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Appendix B. Glossary
The definitions below provide a quick route back into the concepts used in the chapters. They distinguish economic mechanisms, accounting measures and regulatory categories rather than treating similar-sounding terms as synonyms.
Intermediation, information and contracts
- Adverse selection
- An information problem before contracting in which counterparties differ in characteristics that the other party cannot fully observe. Contract terms can change the mix of applicants that participate.
- Agency relationship
- An arrangement in which one party acts for another. Divergent objectives and incomplete observation can create costs that incentives, monitoring and contractual restrictions try to contain.
- Asset transformation
- The process of acquiring assets with one set of risk, maturity, liquidity, size or currency characteristics and issuing claims with another. The transformation reallocates risk and can create new vulnerabilities.
- Asymmetric information
- A situation in which parties to a transaction possess different relevant information. Adverse selection and moral hazard concern different timings and forms of this problem.
- Broker
- An intermediary acting as an agent to arrange transactions. A dealer instead trades as principal and holds the resulting position on its own balance sheet.
- Collateral
- An asset or right securing an obligation and available to a creditor under the contract and applicable law. Its value depends on enforceability, priority, sale costs and conditions at recovery.
- Commitment
- A lender's contractual promise to provide funds subject to stated conditions. A commitment can create liquidity exposure before it becomes a drawn loan.
- Consumption smoothing
- Using saving, borrowing and insurance to transfer consumption across time or states of the world, subject to an intertemporal resource constraint.
- Covenant
- A contractual obligation or restriction, such as a reporting requirement or leverage limit. Breach can give creditors rights to renegotiate, suspend advances or accelerate repayment.
- Credit rationing
- A situation in which borrowers willing to accept the prevailing terms cannot obtain all the credit they demand. Information and incentive effects can prevent a higher interest rate from clearing the market.
- Delegated monitoring
- Having an intermediary monitor borrowers on behalf of multiple investors, potentially avoiding duplicated effort while creating a separate need to discipline the intermediary.
- Direct finance
- Funding in which the ultimate investor holds a claim issued by the ultimate borrower, even if an intermediary arranges or distributes it.
- Indirect finance
- Funding through an intermediary that holds a claim on a borrower and issues a distinct claim to its own funders.
- Limited liability
- A legal or model feature limiting an investor's losses to a defined stake. The precise liability of a borrower or guarantor depends on the contract and law.
- Moral hazard
- An incentive problem after contracting when a party can take actions that another party cannot fully observe or control and some consequences are borne by others.
- Relationship lending
- Lending based partly on information accumulated through repeated interaction, account activity and borrower contact. It can improve screening while increasing switching costs.
- Screening
- Gathering and assessing information before a transaction to distinguish borrower quality, investment prospects or counterparty suitability.
- Seniority
- A claim's priority relative to other claims in receiving payment or bearing losses. Seniority is different from the probability that the debtor enters default.
- Syndicated loan
- A loan provided by multiple lenders under a coordinated contractual arrangement, often with an arranger and an administrative agent.
Accounts, valuation and credit risk
- Assets
- Resources and claims recognised on an institution's balance sheet, including loans, securities and cash. Book value, market value and liquidation proceeds can differ.
- Cost-to-income ratio
- Operating expenses divided by operating income under a stated definition. Differences in classification and exceptional items affect comparisons.
- Credit spread
- A yield difference relative to a specified benchmark. It can compensate for expected loss, unexpected risk, liquidity and other factors rather than default risk alone.
- Duration
- A measure related to the timing of discounted cash flows and their sensitivity to yield changes. Modified duration provides a local approximation to percentage price changes.
- Equity
- The residual interest after liabilities are deducted from assets. Equity absorbs losses before creditors under the relevant accounting and legal framework.
- Expected loss
- The probability-weighted average credit loss over a specified horizon. A basic exposure-level approximation multiplies default probability, loss given default and exposure at default.
- Exposure at default (EAD)
- The amount exposed when a debtor defaults, potentially including future drawings on committed facilities and other contract-specific items.
- Haircut
- A reduction applied to an asset's reference value for collateral, prudential or sale purposes. The haircut's meaning and valuation base must be stated.
