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Banking & Financial System
Bank balance sheets and the broader financial system. 5 indexed terms, 25 additional definitions.
Key Concepts
Interbank Lending
Interbank lending is the market where banks borrow and lend reserves to each other, primarily on an overnight basis, and the rate on these transactions is a key monetary policy benchmark.
Money Market Fund
Money market funds are mutual funds that invest in short-term, high-quality debt securities, offering investors a cash-like investment with slightly higher yields than bank deposits.
Prime Rate
The prime rate is the interest rate commercial banks charge their most creditworthy borrowers, and it benchmarks many consumer and business lending products.
Secured Overnight Financing Rate
The Secured Overnight Financing Rate is the full name for SOFR, the benchmark rate measuring the cost of overnight cash borrowing collateralized by Treasury securities in the U.S. repo market.
Stress Test
Bank stress tests are regulatory exercises that evaluate whether financial institutions can maintain adequate capital during hypothetical severe economic downturns.
Show 25 additional definitions ▾
Bank Holding Company
A bank holding company is a corporation that owns or controls one or more banks, allowing diversified financial activities while subjecting the entire group to Federal Reserve supervision.
Banking Crisis
A banking crisis occurs when widespread bank failures or severe stress across the banking system threaten financial stability, often requiring government intervention to prevent economic collapse.
Bank Run
A bank run occurs when a large number of depositors withdraw their funds simultaneously due to fears about the bank's solvency, potentially causing the bank to fail even if it was previously solvent.
Basel III
Basel III is an international regulatory framework that strengthened bank capital requirements, introduced liquidity standards, and added leverage ratio constraints after the 2008 financial crisis.
Capital Adequacy
Capital adequacy measures whether a bank holds enough capital to absorb losses and protect depositors, expressed as a ratio of capital to risk-weighted assets.
Certificates of Deposit
Certificates of deposit (CDs) are time deposits offered by banks that pay a fixed interest rate for a specified term, typically offering higher yields than savings accounts in exchange for locking up funds.
Commercial Paper
Commercial paper is an unsecured short-term debt instrument issued by corporations to fund working capital needs, typically maturing in 1 to 270 days.
Correspondent Banking
Correspondent banking is a system where banks hold accounts with each other to facilitate cross-border payments and international financial transactions on behalf of their customers.
Deposit Insurance
Deposit insurance is a government-backed guarantee that protects bank depositors from losing their funds if a bank fails, currently covering up to $250,000 per depositor per bank in the U.S.
Discount Window
The discount window is the Federal Reserve's lending facility where banks can borrow reserves directly from the Fed, typically at a rate above the federal funds rate, a backup source of liquidity.
Dodd-Frank Act
The Dodd-Frank Act is comprehensive U.S. financial reform legislation enacted in 2010 in response to the 2008 financial crisis, creating new regulatory agencies, strengthening oversight, and restricting risky bank activities.
FDIC
The FDIC is a U.S. government agency that insures bank deposits up to $250,000 per depositor per bank, maintaining public confidence in the banking system.
Fractional Reserve Banking
Fractional reserve banking is the system in which banks hold only a fraction of deposits as reserves and lend out the rest, enabling credit creation and money supply expansion.
LIBOR
LIBOR was the benchmark interest rate at which major global banks lent to one another, underpinning trillions in financial contracts before being phased out due to manipulation scandals and replaced by rates like SOFR.
Loan-to-Deposit Ratio
The loan-to-deposit ratio measures how much of a bank's deposits are used for lending, indicating liquidity risk and the bank's ability to fund future loan growth.
Net Interest Margin
Net interest margin (NIM) is the difference between interest income earned on loans and investments and interest paid on deposits and borrowings, expressed as a percentage of earning assets.
Reserve Requirement
Reserve requirements are the minimum amount of deposits that banks must hold as reserves rather than lend out, historically used as a monetary policy tool to control money supply growth.
Risk-Weighted Assets
Risk-weighted assets are a bank's total assets adjusted by risk factors, with higher-risk assets requiring more capital backing, forming the denominator of capital adequacy ratios.
Shadow Banking
Shadow banking refers to credit intermediation activities conducted outside the traditional regulated banking system, including money market funds, hedge funds, private credit, and other non-bank financial entities.
SOFR
SOFR is the benchmark interest rate based on overnight Treasury repurchase agreement transactions, replacing LIBOR as the primary reference rate for U.S. dollar financial products.
SWIFT
SWIFT is a global messaging network used by banks and financial institutions to send and receive standardized financial transaction instructions, processing trillions of dollars daily.
Systemically Important Financial Institutions
Systemically important financial institutions (SIFIs) are firms whose failure could trigger a financial crisis, subjecting them to enhanced regulatory oversight, higher capital requirements, and mandatory resolution planning.
Tier 1 Capital
Tier 1 capital is the highest quality bank capital, consisting primarily of common equity and retained earnings, serving as the primary buffer against losses.
Too Big to Fail
Too big to fail describes financial institutions so large and interconnected that their failure would cause catastrophic damage to the broader economy, leading governments to intervene with bailouts.
Volcker Rule
The Volcker Rule is a provision of the Dodd-Frank Act that prohibits banks from proprietary trading and restricts their investments in hedge funds and private equity funds.
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