Chapter 7 Flashcards
Community Bank
A bank with assets of less than 1 billion that specializes in consumer or retail banking
Commercial Bank
Depository institution that makes loans and accepts deposits
Correspondent banking
banking services to banks that can’t perform the services because of low staff resources.
Controlled disbursement account
Feature permitting most payments, that are to be made throughout the day, known in the morning
Depository institutions
Commercial banks, credit unions and savings banks
Dual Banking Systems
The coexistence of national and state chartered banks in the US.
Economies of scope
Extent to which a bank produces multiple financial services to create cost synergies
Float
Delays involved with the check clearing process
Holding Companies
Parent companies that own and control subsidiary financial institutions or banks
Interest rate spread
The difference between deposit and lending rates
Lockbox services
Collection service for corporate payments that is centralized to decrease the delays involved with the check clearing process.
Money Center Bank
The largest classification of banks in which non-deposit or borrowed fund sources are relied upon heavily
Net Charge Offs
Actual losses on leases and lones
Net Interest Margins
Interest income less interest expense divided by earnings.
Non Current loans
Loans that are at least 90 days overdue and loans that do not earn interest due to problems associated with the borrower.
NOW Accounts
Interest bearing checking accounts or negotiable order of withdrawal accounts
Off-Balance Sheet (OBS) Asset
An Item that is entered into the asset side of a balance sheet or income realized on an income statement once the event actually occurs.
Off-Balance Sheet (OBS) liability
An item that is entered into the liability side of a balance sheet or expense realized on an income statement once the event actually occurs.
Preauthorized Credits/Debits
Mortgage and utility bills that are directly paid from banks and direct deposit of payroll checks.
Revenue Economies of Scope
Extent to which a bank develops financial service products to create revenue synergies; result from mergers and acquisitions.
Transaction Accounts
The total of interest bearing checking accounts and demand deposits that do not bear interest.
What kinds of loans due commercial banks make?
Real estate, international, commercial and consumer loans (RICC acronym)
What is the main asset of a commercial bank?
Loans
What is the main liability of a commercial bank
Deposits
How do electronic innovations help banks?
They allow banks to have greater control of their operations and offer more services.
Multibank Holding Companies (MBHCs)
Parent Companies owning several subsidiary banks
Nonbank Bank
Subsidiary banks not allowed to accept demand deposits make commercial loans nor obtain deposit insurance coverage
One-Bank Holding Companies (OBHCs)
Parent companies owning a single subsidiary bank in addition to nonbank subsidiaries.
Prompt Corrective Action
A specific group of actions regulators must follow if a commercial bank’s capital to assets ratio falls below 5%.
Risk Adjusted Assets
The denominator in the risk based capital ratio; equal to risk adjusted on balance sheet and off balance sheet assets.
Section 20 securities affiliates
Subsidiaries of commercial bank holding companies that perform investment banking activities.
Universal financial institution
A financial institution allowed to perform a wide range of financial services.
What does some regulations seek to protect from?
Insolvency and commercial bank failure
What does some regulation seek to strengthen?
Lending to sectors important to society like small businesses, farming and housing
What does Regulation K allow?
Allows banks to operate branches in foreign countries.
Why are finance companies growing
Because they can give attractive interest rates for riskier loans
Why are finance companies subject to less regulation than commercial banks?
Because they don’t accept deposits.
What are savings associations in fierce competition for
Home mortgage market by mortgage brokers and commercial banks.
What is the recent trend in savings institutions?
Consolidation
Business Credit Institutions
Finance Companies specializing in corporate equipment leasing and factoring
Captive Finance Company
Finance company that is a wholly owned subsidiary of a parent company.
Corporate Credit Unions
Financial institutions cooperatively owned by member credit unions that serve members by lending and investing unloaned deposits of member credit unions; also provide services like data processing, accounting, payment services and securities
Credit Unions
Not for profit depository institutions, organized and owned by depositors, concentrating on consumer loans financed with member deposits
Disintermediation
Deposit withdrawals from depository institutions that are reinvested in other areas such as money market mutual fund accounts.
Factoring
Buying accounts receivable from corporations, sometimes at a discount, without recourse for receivables gone bad; buyer assumes responsibility for collecting the accounts receivable.
