Part II Chapter 2

Question 1

balance sheet

Answer 1

A financial statement that reports a company’s
financial condition—including assets, liabilities, and
stockholders’ equity—at a point in time.

Question 2

bank capital requirements

Answer 2

Rules or regulations that specify the amount of
funds the owners of a bank must contribute to the
business.

Question 3

Bank Secrecy Act of 1970 (BSA)

Answer 3

A US legislative act under which US banks (and,
in many cases, companies and individuals) are
required to perform due diligence by determining a
customer’s identity and monitoring transactions for
suspicious activity.

Question 4

capital adequacy

Answer 4

A factor that measures whether the amount of more
permanent sources of funds maintained relative
to the nature and extent of an institution’s risks is
sufficient given management’s ability to identify,
measure, monitor, and control these risks.

Question 5

capital tax

Answer 5

A type of levy assessed by some countries
(particularly those experiencing an upsurge in
economic growth) on multinational companies that
are headquartered in another country

Question 6

central bank

Answer 6

An entity that is responsible for implementing and
managing a country’s monetary policy—in other
words, the country’s money supply and interest rates.

Question 7

Check Clearing for the 21st Century

Act of 2003 (Check 21)

Answer 7

A US law that provided the basis for electronic
clearing of checks by allowing the substitution of a
copy or image of a check for the original document
in the clearing process.

Question 8

common equity

Answer 8

The capital contributed by stockholders and earnings

retained in the business.

Question 9

Consumer Financial Protection Bureau

CFPB

Answer 9

An independent consumer protection entity within
the US Federal Reserve that was created as part of
the Dodd-Frank Act. The primary aim of this entity is
to consolidate and strengthen consumer protection
responsibilities and oversee the enforcement of
federal laws intended to ensure the fair, equitable,
and nondiscriminatory access to credit for individuals
and communities.

Question 10

credit transfer

Answer 10

In an electronic payment system, this is the process
of a payor pushing funds from its account to the
account of the payee.

Question 11

deposit insurance (guarantee)

Answer 11

A regulatory safeguard that protects the assets of
smaller deposit customers (typically consumers,
although corporate accounts are also often covered
up to a certain amount) who would be most harmed
by a bank failure.

Question 12

Depository Institutions Deregulation
and Monetary Control Act of 1980
(DIDMCA)

Answer 12

A US legislative act that provided for a phase-out
of interest rate ceilings for financial institutions,
mandated that all depository institutions hold
reserves at the Federal Reserve (Fed), and mandated
that the Fed price or eliminate its float in the checkclearing system.

Question 13

Dodd-Frank Wall Street Reform and

Consumer Protection Act of 2010

Answer 13

Legislation enacted in the United States in response
to concerns related to the financial services industry
in the wake of the global financial crisis of 2007–
2009. The act had a major impact on the regulation
of banks and other financial institutions, and brought
financial consumer protection under a single
authority.

Question 14

Electronic Signatures in Global and
National Commerce Act of 2000
(E-SIGN Act)

Answer 14

US legislation that was enacted to support electronic
commerce (e-commerce) initiatives and grant digital
signatures the same legal status as handwritten
ink signatures. It establishes the legal certainty of
e-commerce transactions and provides a measure of
confidence around the enforceability of electronic
transactions.

Question 15

escheatment

Answer 15

The process of turning over unclaimed assets to the

government, in specific instances.

Question 16

European Central Bank (ECB)

Answer 16

The central bank for the European Union (EU).

Question 17

European Payments Council (EPC)

Answer 17

The coordination and decision-making body of the

European banking industry in relation to payments.

Question 18

European Union (EU)

Answer 18

A union of more than two dozen member countries
that have organized to work toward common
political, social, and economic interests.

Question 19

Federal Deposit Insurance Corporation

FDIC

Answer 19

An independent agency of the US federal
government whose primary role is to protect
depositors from losses caused by bank insolvency

Question 20

Federal Reserve (the Fed)

Answer 20

The central bank for the United States, from the

perspective of monetary policy

Question 21

Financial Action Task Force (FATF)

Answer 21

An international, intergovernmental organization
composed of members from more than 30 countries,
whose primary purpose is the development
and promotion of policies, at both national and
international levels, to combat money laundering and
terrorist financing.

Question 22

Financial Crimes Enforcement

Network (FinCEN)

Answer 22

The primary US government agency (operating
as a bureau of the US Treasury) that oversees and
implements policies to prevent and detect money
laundering by criminal or terrorist organizations.

Question 23

Financial Stability Board (FSB)

Answer 23

An entity established to provide international
coordination of national financial authorities and
international standard-setting bodies.

Question 24

Financial Stability Oversight Council

FSOC

Answer 24

A US agency created under the Dodd-Frank Act,
whose primary responsibility is to prevent systemic
risk from threatening the financial system by
identifying threats to financial stability and gaps
in regulations, and facilitating coordination across
federal and state agencies.

Question 25

foreign tax credit

Answer 25

A type of tax credit available to a company with
foreign income that has already been taxed by the
foreign jurisdiction.

