• Account Agreement: The contract governing your open-end credit account, it provides information on changes that may occur to the account.
• Account History: The payment history of an account over a particular period of time, which includes the number of times the account was past due or over drawn.
• Account Holder: A person or group of persons designated and authorized to transact business on behalf of an account. The signature of the account holder which is filed with the bank authorizes that person to conduct business on behalf of the account.
• Account Payable: Obligations to pay for goods or services that have been acquired on credit from suppliers, accounts payable is a current liability in the balance sheet.
• Accounts Receivable: Money which is owed to a company by a customer for goods and services provided on credit, accounts receivable is treated as a current asset in the balance sheet.
• Accrued Interest: Interest that has been earned but not yet paid.
• Acquiring Bank: In a merger, the bank that absorbs the bank acquired. The acquiring bank purchases some or all of the assets and assumes some or all the liabilities of the bank acquired.
• Adverse Selection: The tendency for higher-risk banks to opt for deposit insurance and lower-risk banks to opt-out of deposit insurance when membership in a deposit insurance system is voluntary.
• Assessment Base: The base on which the deposit insurer determine the premium or contribution made by member institutions to the Deposit Insurance Fund needed to pay the insured depositors.
• Bank: A limited liability company, licensed by the Central Bank, to carry on the business of banking.
• Bank Failure: closing of an insolvent bank by the licensing authority.
• Bank Insolvency: When a bank’s net worth becomes negative and could no longer meet any of its financial obligations when they fall due.
• Bank Rating: A rating system designed by Bank Supervisors to evaluate the financial condition and performance of banks. It serves as an Early Warning System to detect emerging problems in banks to allow for prompt corrective actions. It provides both qualitative and quantitative approach of evaluating the factors that materially affect the condition, performance and growth of banks. The quantitative approach is undertaken by evaluating Capital Adequacy, Asset Quality, Management, Earnings and Liquidity (CAMEL) parameters. Qualitative Management factors considered include Adherence to Safe and Sound Policies (Compliance with laws and Regulations) and other fundamental factors.
• Bank Run: A series of unexpected cash withdrawals, caused by a sudden decline of depositor confidence or fear that a bank will be closed by the licensing agency and depositors may suffer losses.
• Bank Statements: This is a statement that can be requested at any interval, usually monthly from a bank giving details of transactions in a relevant account.
• Basis Point: smallest measure used to measure changes in or differences between yields or interest rates, equal to one one-hundredth of one percentage point, or .01%.
• Blanket Guarantee: A declaration by the government that all deposits and perhaps other financial instruments will be protected.
• Benchmark: a standard or guideline to which other items or processes can be compared.
• Bridge bank: This is a situation whereby a failed bank is turned over to a new bank specifically set up to assume the assets and liabilities of the failed bank for a specified period of time. The bridge bank would permit continuity of banking services to all customers and fully protect all the depositors and creditors of the failed bank.
• Charges: This is the money paid to the bank for services rendered. e.g. overdraft fees, interest on overdraft and any charges that a business account normally incur.
• Cheque: A cheque is a piece of paper produced by a bank for an account holder with account number, sort-code and number printed on it.
• Cheque Book: A small, bound booklet of cheques.
• Cheque Clearing: This is a process of getting money into the cheque receiver’s account from the cheque writer’s account.
• Claim: An assertion of the indebtedness of a failed institution to a depositor, general creditor, subordinated debt holder, or shareholder.
• Claim Settlement: This involves the processing, verification and settlement of claims filed by proven depositors of the closed banks. It also includes the payment of dividends to uninsured depositors and other creditors of the failed banks.
• Clearing Bank: This is a bank that can clear funds between banks.
• Coinsurance: An arrangement whereby depositors are insured for a pre-specified portion, less than 100 percent of their deposits.
• Compulsory System: A deposit insurance system that all insured institutions must participate in to be member institutions according to law or agreement.
• Contagion: Adverse effects of a single firm that become contagious throughout the industry.
• Corporate Governance: The way in which an organisation is administered, directed or managed by its stakeholders.
• Coverage Ratio: A financial ratio measuring number of depositors that would be protected by deposit insurance either by value or account in case of an insured institutions failure.
• Credit Risk: The risk that promised cash flows from loans and securities held by financial institutions may not be paid in full.
• Debt: Debt refers to a loan to a company that creates an obligation to repay on a particular date, referred to as the maturity date, as well as an obligation to pay a fixed amount of interest on a periodic basis.
• Deposit: Monies lodged by the general public with any insured bank or financial institution whether or not it is for safe-keeping or for the purpose of earning interest or dividend, whether or not such monies are repayable upon demand, upon a given period of notice or upon a fixed date.
• Deposit Insurance: Deposit Insurance is a system established by the Government to protect depositors against the loss of their insured deposits placed with member institutions in the event that a member institution is unable to meet its obligations to depositors.
