Dictionary - Banking
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

ABA Bank Index

The ABA Bank Index is a composite market index comprised of small retail and community banks. Traded on the Nasdaq, the ABA Bank Index is made up of 440 small banking institutions nationwide. Read more

Account Balance

An account balance is a statement of how much money is in an account. For example, let's say John Doe deposits $100 into a new bank account. Read more

Account Hold

Also called an account freeze, an account hold occurs when a bank or other financial institution prevents any transactions from hitting an account. For example, let's say John Doe is selling drugs for a living. Read more

Allowance for Bad Debt

An allowance for bad debt is essentially a reduction in a bank's accounts receivable.The allowance for bad debt equals the amount of the banks loans that it does not expect to collect. Read more

Back-to-Back Letters of Credit

Back-to-back letters of credit occur when a buyer gives a letter of credit to a seller, who then obtains a letter of credit for a supplier. A letter of credit is a bank's written promise that it will make a customer's (the holder) payment to a vendor (called the beneficiary) if the customer does not. Read more

Backup Line

A backup line is a bank promise that a commercial paper issuer will repay the maturing debt. For example, let’s assume Company XYZ wants to issue $10 million in commercial paper. Read more

Bad Check

A bad check is a check written on an account that doesn't have enough funds to cover the amount of the check. For example, let's assume that John has $1,000 in his checking account today. Read more

Balance Protection

Also called overdraft protection, balance protection is a feature on a checking account that prevents a customer from bouncing checks. A bad check is a check written on an account that doesn't exist or that has insufficient funds to cover the amount of the check. Read more

Bank Card

A bank card is a plastic card issued by a financial institution that allows the user to make purchases with funds either borrowed from or held at that financial institution. The most common bank cards are credit cards and debit cards. Read more

Bank Card Association

A bank card association is a company owned by one or more financial institutions that licenses credit card programs. The two most popular bank card associations are Visa and MasterCard. Read more

Bank Credit

Bank credit is an amount of funds that a person or business can borrow from a bank. All kinds of things can be bank credit: mortgages, credit card accounts and even overdraft lines. Read more

Bank Debits

Bank debits are reductions in customer accounts. Let's say you write a check at Target for $50. Read more

Bank Deposits

A bank deposit involves the placement of funds into an account with a bank. There are two general types of bank deposits: demand deposits and time deposits. Read more

Bank Draft

A bank draft is a check that a bank guarantees. Bank drafts are not common in the United States; they are more popular in Britain. Read more

Bank Efficiency Ratio

A bank efficiency ratio is a measure of a bank's overhead as a percentage of its revenue. The formula varies, but the most common one is: Bank Efficiency Ratio = Expenses* / Revenue *not including interest expense For example, if Bank XYZ's costs (excluding interest expense) totaled $5,000,000 and its revenues totaled $10,000,000, then using the formula above, we can calculate that Bank XYZ's efficiency ratio is $5,000,000 / $10,000,000 = 50%. Read more

Bank Endorsement

A bank endorsement is an assurance that it will stand behind a check or other negotiable instrument that one of its customers creates. Let's say you want to buy 1,000 cars from a Canadian wholesaler on the Internet. Read more

Bank Failure

A bank failure occurs when a regulator closes an insolvent bank.An insolvent bank can't meet its obligations to depositors (e.g., it doesn't have the money to meet withdrawal demands) or to creditors (i.e., it can't pay its debts). Read more

Bank Guarantee

A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss.note that a bank guarantee is not the same as a letter of credit (see the differences between those two below). Read more

Bank Holiday

A bank holiday is a day on which a bank or banking system is closed. In the United States, banks and financial markets generally cannot be closed for more than four calendar days in a row, which puts some limits on the timing and quantity of bank holidays. Read more

Bank Identification Number (BIN)

A bank identification number (BIN) identifies and verifies parts of a bank transaction. For example, when you purchase something with your Visa card, the vendor and the payment processor receive a six- to nine-digit ID number. Read more

Bank Investment Contract (BIC)