- Impairment allowance
- An accounting adjustment for expected or identified credit losses under the relevant reporting framework. Recognising an expense need not mean that a payment default has already occurred.
- Leverage
- The relationship between an institution's exposures or assets and its capital. Greater leverage magnifies shareholders' sensitivity to asset-value changes.
- Liabilities
- Obligations owed to other parties, such as deposits, debt securities and borrowing. The timing and conditions of payment determine their funding and liquidity implications.
- Loss given default (LGD)
- The fraction of exposure lost conditional on default, after allowing for the assumed recovery process and costs.
- Mark-to-market
- Valuation using current market prices or appropriate market-based estimates. Economic value changes may be relevant even when accounting recognition follows another convention.
- Net interest income
- Interest income less interest expense over a period. It is an amount, while a net interest margin is that amount divided by a specified asset base.
- Nonperforming loan (NPL)
- A loan meeting a defined nonperformance criterion, commonly involving material arrears or unlikeliness to pay. Exact definitions differ across reporting and regulatory frameworks.
- Probability of default (PD)
- The probability of entering a defined default state during a specified horizon. A lifetime PD and a one-year PD are not interchangeable.
- Recovery rate
- The recovered fraction of a specified claim, measured under stated timing, discounting and cost assumptions.
- Return on assets (ROA)
- Net income divided by assets, often average assets over the income period. It measures profitability relative to the asset base.
- Return on equity (ROE)
- Net income divided by equity, often average equity. Leverage can increase ROE while also increasing risk.
- Write-off
- Removal of all or part of a recognised asset when recovery is no longer reasonably expected under the applicable accounting policy. It differs from an earlier impairment allowance.
Funding, crises and safeguards
- Bank run
- A rapid attempt by many creditors or depositors to withdraw or refuse renewal. The expectation that others will withdraw can make early withdrawal individually attractive.
- Bridge loan
- Temporary financing intended to cover a period before longer-term funding or another anticipated cash inflow becomes available. It need not be a revolving facility.
- Capital buffer
- Loss-absorbing resources held above a defined minimum or internal requirement. It is not the same thing as a stock of cash available for withdrawals.
- Contagion
- Transmission of distress across institutions or markets through contractual exposures, common assets, information, confidence or funding channels.
- Deposit insurance
- A scheme protecting eligible depositors within defined coverage limits and conditions. Coverage of principal does not automatically cover every promised interest payment or every type of claim.
- Deposit franchise
- The economic value associated with a bank's ability to attract and retain deposits on advantageous terms, allowing for servicing costs, customer behaviour and competition.
- Fire sale
- A sale driven by urgent funding needs at a price depressed by limited buyer capacity or market illiquidity. Such sales can transmit losses to other holders of similar assets.
- Funding liquidity
- The ability to obtain cash or other immediately usable means of payment to meet obligations when due.
- High-quality liquid assets (HQLA)
- Assets satisfying the eligibility and valuation conditions of a liquidity framework. Their role is to provide reliable resources under stress.
- Illiquidity
- Inability to meet payments on time using available funds or reasonable funding options, even where ultimate asset values may exceed liabilities.
- Insolvency
- A condition in which an institution cannot meet the applicable solvency test, often associated economically with asset values below liabilities. Legal definitions depend on jurisdiction.
- Lender of last resort
- A central bank or other designated institution providing emergency liquidity under specified conditions when ordinary funding channels fail.
- Liquidity coverage ratio (LCR)
- A regulatory ratio comparing eligible liquid assets with stressed net cash outflows over a 30-day horizon, using prescribed definitions and adjustments.
- Maturity transformation
- Funding longer-lived assets with claims that mature or can be withdrawn earlier. The resulting renewal and liquidity risks require active management.
- Net stable funding ratio (NSFR)
- A regulatory measure comparing available stable funding with the required stable funding of assets and activities over a longer horizon.
- Refinancing risk
- The risk that maturing obligations cannot be replaced on feasible terms, even when the underlying project or asset has not reached its final cash-flow date.