• Deposit Payout: The payment of insured deposits up to the maximum limit to each insured depositor administered directly or through Agent Banks. It entails an elaborate procedure which includes the verification of accounts and balances, the crediting of interest up to the day of closure, production of deposit register, and the procurement of cheques for payment including other logistics for payment.
• Depositor Priority: Giving priority to depositors such that their claims are in settled in full before remaining creditors’ claims are settled.
• Derivatives: An investment interest whose value is dependent upon the performance of other securities or factors outside of the actual performance of the derivative itself. E.g. stock option.
• Differential Premium: A levy on a bank assessed on the basis of that bank’s risk profile. Under Differential Premium, bank pays premium based on its relative risk of failure.
• Disclosure: A fact, condition, or any relevant information that is revealed unambiguously and publicly.
• Distressed Bank: Distressed Bank is a bank with severe financial, operational and managerial weaknesses which have rendered it difficult for the bank to meet its obligations to depositors, customers, and the rest of the economy as and when due.
• Dual Control: Actions requiring approval by two persons, each being held accountable.
• Due Diligence: In a corporate merger, it is a close examination of operations and management of a potential investment, by investors with a view to verifying material facts.
• Enterprise Risk Management: is the comprehensive, systematic and disciplined process, by which an organization identifies, assesses, manages, monitors and reports on, at any point in time, the significant risks inherent in its objects, strategies, plans and affairs with a view to enhancing its long-term value to its stakeholders.
• Ex-ante funding: The accumulation of a fund to cover deposit insurance claims in anticipation of the failure of an insured bank.
• Explicit Deposit Insurance Scheme (DIS): Usually created by a legal instrument, it provides a formal framework with clear-cut rules and procedures for providing deposit protection, assessment and management of failed and failing deposit-taking institutions. The objectives of the scheme and other operational guidelines relating to such issues as ownership, funding, extent of deposit protection, membership, failure resolution options compatible with stated objectives etc are slated in the enabling statute.
• Ex-post funding: An assessment levied after the failure of an insured bank to provide funds to cover deposit insurance claims.
• Fiduciary Duties: A fiduciary duty is an obligation owed by all corporate directors and officers to the corporation by reason of the position of trust and confidence enjoyed by the director or officer. The two fundamental fiduciary duties are the duty of care and duty of loyalty. These obligations exist regardless of any statutory provision, although the duties may be set forth in statues if desired.
• Financial Assistance: Economic assistance which could take the form of loans, guarantees, subsidies, tax allowance, contribution, or cost-sharing arrangements government agencies or deposit insurers.
• Financial Institutions: Government agency or privately owned entity that collects funds from the public, and from other institutions, and invests those funds in financial assets, such as loans, securities, bank deposits, and income generating property.
• Financial Instruments: A financial instrument evidencing an investment in a company or other economic entity made by the purchaser of the instrument for the purpose of earning an economic return through market appreciation, interest, dividends or a combination of these elements.
• Financial safety net: A financial stability mechanism that usually comprises prudential regulation and supervision, the deposit insurance function, and the lender-of-last-resort function.
• Flat-Rate Premium: A premium assessed at the same rate across all insured institutions.
• Forbearance: Granting an extension of time to certain distressed banks from minimum regulatory requirements.
• Foreign Exchange Risk: The risk that exchange rate changes can affect the value of a financial institution’s assets and liabilities located abroad.
• Holding Actions: Imposition of restrictions on certain activities placed on distressed banks by regulatory/supervisory authorities to enable them undertake self-restructuring measures as a first line of self-salvaging action and to arrest further deterioration in their financial condition.
• Implicit Deposit Protection System (IDPS): The IDPS is a discretionary approach adopted by monetary authorities for propping up some failing deposit-taking institutions in the system. Lack of explicit statutory obligation on the part of government to protect deposits, absence of any prior funding arrangement, lack of any formal rules and procedures for intervention and the use of ad-hoc administrative structures are some of the features of IDPS.
• Insolvency Risk: The risk that a financial Institution may not have enough capital to offset a sudden decline in the value of its assets.
• Insured Deposits: Types of deposits that are covered by a deposit insurance system.
• Insured Deposits Transfer: This involves the transfer of the insured deposits of the closed bank to other sound bank(s) preferably those operating within the same vicinity as the closed bank. The bank(s) assuming the insured deposits would be given enough cash and/or riskless assets to cover the insured deposits transferred from the closed bank.
• Interest Rate Risk: The risk incurred by a financial institution when the maturities of its assets and liabilities are mismatched.
• Internal Control System: A system of objectives and controls designed to provide for the safeguarding of assets and the reliability of financial records.
• Least-cost resolution: Implementing resolution alternative by the deposit insurer or other designated entity that is determined to be less costly to the system compared to other resolution alternatives, including the liquidation of the failed bank.
• Lender-of-last-resort function: The provision of liquidity to the financial system by a central bank.
