to
borrowers located in a defined geographic area.
See back-end load.
A term used in credit swap transactions to identify the underlying
instrument. In the most simple structure, cash flow from the reference
asset is paid by the asset owner called a protection buyer to a
counter-party known as a protection seller. The reference asset
is often a marketable, corporate bond rather than a corporate loan
from the same obligor because the bonds provide price information
than loans which are less homogenous and less marketable. See credit
derivative, credit swap.
An interest rate used as an index rate. For example, if a loan pays
interest at a rate of 50 basis points above the 6-month LIBOR, the
reference rate is the 6-month LIBOR.
The replacement of existing securities using funds obtained from
the issuance of new securities.
Bonds issued to replace outstanding bond issues. Usually used to
replace callable bonds when interest rates drop.
Financial instruments similar to pre-refunding bonds. Tax law changes
in 1984 restricted tax exempt pre-refundings for certain types of
municipal debt including airport and convention center related debt.
To circumvent those restrictions, a forward transaction, rather
than a second bond issue, is used to lock in a lower cost of funding.
Under this arrangement, funds dedicated to repaying higher cost
debt at the next call date are held in escrow. See pre-refunding
bonds.
The name used in some states for the public official responsible
for receiving and maintaining public notices of liens such as financing
statements. Usually a county official.
A form of ownership of certificated bonds. The name of the owner
is listed on the certificate and in the records of the issuer's
agent.
Buyers and sellers can negotiate settlement periods; however, standard
time periods are usually used. For U.S. Treasury and agency debt
securities, the customary settlement time, called regular way settlement,
is the next business day. For municipal and corporate debt securities,
the customary settlement period, often called corporate settlement,
is three days. See net settlement and settlement.
Federal Reserve Regulation titled Unfair or Deceptive Acts or Practices.
Provides for consumer complaints against banks and prohibits certain
practices. See cascading late charges and late charges.
See Equal Credit Opportunity Act.
See Home Mortgage Disclosure Act.
A Federal Reserve Board regulation governing the availability of
funds and collection of checks. The regulation sets legal limits
on the time banks can take before making deposited funds available
for withdrawal.
See Consumer Leasing Act.
Federal Reserve Regulation entitled Credit by Brokers and Dealers.
Provides limits on the amount of credit that can be extended for
the purpose of purchasing or carrying certain stocks and a few bonds.
See margin stock.
Federal Reserve Regulation entitled Credits by Banks For the Purpose
of Purchasing or Carrying Margin Stock. Provides limits on the amount
of credit that can be extended for the purpose of purchasing or
carrying certain stocks and a few bonds. See margin stock.
See Real Estate Settlement and Procedures Act.
See annual percentage rate, rescission, and Truth in Lending Act.
The risk of a decline in earnings or capital resulting from the
fact the interest and/or principal cash flows received by investors
during the time that an investment is held must be reinvested at
a lower than expected rate as a result of a decline in prevailing
interest rates.
A phrase used to refer to whether or not a security's price is relatively
cheap, relatively fair, or relatively rich (expensive) compared
to prices for other securities.
A document or a process in which a secured party gives up its collateral
interest in the property of the debtor. Releases may be for all
of the property of the debtor or may be partial. For example, if
a real estate developer has pledged 10 lots as collateral for a
loan, a partial release may be used for each lot as it is sold.
For personal property collateral, a release may be entered into
the public record by using a standard form called UCC-3.
The predetermined amount of loan reduction that will be required
by the bank before the developer can obtain a partial release of
the bank's lien that covers the portion of the collateral that is
being sold.
See real estate mortgage investment conduit
Float due to the time a payment is in transit. This is often called
mail float since its major component is the time it takes a remittance
to move from the remitter to the recipient through the mail.
An arrangement by which an organization’s checks are drawn
against funds in a bank that is located in a distant area. A cash
management practice designed to increase disbursement float.
A portfolio of instruments with known rates and maturities that
tends to closely duplicate the changes in a portfolio of instruments
with administered rates and/or indeterminate maturities.
An informal name for a repurchase agreement.
