Glossary of Banking Terms

A

Account or (Bank account) — you have an account created by the deposit of money at a bank and can use it when you need it. You are became a customer of the bank.

Accrued interest — Interest owed but not yet paid.

Adjustable rate mortgage (ARM) — A mortgage plan with an interest rate tied to some economic index.

Amortization — The process of paying or reducing a debt by periodic payments sufficient to cover current interest and to extinguish part of the principal.

Annuity — A contract to make periodic payments in the future.

Appraisal — An estimate of the value of property, especially real estate, to be used as collateral for a loan.

Arbitrage — The process of simultaneously buying and selling identical or similar securities in related markets, thus providing a profit to the investor.

Automated clearinghouse (ACH) — A clearinghouse in which the information enters the system in an electronically readable form, such as magnetic tape.

Automated teller machine (ATM) — Equipment that can provide certain banking services without the involvement of bank personnel. Customers access an ATM by using a plastic card (a "debit" card) issued by their bank.

Available funds — Funds that may be withdrawn or used immediately or on demand.

B

Balance — The amount standing to the credit of a depositor's account, representing the amount that may be withdrawn.

Bank account see Account

Bank capital — The difference between the value of a bank's assets and its liabilities. The total of the capital accounts of the bank sometimes includes, for regulatory purposes, loan loss reserves and subordinated debt. Many banking regulations are tied to the amount of the bank's capital.

Bank check — A check drawn by a bank on itself and signed by an authorized officer; also called officer's check or cashier's check.

Banker's acceptance — A short-term marketable security guaranteed by a bank, generally resulting from trade in staple commodities. A "trade acceptance" is a draft drawn by the seller of goods on the buyer and "accepted" by the buyer. In a bank acceptance the bank substitutes its credit for that of its customer. The customer is to provide funds to pay acceptances at maturity.

Bank examination — An on-site investigation of the bank's financial condition, management, and policies by representatives (bank examiners) of the regulatory agencies.

Bank holding company — Any corporation that controls one or more banks. The corporation is subject to the Bank Holding Company Act, administered by the Federal Reserve Board.

Bank Insurance Fund (BIF) — Insurance fund for depositors in failed commercial banks, created in 1989 to assume the responsibilities of the FDIC insurance fund.

Bank notes — Instruments issued by banks evidencing a promise to pay bearer on demand, intended to be used as money. Currently, only Federal Reserve bank notes are in circulation. During the 19th century, bank notes constituted the bulk of the money supply of the United States.

Bank statement — A statement of a customer's account, showing all deposits recorded, checks paid, and charges made during a period, as well as the balance at the end of the period. The statement is usually accompanied by the customer's canceled checks.

Basis point — One one-hundredth of a percentage point. A unit commonly used to express differences in or changes in interest rates.

Bearer — Holder or person in possession of money or of a check, note, or other instrument.

Beneficiary — (1) The person specified by a depositor in connection with an account in trust for another; (2) the person in whose favor a letter of credit is issued; (3) the person designated to receive the income or principal of an estate; (4) the person who is to receive the proceeds of an insurance policy or annuity.

Bond — An interest-bearing certificate of debt that promises that the issuer (a government or corporation) will pay a certain sum of money to the holder of the bond at a specified date. In effect, it is a long-term loan by the bondholder to the issuer.

C

Call loan — Money loaned by banks, usually to securities dealers or brokers, for which demand may be made at any time. Also called demand loans.

Call option — Contract that provides the owner with the right to purchase a specified financial instrument at a specified price within a specified period of time.

Cash items — Checks or coupons that accepted for tentative credit to a depositor's account, subject to reversal if the items are not paid.

Certificate of deposit (CD) — Written description of а dерosit payable on а sрeсified date, generally interest-bearing. The depositor usually may not withdraw the funds prior to maturity wthout incurring a penalty.

Check — A draft drawn on a checking account payable on demand. It is, in general, a negotiable instrument.

Check kiting — Writing checks against deposits that have not cleared throught the banking system, thus taking advantage of the "float" - the time needed for checks to clear.

Checking account — A bank account against which checks may be drawn. May also be referred to as a transaction account or a demand deposit.

Classified loans — Those loans criticized by an examiner as having a greater than normal degree of risk, The ratings used include "substandard", "doubtful", and "loss".

Clearinghouse — A place where representatives of local banks meet at an agreed time each day to exchange checks and other items drawn on each other, and to settle the resulting balances.

Collateral — Specific property that a borrower pledges as security for a loan, agreeing that the lender shall have the right to sell the collateral if the borrower fails to respay the loan at maturity.

Commercial paper — Short-term securities issued by corporations, usually of high credit quality.

Comptroller of the Currency — The federal official responsible for supervision and examination of national banks.

Correspondent banking — Procedure by which banks perform services for another. Small banks rely extensively on larger correspondent banks for such services as check collection and participation in loans, and as a source of liquidity.