- Resolution
- A framework for handling a failing financial institution while pursuing defined public objectives, potentially including continuity of critical functions and allocation of losses to investors.
- Risk-weighted assets (RWA)
- A regulatory exposure measure incorporating specified risk weights or model-based requirements. It is not the accounting total of assets.
- Systemic risk
- The risk of financial disruption with consequences for the functioning of the broader system and the real economy, including amplification through interconnected institutions and common exposures.
Markets, money and payments
- Asset-backed security (ABS)
- A security whose payments depend on an underlying pool of financial assets, subject to the transaction's legal structure and payment rules.
- Attachment and detachment points
- The pool-loss thresholds at which a tranche begins to absorb losses and becomes fully exhausted.
- Broad money
- A monetary aggregate including currency and specified deposit-like instruments held by designated sectors. Its composition depends on the statistical definition used.
- Central bank digital currency (CBDC)
- A digital monetary liability of a central bank designed for a defined group of users and payment functions. Retail and wholesale proposals differ in access and purpose.
- Clearing
- Processing and reconciling transaction instructions and determining the resulting obligations before final settlement.
- Closed-loop balance
- A prepaid balance usable within a defined merchant or platform network, rather than general-purpose money accepted everywhere.
- Correspondent banking
- An arrangement in which one bank provides payment, account or other services to another, often across borders.
- Credit creation
- Expansion of loan claims and associated obligations. A bank loan commonly creates a deposit at origination, while subsequent payments require settlement and funding management.
- Custody
- Safekeeping and administration of assets and records on behalf of clients, with appropriate segregation and ownership controls.
- Digital wallet
- An interface or arrangement for storing payment credentials, accessing account balances or controlling digital assets. Its economic and legal functions depend on what it actually holds or accesses.
- Interchange fee
- A payment between participating institutions within a card arrangement under its rules. It differs from the total fee a merchant pays its payment provider.
- Investment banking
- Activities including securities issuance, underwriting, capital-raising advice and mergers-and-acquisitions services. Different activities involve different agency and principal risks.
- Market liquidity
- The ability to trade an asset promptly in meaningful size without an excessive price concession. It can deteriorate precisely when many holders need cash.
- Monetary base
- Central-bank monetary liabilities included in the chosen definition, commonly currency and bank reserves. It differs from broad money held by the public.
- Money destruction
- Reduction of monetary claims, such as when repayment of bank-loan principal cancels a deposit liability and the corresponding loan asset.
- Network effects
- Changes in the value of a service as the number or composition of its users changes. Payment platforms can link adoption on the customer side to acceptance on the merchant side.
- Quantitative easing (QE)
- Central-bank asset purchases used for monetary-policy purposes. Their balance-sheet effects depend on the seller and settlement chain; reserves are not mechanically lent onward to households.
- Redemption
- Exchanging a financial claim for the assets or money promised under its terms. Legal entitlement and practical access are as important as the issuer's stated backing.
- Reserves
- In monetary accounting, bank balances at the central bank used for settlement and other permitted purposes. Stablecoin reserve assets are a different category and should not be confused with central-bank reserves.
- Securitisation
- Financing or risk transfer using securities linked to a pool of exposures, often with different priorities and loss-bearing tranches.
- Settlement
- Discharge of a payment or securities obligation through the final transfer of the required asset, subject to the relevant system's rules and legal finality.
- Special-purpose vehicle (SPV)
- An entity established for a defined transaction or activity, frequently used to hold securitised assets. Legal separation and risk transfer depend on the actual structure.
- Stablecoin
- A crypto-asset designed to maintain a stable value relative to a reference asset or unit. A target value does not guarantee that market prices or redemption proceeds always equal it.
- Tokenisation
- Representing claims or assets in digital-token form within a specified infrastructure. It does not by itself change the underlying economic claim, legal priority or credit risk.
- Tranche
- A class of claims with a defined position in a payment or loss waterfall. A senior tranche can remain exposed to correlated or sufficiently severe pool losses.
- Underwriting
- Assessment and assumption of defined risks in lending, insurance or securities issuance. In an issuance, the underwriter's commitment determines how much placement risk it bears.