A funding technique often used by dealers who encourage speculation
through the use of gains trading, pair-off, when-issued, and extended
settlement ploys. When an investor agrees to purchase a security
with the intent of quickly selling it for a profit, price movements
do not always favor these speculations. The repositioning repurchase
agreement is service offered by dealers to enable buyers to hold
onto such speculative positions until prices change and the position
can be closed out at a profit. In a repositioning repurchase agreement,
the buyer pays the dealer a small margin that approximates the actual
loss in the security. The dealer then agrees to fund the purchase
of the security by entering into a repurchase/reverse repurchase
agreement with the buyer. (The transaction is a borrowing called
a repurchase agreement for the buyer. It is a loan called a reverse
repurchase agreement for the dealer.) These transactions are deemed
to be inherently speculative.
Taking physical possession of personal property collateral pledged
to secure a defaulted loan.
(1) A contractual provision applicable to specific loans, investments,
or deposits that changes the interest rate paid or received. For
example, a loan may have an interest rate tied to the prime rate
that changes every time the prime rate changes, or an investment
may have a rate tied to the one-month LIBOR. It is immaterial which
index, if any, the rate is linked to or when the rate adjusts.
(2) As used in asset liability management (ALM),
refers to the timing of cash flow from the principal of an asset
that is received by the bank or the timing of payment of the principal
of a liability by the bank. For example, in the case of a 5-year,
fixed-rate investment, the principal is received at the end of 5
years, therefore, the asset reprices at the end of the fifth year.
Note that the end of the fifth year could be tomorrow if the investment
was issued 4 years and 364 days ago. In the case of a car loan,
an amount equal to the monthly principal payments made to the bank
reprices each month. In the case of a certificate of deposit, repricing
occurs at maturity.
See mismatch risk.
A form of secured, short-term borrowing in which a security is sold
with a simultaneous agreement to buy it back from the purchaser
at a future date. The purchase and sales agreements are simultaneous
but the transactions are not. The sale is a cash transaction while
the return purchase is a forward transaction since it occurs at
a future date. The seller/borrower pays interest to the buyer at
a rate negotiated between the parties. Rates paid on repos are short-term
money market interest rates and are completely unrelated to the
coupon rate paid on the instrument being purchased. Informally known
as repos. Sometimes called a classic repo to distinguish between
these transactions and sell/buybacks. Every transaction where a
security is sold under an agreement to be repurchased is a repo
from the seller/borrower's point of view and a reverse from the
buyer/lender's point of view. Repos and reverses are often used
to finance investment purchases, especially by traders.
One of nine risks defined by the OCC and one of six risks defined
by the Federal Reserve. The risk to earnings or capital arising
from the possibility that negative publicity regarding the institution’s
business practices, whether true or not, will cause a decline in
its customer base, costly litigation, or revenue reductions. The
Federal Reserve and the OCC define reputation risk in almost exactly
the same way.
A written notification prepared by an organization requesting offers
to provide certain services (e.g., banking service) and to specify
prices for these services. RFPs are generally quite detailed as
to the types of services needed.
Cancellation of a contract without penalty. Regulation Z provides
circumstances under which a borrower may cancel loan transactions
involving nonpurchase money liens on the borrower's principal place
of residence. The regulation permits such rescissions during a three
day period after the loan closing. Specific requirements apply to
bank disclosures of the borrower’s right to rescind.
A type of credit enhancement used in some asset backed securities.
The reserve account may be created by an initial deposit from the
seller and may be augmented over time by the application of funds
from excess servicing income. Credit is enhanced because withdrawals
from the reserve account are made to reimburse investors when excess
servicing is insufficient to cover charge -offs. Until needed, funds
in a reserve account are invested.
The percentages of different types of deposits that banks are required
to hold on deposit at the Federal Reserve or as cash in their vaults.
These requirements are determined by the Federal Reserve Board and
function as a tool to control monetary policy.
The maximum amount by which an adjustable-rate security’s
coupon rate can change in any given period of time. Also called
the periodic cap. For most ARMs and floaters, the maximum periodic
or reset change is defined as an amount of change in each, consecutive
12-month period over the life of the security. Thus the term "annual"
cap is also used to describe most periodic caps.
The point in time when the coupon rate for a variable rate or floating
rate financial instrument is re-established to reflect changes in
a benchmark index. Reset dates are typically monthly, quarterly,
semi-annually or annually. See index.
(1) For sequential-pay CMO structures, a residual tranche is the
CMO tranche that receives the excess cash flow that remains after
all of the payments due to the holders of other tranches and all
of the administrative expenses have been met. When the residual
is an accrual bond, it is often called a Z tranche or a Z bond.