Credit — An advance of cash or merchandise in exchange for a promise to pay a definite sum in the future. Long-term credit generally involves bonds or mortgages. Short-term credit granted to an individual for personal use is called consumer credit.

Currency — Paper money and coin.

D

Debit card — A plastic card issued by a bank to a depositor, encoded so that it may be used in ATMs or in POS systems.

Demand deposit — Funds in a checking account subject to withdrawal on demand or by check.

Depository institution — A financial institution that accepts deposit accounts; a commercial bank, savings bank, savings and loan association, or credit union.

Discount — Interest paid at the beginning of a loan. So-called bank discount is calculated on the sum to be repaid at maturity rather than on the proceeds of the amount borrowed.

Discount rate — The rate charged by the Federal Reserve banks for loans to banks.

Discount window — The Federal Reserve facility for lending to depository institutions.

Disintermediation — The process of removing deposits from financial institutions ("intermediaries") for investment directly in market instruments. This has occurred when financial institutions are unable, because of regulation or for other reasons, to pay interest rates as high as those available in the open market.

Draft — A written order signed by the drawer directing the drawee to pay a specified sum to the payee - that is, a check.

Dual banking system — Regulatory framework of the banking system, composed of federal and state regulators.

E

Electronic fund transfer system (EFTS) — A system that provides for payments electronically, rather than by use of paper checks or currency. These systems include such devices as wire transfers, automated teller machines (ATMs), and point-of-sale (POS) systems.

Endorsement — The signature plus any other writing by which the endorser transfers rights in an item (that ia, a check) to someone else. It is generally written on the back of the item.

Escrow — A written agreement, such as a deed or bond, entered into by three parties and deposited for safekeeping with the third party as custodian, to be delivered by the latter only upon the performance or fulfillment of some condition.

Eurodollar — Deposits denominated in dollars in a bank outside the United States (including banks not in Europe).

Excess reserves — The amount of reserves held by a bank in excess of what is needed to meet legal requirements.

Exchange rate — The price of the monetary unit of one country in terms of the monetary unit of another.

F

Federal Deposits Insurance Corporations (FDIC) — Federal agency that insured the deposits of commercial banks and savings institutions.

Federal funds — Overnight loans between banks that are needed in immediately available funds.

Federal funds transactions — Overnight or short-term loans from one bank to another of excess reserves as deposit at the Federal Reserve Bank. These transactions are frequently referred to as purchases, and sales, of funds.

Federal Reserve note — Paper money issued by the Federal Reserve Bank. Also use as the prevailing paper currency in the USA. Such money is legal trades.

Federal Reserve System — The central bank of the United States, consisting of 12 Federal Reserve Disctrics (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco). Each of this districs are including member banks regulated and served by a Federal Reserve Bank. Its principal responsibility in the management of monetary policy.

Fedwire — The Federal Reserve funds transfer system used to transfer reserves and other balances of financial institutions and to transfer book-entry U.S. government securities.

Fiduciary services — Services provided by an individual or a corporation acting in a trust capacity. A bank authorized to do a trust business may act as executor or administrator of estates, guardian of minors, and trustee under wills.

Float — Items for which the recipient institution has given credit but which it has not yet collected.

Futures — Standardized contracts traded on exchanges that call for delivery of commodities, securities, or foreign currency in the future.

Futures contract — Standardized contract to purchase or sell a specified amount of a specified instrument (such as a security or currency) for a specified price at a specified future date.

G

Guaranty — A written promise by one party (the guarantor) to be liable for the debt of another if the principal debtor fails to meet the obligation.

I

Installment loan — A loan with several scheduled repayments at specified intervals.

Interest — The amount paid for use of money or credit.

Interest rate — The price of borrowing, expressed as a percent of the amount borrowed. See Discount.

Investment banker — An intermediary who acquires new issues of securities from the corporate issuer and resells them to the public.

J

Joint account — An account in the names of two or more persons. Generally the funds may be withdrawn by only one of the depositors.

L

Legal tender — Money that legally satisfies financial obligations.

Letter of credit — An instrument issued by a bank by which the bank substitutes its own credit for that of the individual or corporation that purchases the letter.

Line of credit — An arrangement whereby a bank commits to lend up to a specified amount at the borrower's option.

Loan participation — Credit extended to a borrower in which a group of lenders each provide a fraction of the total financing, typically arising because individual banks are limited in the amount of credit they can extend to a single customer.

London Interbank Offer Rate (LIBOR)— Interest rate charged on interbank loans.

M

Maker — The person who signs and executes a note or other promise to pay. The drawer of a check is sometimes referred to as a maker.

Market — a place, where are meeting people for buying and selling goods, usually outside. Market may be financial - bear market, bond market, commodities market, bull market, stock market, capital market, currency market, eurobond market, eurocredit market, eurocurrency market, euromarket, export market, external market, foreign exchange market, foreign market, grey market, internal market, world market and etc.; may be: food market, energy market, gas market, residential market, market an invention, black market, domestic market and others.