A bank investment contract (BIC), also sometimes called a Bank Deposit Agreement, is an agreement between a bank and an investor whereby the bank provides a guaranteed rate of return in exchange for keeping a deposit for a fixed period of time (several months to several years). BICs are similar to guaranteed investment contracts (GICs) except that they are issued by banks rather than insurance companies. Read more

Bank Reserve

A bank reserve is a portion of a bank's deposits that are set aside in a liquid account to ensure that the bank has enough cash on hand to fulfill withdrawal requests. Reserve requirements are Federal Reserve rules that require banks and other financial institutions to keep a strict percentage of their deposits on reserve at a Federal Reserve bank. Read more

Bank Run

A bank run occurs when a flood of depositors withdraws funds from a bank within a short time frame. It’s important to remember one thing about banks: They don’t keep your money in cash in a vault. Read more

Bounced Check

When a check is refused by a bank and returned to the person who wrote it due to insufficient funds, it is called a bounced check. Checks should be written for an amount that is less than or equal to the checking account balance at the time the check is deposited or cashed by the recipient. Read more

Bump-Up Certificate of Deposit (CD)

A bump-up certificate of deposit (CD), also called a step-up CD, is a certificate of deposit that allows the owner to “bump up” the interest rate if rates should rise during the CDs’ holding period.A bump-up CD will typically offer a slightly lower rate than a CD without the option, due to its flexibility. Read more

Callable Certificate of Deposit (Callable CD)

A callable certificate of deposit (callable CD) is a time deposit with a bank or financial institution.But unlike other CDs, callable CDs can be redeemed by the issuer before the maturity date. Read more

CAMELS

CAMELS is a system used to rate banks. In order to ensure their financial strength, banks must undergo periodic examinations by a federal agency (usually the Office of the Comptroller of the Currency). Read more

Cashier's Check

A cashier's check is a check that guarantees the availability of the underlying funds because it is drawn upon and issued by the bank itself. To obtain a cashier's check, a person must first deposit funds equal to the check amount with the issuing bank. Read more

Certificate of Deposit Account Registry Service (CDARS)

A for-profit service run by the Promontory Interfinancial Network, the Certificate of Deposit Account Registry Service (CDARS) allows investors to purchase certificates of deposit (CDs) across a network of multiple banks in order to access FDIC insurance beyond the $250,000 single-institution limit. When investors are looking to make a CD purchase that exceeds the limit, the bank they are using will employ the CDARS system in order to locate multiple CDs that can accommodate the customer’s needs. Read more

Certified Check

A certified check is a check for which the issuing bank guarantees payment. Let's assume you want to rent an apartment from the XYZ Leasing Company but your credit is bad. Read more

Checkable Deposits

Checkable deposits are bank accounts against which checks can be drawn.There are different types of checkable accounts offered by retail banks and credit unions: deposit accounts, interest-bearing accounts, and money market accounts.  Checkable deposits are payable on demand, which means that when a depositor demands payment by making a withdrawal of funds, the bank is obliged to pay it immediately in the exact amount requested. Read more

Christmas Club

Banks offer different types of savings accounts any time of year.A way to save money toward holiday shopping and seasonal spending is a Christmas Club account. Read more

Commercial Bank

A commercial bank is a financial institution that offers checking accounts, demand deposits, business and personal loans, savings vehicles and a variety of other related financial services. Commercial banks are owned by shareholders and are run for a profit, which is largely obtained by lending at rates higher than they pay their depositors. Read more

Compound Interest

The financial world often refers to compound interest as magic.Compound interest can be thought of as “interest building on interest” which adds to your principal. Read more

Consolidated Reports of Condition

Consolidated Reports of Condition are reports that are filed quarterly by banks and all regulated financial institutions with the Federal Financial Institutions Examination Council (FFIEC). Consolidated Reports of Condition are commonly referred to as a call report. Read more

Daylight Overdraft

A daylight overdraft occurs when a bank transfers out more in a day than it has in its reserves. Let's say Bank XYZ has assets of $100 million. Read more

Demand Deposit

A demand deposit is an account with a bank or other financial institution that allows the depositor to withdraw his or her funds from the account without warning or with less than seven days' notice. Read more

