Bank failures and rescues/Glossary

• Agency cost [r]: Add brief definition or description
• Arbitrage [r]: transactions to take advantage of a price differences of a product in different markets by buying where it is cheap and selling where it is dear. The possibility of arbitrage often prevents the occurrence of price differences. ^[e]
• Capital adequacy ratio [r]: The ratio of a bank's capital to its risk weighted credit exposures. May be defined in terms of tier 1 (core) or tier 2 capital. ^[e]
• Central Bank [r]: A government agency that is responsible for monetary policy and the support of the banking system (for example the Federal Reserve Board and the Bank of England). Usually responsible for controlling a country's monetary policy and preserving the value of its currency. ^[e]
• Contagion (banking) [r]: the spread of a run, loss or insolvency from one bank to another, or the spread of a banking crisis from one country to another. ^[e]
• Debt_instrument [r]: A formal obligation assumed by a borrower to replay the lender in accordance with the terms of an agreement, including bonds, debentures, promissory notes, leases and mortgages. ^[e]
• Derivative [r]: The rate of change of a function with respect to its argument. ^[e]
• Financial_Intermediary [r]: A go-between organisation that obtains finance from investors (or savers) and lends it to corporations (or other borrowers). Financial intermediaries include banks, building societies (or savings and loans associations) , life insurance companies and credit unions. ^[e]
• Financial_regulator [r]: The United States Securities and Exchange Commission gives as its mission "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation". Financial regulators in other countries have similar responsibilities. ^[e]
• Gearing: see Leverage
• Herding (banking) [r]: A tendency to base decisions upon the actions of others - on the part of bankers, depositors or investors see also Panic (banking). ^[e]
• Insolvency [r]: Inability to meet a debt - or other financial - obligation. ^[e]
• Interbank market [r]: a market in which a group of banks lend to each other (for example, see LIBOR). ^[e]
• Lender of last resort [r]: An institution, that is prepared to lend money to any solvent bank that encounters a serious liquidity risk, or a threatened bank run. (The term has sometimes also been applied to financial assistance to avert insolvency that could occur for other reasons, or to financial assistance to governments). ^[e]
• Leverage [r]: (i) The use of borrowing to increase the amount of money that is available for investment or consumption. (ii) A proportional measure of indebtedness, such as the ratio of a company's debt to its shareholders' equity (the same as British "gearing"), or the ratio of the indebtedness of a household to the net value of its assets (ie net of its debts). ^[e]
• LIBOR [r]: (London Interbank Offer Rate) the rate of interest at which a group of banks (16 banks from seven countries, including the United States, Switzerland and Germany) are willing to lend to each other for periods ranging from a day to a year . ^[e]
• Liquidity [r]: (i) The quantity of available assets in its possession that an organisation could rapidly exchange for cash (assets that cannot be exchanged for cash at a particular time are considered to be "illiquid" at that time); (ii) the funding that is unconditionally available to settle claims through monetary authorities (termed "official liquidity"). ^[e]
• Liquidity risk [r]: the risk that assets cannot be sold at time when cash is needed to meet a commitment. ^[e]
• Moral hazard [r]: Motivation to take an otherwise unwarranted risk because the cost of an unfavourable outcome would be borne by someone other than the risk-taker. ^[e]
• Option [r]: A right, but not an obligation, to buy (or to sell) an asset, usually at a stipulated price (termed the "exercise price") and at a stipulated time. An option to buy is called a "call option" and an option to sell is called a "put option". ^[e]
• Portfolio insurance [r]: A way of protecting a portfolio against market risk by selling short on the share index futures market, or by buying put options on the share index. ^[e]
• Prime rate [r]: The interest rate that commercial banks charge for loans involving the lowest risk of default - such as loans to large companies. ^[e]
• Run (banking) [r]: An attempt by a large number of investors to withdraw their deposits. ^[e]
• Systemic failure (finance) [r]: The inability of a large proportion of a country's financial institutions to perform their financial intermediary function. ^[e]
• Warrant [r]: A right, but not an obligation, to buy (or to sell) an asset, at a stipulated price and time. (Similar to an option but of longer duration.) ^[e]