Finance Companies
Institutions designed to provide individual and business loans
Mutual organizations
Savings association where liability holders are the legal owners; stock is not issued
Personal credit institutions
Finance companies specializing in consumer installment loans and other consumer loans
Regulation Q Ceilings
Interest rate limits imposed by the Federal Reserve on small savings accounts and time deposits at thrifts and banks before 1986
Regulator Forbearance
A policy implemented by maintaining deposit insurance premium assessments and not closing insolvent, capital depleted financial institutions
Sales Finance Institutions
Finance Companies specializing in loans for customers of specific manufacturers or retailers
Savings Associations
Depository institutions concentrating on residential mortgages
Savings Banks
Depository institutions with a divers product offering primarily composed of residential mortgages in addition to corporate stocks, corporate bonds, and commercial loans.
Savings Institutions
A combination of savings associations and savings banks
Securitized mortgage assets
Mortgages packaged and used as assets to back securities in secondary markets.
Subprime Lender
Finance Companies that lend to high risk borrowers.
What are 3 reasons why a P & C company can become unprofitable
Loss rate increases;
Investment return decreases;
Increasing expenses
Who are P & C companies regulated by?
The States
Adverse Selection
The theory that the individuals who apply for life insurance are the same individuals with the greatest need for life insurance
Annuities
Annuity Contracts provide different ways to eliminate a buildup of funds over a long period.
Combined Ratio
A measure equal to the loss ratio plus the ratios of loss adjustment expenses to written premiums and commissions/operating expenses to written premiums
Endowment Life
A life insurance contract under which the insured’s beneficiaries receive the contract’s face value if the insured dies during a particular period; if the insured survives pas the period’s end date, the insured receives the contract’s face value
Frequency of Loss
The likelihood of a particular loss happening
Long Tail Losses
Insured Losses that happen during the covered period but are not reported until years later
Loss Ratio
The ratio of incurred losses to earned premiums
Operating Ratio
The measure of an insurer’s overall profitability equal to the difference of the combined ratio after dividend payments and the investment yield.
Policy Loans
Cash advances to an insured by using the value of the insured’s individual policy as collateral.
Policy Reserves
Funds laid aside by an insurer to cover anticipated future payouts for deaths, matured investment policies, and cash surrender value.
Separate account business
Life insurance company annuities whose values depend on returns from premium investments; separate account funds are kept separate from other insurer assets.
Severity Of A Loss
The amount of damage a particular loss causes.
Surrender Value of Policies
The amount in cash an insurer must pay to an insured if the insured decides to give up the policy before the maturity date.
Term Life
A life insurance contract under which the insured’s beneficiaries receive a specified payment when the insured dies only if the insured dies during the specified coverage period.
Unearned Premiums
Reserves equal to the premiums paid when the period of coverage begins, before the insurer actually provides coverage.
Universal Life
A life insurance contract allowing the insured to alter the amount of premium paid and the maturity date.
Variable Life
A life insurance contract whereby the insured’s premiums are invested in mutual funds usually selected by the insured.
Variable Universal Life
Life Insurance contracts that combine the premium and maturity flexibility of universal life with the investment benefits of variable life.
Whole Life
A life insurance contract whereby the insured is covered for a full lifetime instead of a limited time; as long as the insurer continues to receive premium payments, the insured’s beneficiaries receive the contract’s face value when the insured dies.
Investment Banks work mainly in which market?
Primary
Securities Firms work mainly in which market
Secondary Market
How do Investment banks help firms and the government raise money?
By Underwriting issues of equity and debt securities
What are the major activities of investment banks and securities firms?
Mergers and acquisitions; Investing; cash management; market making, investment banking; and trading
Who does the SEC (Securities and Exchange Commission) regulate?
Securities and Investment Banking Industry
Who are the 2 organizations that self regulate on a daily basis under the SEC Authority?
The New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD)
What is the capital to assets ratio that the SEC require banks and securities firms to keep as a minimum?
2%
What is the major influence on trends in the securities and investment banking industry?
The Stock Market
Best Efforts Underwriting
Securities issuance in where the underwriter does not guarantee the issuer a firm price and participates as a distribution or placing agent for a fee based on placement success.
Broker/dealers
Investment banks that provide support in trading securities that already exist.
Cash Management account (CMA)
Deposit accounts associated with mutual fund accounts that allow check writing privileges.
Discount Brokers
Highly specialized firms that do not offer investment advice and perform only customer trades.
Firm Commitment Underwriting
Securities issuance by an investment bank in which the investment bank guarantees the issuer a fixed price by purchasing the entire new issue and then reselling the securities to investors at a higher prices.