Maturity — The due date of a financial instrument.

Money order — A draft sold to a customer with a payee designated by the purchaser. The issuer is usually a bank or other party of high credit standing, so the money order is widely accepted as payment.

Mortgage — A method of pledging real property as security for debt so that the lender may foreclose if the borrower defaults.

Mutual institution — A thrift institution or insurance company that has no stockholders and is owned by its depositors or policyholders.

N

Negotiable instrument — An unconditional written order or promise to pay that can be transferred to a holder in due course free from any claim from the original parties.

Net interest margin — The difference between a bank's interest income and interest expense, expressed as a percentage of earning assets.

NOW account — Negotiable Order of Withdrawal account. A checking account based on a savings deposit, that is, an interest-bearing checking account. It is not available to corporations, the checking accounts of which must be based on noninterest-bearing demand deposits.

O

Office of Thrift Supervision (OTS) — The government agency responsible for supervision of savings and loan institutions.

Open market operations — Federal Reserve purchases and sales of government securities as part of its monetary policy responsibilities. The transactions are designed to affect the level of bank reserves.

Overdraft — The amount owing to a bank by reason of its paying an item drawn against insufficient funds. Sometimes the term is used for an item drawn against insufficient funds (NSF) whether or not paid by the bank.

P

Par value — Of a bond, note, or other obligation, the amount agreed to be repaid, exclusive of interest.

Passbook — A record provided by a bank to a depositor showing deposits and withdrawals end interest credited.

Point-of-sale (POS) system — An electronic arrangement that allows customers at stores to transfer funds immediately from their bank account to the account of the merchant.

Postdated check — A check dated ahead. It is not payable until the data specified.

Prime rate — A base rate to which many loans (particularly business loans) are indexed. In the past it was the rate that banks charged their best, most creditworthy customers.

Principal — The face amount or par value of a note or other instrument.

Promissory note — A written promise by the maker to pay a certain sum of money to the payee on demand or at a specified future date.

Purchase and assumption transaction (P&A) - The procedure by which the Federal Deposit Insurance Corporation arranges for a healthy bank to purchase the assets and assume the liabilities of a failed bank.

Put option — Contract that provides the owner the right to sell a specified financial instrument at a specified price within a specified period of time.

R

Repurchase agreement — An arrangement whereby the lender buys securities from the borrower, subject to an agreement that the borrower will repurchase the securities at a specified price at a specified data.

Reserves — Funds set aside by a bank to enable it to pay its depositors. Reserves may consist of vault cash, deposits in other banks, and deposits with the Federal Reserve. The term sometimes refers only to those reserves that meet Federal Reserve requirements.

Resolution Trust Corporation (RTC) — Government agency created in 1989 responsible for handling failing savings institutions; the RTC liquidates the assets of failed institutions.

Return item — An item returned unpaid by a payor bank.

S

Savings Association Insurance Fund (SAIF) — Insurance fund for savings institutions.

Securities — Documents evidencing ownership or a creditor position in a corporation, such as stocks, bonds, or coupons.

Service charge — A fee charged to depositors for services rendered, particularly in connection with a checking account.

Stop-payment order — An instruction to a bank by a depositor that it refuse payment of an item specified by the depositor.

Survivorship account — An account in the names of two persons that, on the death of one, belongs to the survivor.

T

Term loan — Business loan with a maturity of over one year, usually used to finance the purchase of fixed assets.

Time deposit — Deposits that (except for NOW accounts) may not be withdrawn by check and on which advance notice may be required before withdrawal, or that may not be withdrawn before maturity without penalty.

Transaction accounts — Deposits that are subject to transfer by check: demand deposits or NOW accounts.

Transit items — Cash items payable outside the city of the bank receiving them for credit to customers' accounts and transmitted by the collecting bank to a payor bank.

Transit number — A coding on a check indicating a bank and its location. The transit number on the check has a prefix (before the hyphen) designating the city or state in which the bank is located and a suffix Indicating a particular bank. This number as a numerator is combined with a denominator, which is the check-routing symbol.

Traveler's check — A means by which a person may make payments or obtain cash where he or she is not known. A traveler's check is issued by a bank or other firm and is not subject to stop-payment orders. The buyer signs the check at the time of purchase and countersigns at the time it is used. Comparison of the signatures affords identification.

Treasury bills — Government securities with a maturity of one year or less, sold on a discount basis (that is, at a price less than par value).

Truncation — A check-processing system in which the bank does not return canceled checks to the depositor with the monthly statement, thereby saving some sorting and postage costs and — if truncation is performed at an early stage in the check collection process — some costs of transporting checks. Credit card systems routinely use truncation.

U

Usury laws — Legal ceilings on the interest rates that may be charged on loans.

V

Vault cash — Currency held by banks on their premises.

Z

Zero coupon bonds — Bonds that promise to pay principal and all interest at maturity, with no intermediate payments.