(2) In REMIC CMO structures, one class of each
issue must be designated as the residual for tax purposes. Some
REMIC residuals do not meet the traditional definition of a residual
as the last tranche to be retired.
Term used to describe the market or sale value of leased equipment
(net of removal or disposal costs) at the end of the lease term.
In most cases, it is projected or estimated. Sometimes called salvage
value. With some exceptions, national bank lessors are subject to
a rule that limits the residual value assumption made at the time
the lease is created to 25 percent of the equipment's cost. Bank
holding company leasing subsidiaries are subject to a 20 percent
limit on the residual assumption.
See key rate duration.
See Real Estate Settlement Procedures Act.
One of three types of real estate appraisal reports defined under
Uniform Standards of Professional Appraisal Practice (USPAP) rules.
A restricted appraisal report is the least detailed of the three
report formats. Given a bank’s need to meet both regulatory
requirements and the needs of prudent loan underwriting, more detailed
reports are almost always preferable.
Cash held subject to limitations on how or when it may be used.
For example, refundable customer deposits, cash in escrow accounts,
and debt sinking funds.
Restricted stock is stock purchased from the issuer or from a person
in a controlled relationship to the issuer in a nonpublic or private
transaction. The right to sell restricted stock is limited by provisions
in the Securities and Exchange Act.
(1) Deposits or deposit account balances in amounts of $100,000
or less.
(2) Deposits obtained from individuals and small
businesses in the bank's local trade area(s).
The portion of the payment due to a contractor or equipment builder
that is withheld until final inspection and acceptance of the work.
Also called a holdback.
Earnings of a corporation from the current as well as prior years
that have neither been distributed to the shareholders as dividends
nor transferred to the surplus account. Corporate earnings accumulated
over time. One of a corporation’s equity or capital accounts.
Portions of contracts that are not paid until all contract provisions
are satisfied. Sometimes called holdbacks.
A percentage calculated by dividing net income after tax by total
assets. Annual income is usually used in the numerator; however,
the annualized income for a month, quarter, or half year can be
used. Period-end assets is often used in this calculation; however,
average assets for the period is more accurate. This ratio is a
measurement of how profitably assets are used in an enterprise.
Firms in different industries usually have quite different returns
on assets. This ratio is best used to compare firms in the same
industry.
The return earned by an investor from a specific investment or group
of investments measured in terms of a percentage return on the amount
of capital invested. See return on equity.
A measure of the return realized by the owners of an enterprise.
Calculated by dividing an enterprise’s annualized net income
by its average capital for the period. Alternatively, it can be
calculated by multiplying the enterprise’s ROA by its leverage/equity
multiplier. ROE indicates how effectively the enterprise is using
its capital to produce income.
Reductions to gross sales that occur when customers are given credit
for sold goods that are returned to the firm.
A short-term note sold by a public entity that will be repaid from
the proceeds of anticipated nontax income.
A bond or note for which the payments of principal and interest
made to the investors by the issuer are payable exclusively from
the earnings of the underlying project. For example, turnpike bonds
repaid from tolls.
An informal name for a reverse repurchase agreement.
A form of secured, short-term investment in which a security is
purchased with a simultaneous agreement to sell it back to the seller
at a future date. The purchase and sales agreements are simultaneous
but the transactions are not. The purchase is a cash transaction
while the return sale is a forward transaction since it occurs at
a future date. Informally known as a reverse. The buyer/investor/lender
earns interest paid at rate negotiated between the parties. Rates
paid on reverse repos are short-term money market interest rates
and are completely unrelated to the coupon rate paid on the instrument
being purchased. Every transaction where a security is sold under
an agreement to be repurchased is a repo from the seller/borrower's
point of view and a reverse from the buyer/lender's point of view.
Repos and reverses are often used to finance investment purchases,
especially by traders.
The opposite of a TAC tranche. Bonds created in scheduled-pay CMO
structures. A reverse TAC tranche is structured to avoid prepayment
volatility. Each TAC has a designated target speed. When prepayments
fall below the targeted speed, excess cash flow is diverted to the
reverse TAC tranche. Unlike a PAC, a TAC tranche is not protected
from call risk if prepayments are faster than expected. For this
reason, TACs can be viewed as half PACs. Reverse TACs offer investors
protection (but not immunity) from extension risk but no protection
from call risk. Sometimes called contraction bonds because of their
call risk.