Market Making
Generating a secondary market for an asset by an investment bank or securities firm.
Position Trading
Purchasing large securities blocks in anticipation of a favorable change in price.
Program Trading
Involves using computers to simultaneously purchase and sell a portfolio valued at more than $1 million and containing a minimum of 15 separate stocks
Pure Arbitrage
Selling an asset on a market for a certain price immediately after buying the asset on a different market for a lower price.
Risk Arbitrage
Purchasing securities on the expectation of a release of new information.
Securities Services
The part of the securities and investment banking industry that facilitates the secondary market trading of securities.
Underwriting
A method of providing support for issuing of new securities.
What do small investors increasingly use for retirement and other savings?
Mutual Funds
What are two examples of short term funds
Taxable and tax exempt money market mutual funds
What are three types of long term funds?
Bond Funds, equity funds and hybrid funds that hold both equities and bonds.
Why are mutual fund regulations established?
To create rules to ensure good information flows to investors, to prevent fraud, and to establish procedures for industry oversight.
Where are the bulk of MMMF assets invested?
In domestic and foreign checkable deposits, repurchase agreements, and US Government securities.
Where are the bulk of long-term fund assets invested?
In Corporate Stock and most of what is left is invested in municipal and US Govt bonds.
12b-1 Fees
Fees covering the costs of distributing and marketing mutual fund shares
Bond Funds
Funds made up of fixed income capital market debt securities with maturity dates of over one year
Closed-end investment companies
Specialized companies offering a fixed amount of outstanding shares and investing in other firm’s securities and assets
Equity Funds
Funds made up of common and preferred stock securities
Hybrid funds
Funds made up of both stock and bond securities
Loan Fund
A mutual fund for which the investor must pay an up-front onetime commission or sales fee.
Money market mutual funds
Funds made up of a variety of money market securities with maturities of less than one year.
Mutual Fund
A financial intermediary that pools investor’s financial resources in diversified asset portfolios
Net Asset Value
The price investors pay to buy new shares in a mutual fund or sell shares back to the fund on a specific day.
No Loan Fund
A mutual fund where the investor does not pay an up front commission or sales fee because shares are marketed directly to the investor by the fund instead of through sales agents.
Open-end Mutual Fund
A type of mutual fund where the supply fluctuates daily according to the purchase and redemption of shares.
Real Estate Investment Trust
A closed end investment company specializing in property, mortgages, or shares in real estate companies.
How do defined benefit plans calculate a pension?
Based on factors like final (or average) salary and years of service.
How are Defined contribution plans like savings accounts?
The Retiree gets whatever is in the account when he retires.
What type of plans are the largest investors in the stock market?
Pension Plans
What kind of investments are made by defined benefit plans (including governmental plans and social security?
Low Risk Securities
What puts stress on pension plans and Social Security?
Increased Longevity
401K and 403B plans
Private Pension funds sponsored by the employer that are meant to complement the central retirement plan
Career Average Formulas
A method of calculating the amount of a defined pension fund in which the employee’s benefit amount depends on the employee’s average salary during the employee’s years of service.
Defined Benefit Pension Plans
Pension funds in which employees receive a certain cash benefit upon retirement from the employer; a formula is usually used to calculate the amount of the cash benefit.
Defined Contribution Retirement Plan
A retirement fund in which an employer contributes a particular amount to each employee’s account in the fund during employment years and employees receive retirement benefits equal to the amount contributed by the employee and the employer plus (or minus) the investment earnings on the amounts contributed.
Employee Retirement Income Security Act (ERISA)
The main legislation regulating private pension funds; requires employers offering pension funds to meet specific standards to qualify for tax deferment and makes the Dept of Labor responsible for pension plan oversight.
Final Pay Formula
A method of calculating the amount of a defined benefit pension fund where the employee receives a percentage of the employee’s average salary during a particular period toward the end of the employment multiplied by the number of years of service.
Flat Benefit Formula
A method of calculating the amount of a defined benefit pension fund where employees receives an unchanging amount for each year of service
Fully funded pension plan
A defined benefit plan where the employer has adequate funds to make all future defined benefit pension payments.