Question 26

impairment of capital rule

Answer 26

A regulatory restriction on the amount that a
financial institution can lend or invest in a particular
company or industry, based on the quality of the
financial institution’s existing loan portfolio.

Question 27

insolvency

Answer 27

The inability to pay one’s debts in a timely manner.

Question 28

layering

Answer 28

The attempt to conceal the source of ownership of
money by creating a complex series of transactions
in order to provide anonymity

Question 29

monetary policy

Answer 29

Government policy related to monitoring and
controlling a country’s money supply and interest
rates.

Question 30

money laundering

Answer 30

Any financial transaction that generates an asset or a
value as the result of an illegal act, which may involve
actions such as tax evasion or false accounting.

Question 31

Office of Foreign Assets Control (OFAC)

Answer 31

An office of the US Department of the Treasury
that administers and enforces economic and trade
sanctions based on US foreign policy and national
security goals. Its objective is to identify and target
threats to the national security, foreign policy, or
economy of the United States.

Question 32

Office of the Comptroller of the

Currency (OCC)

Answer 32

A bureau of the US Treasury Department that was
established by Congress in 1863 to regulate the
national banking system. It is the primary chartering
authority and regulator for national banks.

Question 33

Over-The- Counter (OTC) Market

Answer 33

A type of market that is more decentralized than
a formal securities exchange. These markets also
rely upon electronic communication to conduct
trading activity in an auction-style market between
participating brokers and dealers.

Question 34

par value

Answer 34

An arbitrary amount (usually stated in the corporate
charter) that indicates the minimum amount
stockholders have put up (or must put up) in the
event of bankruptcy

Question 35

pension plan

Answer 35

A type of retirement plan, usually tax-exempt,
wherein an employer makes contributions toward
a pool of funds set aside for an employee’s future
benefit. The pool of funds is then invested on the
employee’s behalf, allowing the employee to receive
benefits upon retirement.

Question 36

Red Flags Rule

Answer 36

US regulation requiring financial institutions and
creditors to develop and implement written identity
theft prevention programs that provide for the
identification of, detection of, and response to
patterns, practices, or specific activities that could
indicate identity theft.

Question 37

reserve requirement

Answer 37

A central bank requirement that establishes the
minimum percentage of customer deposits that
financial institutions must hold as reserves and not
lend out to other customers.

Question 38

Sarbanes-Oxley Act of 2002 (SOX)

Answer 38

US legislation that requires companies to evaluate and
disclose their internal financial controls as they relate to
financial reporting, and requires auditors to attest to, or
confirm, the effectiveness of these controls. It further
requires that chief executive officers and chief financial
officers certify financial statements, and specifies fines
and jail sentences for knowingly and willfully misstating
information therein. The act also requires companies with
publicly traded securities to maintain independent audit
committees (of the board of directors) that can interact
with the external auditor in an unfettered way.

Question 39

Securities and Exchange Commission

SEC

Answer 39

A US federal agency designed to maintain a fair
and orderly market for investors by regulating and
supervising securities sales.

Question 40

seigniorage

Answer 40

Government revenue from the issuance of coin and
currency, which is based on the difference between
the value of the money and the cost to produce it.

Question 41

settlement risk

Answer 41

A form of counterparty credit risk that is related
to the probability that a party funding a particular
transaction will default on the actual payment or
settlement obligation.

Question 42

standby letter of credit (L/C)

Answer 42

A bank issued letter that serves as a vehicle to
ensure the financial performance of a bank’s
customer to a third-party beneficiary.

Question 43

stress test

Answer 43

An analytical exercise that assumes an adverse
change in one or more of a firm’s funding sources, or
a major shock to a company’s core business.

Question 44

systemic risk

Answer 44

The risk of collapse of an entire financial system or
entire market, as opposed to risk associated with any
one individual organization, group, or component of
a system.

Question 45

tying

Answer 45

The act of requiring a purchaser to buy one product or service in order to be allowed to buy a second, typically unrelated, product or service.

Question 46

unanimous consent procedure

Answer 46

A type of procedure for formulating a reorganization
plan in a US Chapter 11 bankruptcy filing. Under this
procedure, all classes of creditors and equity holders
must consent to the reorganization plan, with a two thirds vote of all members in each class required.

Question 47

Uniform Commercial Code (UCC)

Answer 47

A set of proposals adopted by US states as laws
to ensure uniformity for commercial financial
transactions in the United States. It defines the rights
and duties of all parties in a commercial transaction
and provides a statutory definition of commonly
accepted business practices.

Question 48

use tax

Answer 48

A type of tax that is imposed directly on the
consumer of goods that were purchased without
paying sales tax.

Question 49

value-added tax (VAT)

Answer 49

A type of sales tax that involves charging a separate
tax at each discrete stage of production and/or
distribution based on the increased value occurring
at that stage.

Question 50

withholding tax

Answer 50

A tax that is deducted at the payment source
and paid directly to the tax authorities where the
payment originates.