• Limited-coverage deposit insurance: A guarantee that the principal and the interest accrued on protected deposit accounts will be paid up to a specified limit.
• Liquidation: It is the orderly winding up of the affairs of a failed bank, realization of its assets and settlement of claims against it.
• Liquidation Dividend: A payment made to depositor of a failed insured institution in excess of the insured sum. Liquidation dividend is paid from funds realized from the sale of the assets and recoveries of debts owed to the failed insured institution.
• Liquidity Ratio: financial ratio measuring an entity’s ability to repay its short-term liabilities, measured by evaluating components of current assets and current liabilities.
• Liquidity Risk: The risk that arises from the difficulty of selling an asset, or potential price distortion due to a lack of liquidity.
• Loan Loss Provision: Reserves held by a bank or other lending institution against loans that are not repaid by the borrower.
• Mandate: A mandate is a set of official instructions or statement of purpose of a firm or an organisation.
• Market Discipline: A situation where depositors or creditors assess the risk characteristics of a bank and act upon such assessments to deposit or withdraw funds from a bank.
• Market Risk: the risk incurred in trading assets and liabilities due to changes in interest rates, exchange rates, and other asset prices.
• Market Value: Highest price that a marketable asset will bring in an open and competitive market, assuming that both buyer and seller are informed and acting independently.
• Maximum Coverage: The amount a depositor can claim from the deposit insurer in the event of bank failures.
• Mismatch: A situation in Asset-Liability management when assets and liabilities do not balance. Example when an asset is funded by a liability of a different maturity.
• Moral Hazard: The incentive for additional risk taking that is often present in insurance contracts and arises from the fact that parties to the contract are protected against loss.
• Moral Suasion: Persuasion through formal and informal influence rather than coercion employed by Central Banks and other Supervisory Agencies to make banks comply with rules and regulations.
• Off-Balance Sheet Risk: The risk incurred by a financial institution as the result of activities related to contingent assets and liabilities.
• Off-site Surveillance: basically involves maintaining constant surveillance over the activities of all insured banks through the analysis of their statutory returns and monitoring their compliance with laws and regulations.
• On-site Examination: periodic review of a bank’s records by licensing agency or supervisory agency to determine adherence to laws and regulators as well as verify the quality of its assets. On-site Examination assesses the quality of assets, management, earnings, capital, and funds management, as well as bank’s internal control, audit, management information and accounting system.
• Open Bank Assistance: Is a situation where a failed insured institution is allowed to continue to operate in the same name as a going concern. In may involve change in ownership and management of the bank, injection of fresh funds in the form of equity and or loan capital, and re-organisation and overhauling of the bank including rationalization of staff and branches.
• Operational Risk: The risk that existing technology or support systems may malfunction or break down.
• Pay box: A deposit insurer with powers limited to paying out the claims of depositors.
• Prompt Corrective Action: A supervisory action to provide a timely and non-discretionary triggering mechanism for early intervention of problem financial institutions.
• Purchase and Assumption Transaction: Is a merger-type transaction and it involves the purchase of some or all the assets of a distressed bank and assumption of all its liabilities by another sound insured bank(s).
• Rebate: The return of part of a payment, representing some deduction from the full amount previously paid.
• Receiver: The legal entity that undertakes the winding down of the affairs of an insolvent bank.
• Receivership: The legal procedure for winding down the affairs of an insolvent institution.
• Resolution: The disposition plan for a failed institution.
• Risk Minimiser: A deposit insurer with powers to reduce the risks it faces. These powers may include the ability to control entry and exit from the deposit insurance system, assess and mange its own risks and may conduct examinations of banks.
• Self-Dealing Transaction: A self-dealing transaction, also known as a conflict of interest transaction, occurs whenever a corporation enters into a contract or other business arrangement with a director, officer, or someone with whom a director or officer has a close personal or financial ties.
• Self- Regulation: Can be defined as the system of checks and reviews put in place by an institution to ensure that no party diverts corporate resources to private gain. It includes private-member organisation called Self Regulatory Organisations (SROs).
• Set-off: Detecting a claim of a creditor in an insolvent bank from a claim of the bank against the creditor.
• Standing Order: A regular payment made out of a current account which is of a set amount and is originated by the account holder.
• Systemic Risk: The risk that the failure of one counterparty to meet its obligation when due will result in the inability of other counterparties to meet their obligations when due, resulting in a collapse of the entire financial system.
• Target Ratio: The level for the deposit insurance fund expressed as a percentage of total or insured deposits.
• Too Big to Fail: Protecting uninsured depositors, creditors and others from loss when large banks fail in order to prevent the occurrence of a systemic risk.
• Transparency: Transparency refers to the obligation to make full and readily understandable disclosure of all material facts and events.
• Trust Account: A trust account is one set up by an individual, company, association or group (trustee) for the benefit of another party (beneficiary).
• Uninsured Deposit: Types of deposits that are not covered by a deposit insurance system.