Individual Retirement Accounts
Private pension funds individually set up and directed by self employed individuals and employees who may also contribute to employer established plans
Insured Pension Fund
Pension funds managed by life insurance companies
Keogh Accounts
Retirement accounts for individuals who are self employed that are managed by financial institutions
Noninsured Pension Plan
Pension funds administered by any financial institution other than an insurance company.
Overfunded Pension Plan`
A defined benefit plan where the employer has more than adequate funds to make all future defined benefit pension payments.
Pay-As-You-Go basis funding
a way to fund pension funds where current contributions are used to pay pensions to currently retired individuals
Pension Plan
The structure designed to control pension fund operations
Private Pension Funds
Pension Funds managed by private companies and business
Prudent person rule
Pension fund fiduciaries must exercise the same attention and care in making pension fund investments as a prudent person could be expected to exhibit in a similar situation
Public pension funds
Pension funds managed by governmental entities, whether local, state, or federal; Social Security is a public pension funds.
Roth IRA
An IRA that provides no deductions for contributions but allows funds to be pulled out tax free
Underfunded pension plan
A defined benefit plan where the employer does not have enough funds to make all future defined benefit pension payments
Vesting
An element of pension fund eligibility that provides employees with no forfeitable right to receive their benefits after working a particular number of years.
Firm Specific Credit Risks
Default risk resulting from the specific project risks undertaken by the borrowing firm.
Letters of Credit
Financial Institution guarantees made for a fee that payment of securities will be made if borrowers default.
Present Value Uncertainty
Uncertainty resulting from interest rate changes affecting discount rates and market values of assets or liabilities
Refinancing Risk
Risk that the cost to refinance an investment will be more than the profit earned on the investment.
Reinvestment Risk
Risk that the borrowed funds will be reinvested at rates lower than the original cost.
Systematic Credit Risk
Default risks affecting all borrowers resulting from economywide conditions.
Where does liquidity risk come from?
The right of depositors to pull funds at any time.
Depository Institutions have a higher level of risk exposure than who?
Mutual Funds and Pension funds
What is a preferred method of liquidity
Through purchased liquidity (borrowing money at interest).
Why don’t mutual fund investors have the same incentive to withdraw funds in a panic as do bank depositors
Because investors in a mutual fund share losses equally
Why would Life insurance companies have withdrawal (surrender) runs just like banks?
If policyholders think the company won’t be able to pay claims.
Why do P & C insurers have higher liquidity needs than life insurance companies?
Because P & C claims are more difficult to predict.
At what level are insurance guarantees provided?
At the state level, not federal.
Asset side liquidity risk
Request for loans from loan commitment holders result in asset increases but require financial institutions to raise funds to be able to provide loans
Bank panics
Bank runs not limited to any particular financial institutions but occurring industrywide.
Bank Runs
Abrupt, unanticipated increases in depositor withdrawls
Core Deposits
Demand deposits usually left in a demand depository account for a long period and therefore serving as steady funding for depository instututions
Financing Gap
The difference between a financial institution’s average loans and core deposits
Financing requirement
The amount needed to close the financing gap; equal to a financial institution’s liquid assets plus the financing gap.
Fire-Sale Price
The low price a financial institution must accept in exchange for an asset because the financial institution needs the money immediately.
Liability Side Liquidity Risk
Depository Institutions usually have many short term liabilities and therefore a constant need to maintain sufficient funds or enough asset liquidity to cover liabilities.
Liquidity Index
A method of measuring the amount a financial institution could lose if forced to sell assets at fire-sale prices rather than under usual conditions.
Liquidity planning
Measuring and examining liquidity risk to help financial institution managers make funding decisions in advance of any liquidity problems.
Maturity Laddering
Method for determining net financing requirements and overall liquidity risk by comparing daily cash inflows and outflows for a specific period.
Net Deposit Drain (Net Cash Outflows)
The amount by which new deposits are insufficient to cover withdrawals.
Net Liquidity Statement
A tool for comparing liquidity sources and uses that helps financial institution managers measure a financial institutions net liquidity.
Peer Group Ratio Comparisons
Measuring on bank’s balance sheet contents and ratios against the same info for banks of comparable size in the same geographical area.
Purchased Liquidity
Liquidity achieved by buying or issuing financial market securities; purchased liquidity is the method of managing liquidity that is preferred today.
Stored Liquidity
Liquidity achieved by using or selling assets; stored liquidity is the traditional method of managing liquidity.
Surrender Value
The amount an insured will receive by canceling an insurance policy before the policy’s expiration or maturity date.