Financial statements prepared by an independent CPA that have been
subject to some examination but have not been audited. The CPA is
required to consider the reasonableness of the information. If any
number appears questionable, the CPA must make inquiries, apply
analytical procedures or take other appropriate actions to provide
the CPA with a reasonable basis for expressing limited assurance
that there are no material modifications that should be made to
the statements in order for them to be in conformity with GAAP.
Any departure from GAAP in reviewed statements should be noted in
the transmittal letter and detailed in a footnote.
A type of credit facility. A term that can be confusing, with different
banks using the term to describe different types of credit facilities.
In some banks, "revolving line of credit"
refers to a credit facility that permits the borrower to draw down
and/or repay amounts up to a specified maximum at any time. Called
a line of credit by other banks.
In other banks, the name "revolving line of credit" is
used to distinguish between "regular lines of credit,"
(situations in which the bank is not legally committed to make advances)
and "revolving lines," (situations in which the bank is
legally committed to make advances.) This usage is outdated, wrong,
and might expose the bank to legal liability.
Large banks, primarily, use the term to refer to a combination of
a line of credit and a term loan. Typically it starts out as a line
for a one-to-three year period, after which, on a previously determined
date, the outstanding balance converts to an amortizing term loan.
A term used for asset backed securities to describe a period of
time during which principal payments received from the underlying
loan collateral are reinvested in new loan receivables thereby enabling
the investor/ABS balance to remain constant. A revolving period
may be prematurely terminated by an early amortization event.
See request for proposal.
A Greek letter used in the financial industry to represent the sensitivity
of an option’s price to changes in interest rates.
Land that has been created by natural or manmade filling in or by
moving of water.
(1) Noun — The possibility of loss.
(2) Noun — The uncertainty of whether events,
expected or otherwise, will have an adverse impact. In this context,
the adverse impact is usually a quantity of return (income) or value
at risk.
(3) Noun — the compound estimate of the probability
of, and the severity of, an adverse event. The amount of risk is
the product of the probability of the adverse consequence and the
potential severity of that adverse consequence.
(4) Verb — to incur the possibility of loss,
to create or accept the possibility of uncertain returns, or to
create or accept volatility.
An economic approach to measure unit and product profitability within
a financial institution. Returns, adjusted to reflect normalized
or expected losses, are divided by an amount of capital that is
carefully quantified to reflect the risk or risks incurred to generate
those returns. The total risk-adjusted capital for an entire financial
institution reflects its calculated economic capital. Economic capital
is the capital required to support the incurred risks. Economic
capital will rarely, if ever, equal accounting or book-value capital.
The risk-adjusted return on capital is usually compared to a standard
or hurdle rate of return. When such comparisons are made, products
or units with returns exceeding the hurdle rate are said to add
value while products or units with returns below the hurdle rate
are said to destroy value. RAROC is not always defined and applied
exactly the same way by different financial institutions but must
be defined and applied consistently throughout each financial institution
that uses it. Often referred to by the acronym RAROC, pronounced
"ray-rock."
Rules for establishing minimum required levels of book capital for
financial institutions. Capital is allocated to types of bank assets
based upon weightings assigned to those assets. For example, U.S.
Treasury obligations and some U.S. Agency obligations require no
capital. Most other U.S. Agency obligations are given a 20 percent
weighting for the purpose of calculating risk-based capital. Corporate
obligations have a 100 percent weighting.
Controlling the probability, and/or the severity, of a potential
adverse event so that the consequences of that event are within
acceptable limits. Since all risks have, by definition, the potential
to generate losses, and since capital is the ultimate protection
against failure resulting from losses, the underlying basis of risk
management is equivalent to managing solvency risk.
A defined quantity or unit of risk. Quantities of risk may be defined
for the purposes of setting risk exposure limits or for the purposes
of allocating capital to measure risk-adjusted returns on capital.
RMUs are often defined in terms of the amount of change or volatility
that is equal to one standard deviation of the volatility.
See Robert Morris Associates.
See risk measurement unit.
See return on assets.
A national organization of bank commercial loan and credit officers.
See return on equity.
The paying off of existing debt, usually debt about to mature, through
the issuance of new debt. Can also refer to the rolling over of
an investment, such as a certificate of deposit at maturity, to
another investment.
See yield curve risk.
See repurchase agreement.
See rate-sensitive assets.
See rate-sensitive liabilities.
See SEC Rule 144.
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