Deposit Interest Rate

The deposit interest rate is the rate of interest earned on a deposit account held by a depositor at a bank or savings institution.Common types of deposit accounts include savings accounts, interest-bearing checking accounts, and certificates of deposit. For example, your local bank may offer a deposit interest rate of 0.5% per year on your savings account balance. Read more

Efficiency Ratio

An efficiency ratio is a measure of a bank's overhead as a percentage of its revenue. The formula varies, but the most common one is: Efficiency Ratio = Expenses* / Revenue *not including interest expense For example, if Bank XYZ's costs (excluding interest expense) totaled $5,000,000 and its revenues totaled $10,000,000, then using the formula above, we can calculate that Bank XYZ's efficiency ratio is $5,000,000 / $10,000,000 = 50%. Read more

Electronic Funds Transfer (EFT)

An electronic funds transfer (EFT) allows payments between two parties via electronic signals.Electronic funds transfers began in the 1960s but became widespread in the 1970s with the introduction of the automatic teller machine (ATM).  Since then, electronic fund transfers have become ubiquitous, with millions of transactions taking place every day. Read more

Eurobank

A eurobank is a financial institution that makes loans and accepts deposits in foreign currencies -- simplifying international trade, transactions and investing. If an American company wants to buy parts from a European company, it can use a eurobank to obtain the proper currency. Read more

FDIC Insured Account

An FDIC insured account is a bank account whose balance is covered by the Federal Depository Insurance Corporation (FDIC) in the event of a bank failure. The FDIC is an agency of the U.S. Read more

Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an agency of the U.S.government that insures deposits in banks and thrift institutions, supervises the risks associated with these insured funds, and limits the repercussions on the economy when a bank or thrift institution fails. Read more

Federal Home Loan Bank System (FHLB)

Created by Congress in 1932, the Federal Home Loan Bank System (FHLB) is a lending system for financial institutions. FHL banks offer loans to their members, which are other banks, credit unions, community development financial institutions and insurance companies. Read more

Federal Reserve System (FRS)

The Federal Reserve System (FRS) is the U.S.'s central bank.The Federal Reserve manages the economy's money supply, regulates the banking industry, acts as a clearinghouse for checks and other payments conducted through the banking system, operates the U.S. Read more

Fixed Rate Certificate of Deposit (CD)

A certificate of deposit (CD) is a savings investment where the investor commits to depositing funds for a set period of time, such as six months, one year, or five years.In exchange for the investor’s commitment of the funds for that time, the issuing bank pays higher interest than for a demand deposit. Read more

Frozen Account

A frozen account refers to a situation where an individual is unable to withdraw money from a bank account due to a court order. A bank account is commonly frozen when the account holder owes money to another party. Read more

Gnomes of Zurich

Gnomes of Zurich is a slang, and often derogatory, term referring to Swiss bankers. A gnome is a mythical greedy creature that lives underground and guards money. Read more

Group Banking

Group banking is offered by some banks to incentivize a whole group of people, like employees of a company, to have a relationship with the banking institution. A bank may team up with a large employer and offer its employees special benefits if they open an account with direct deposit. Read more

High Street Bank

A High Street Bank is a retail bank in the United Kingdom that has many locations. The term gets its name from the British equivalent of "Main Street" in the United States. Read more

Indexed Certificate of Deposit (CD)

An indexed certificate of deposit (sometimes called a market-linked, equity-linked, or market-indexed CD) is a type of CD that’s based on either a market index, a basket of equities, or a combination of the two.Indexed CDs usually have longer terms than traditional CDs. Read more

Interbank Rate

LIBOR is one of the most widely used benchmarks for short-term interest rates and is unlike the prime rate in the United States, which is somewhat arbitrarily based on certain banks' lending costs plus a profit margin.Borrowers thus generally support the use of LIBOR in interest-rate calculations because it represents a true market rate. Read more

Interchange Rate

An interchange rate is a bank fee for executing credit card and debit card transactions. An interchange is an electronic transfer of information. Read more

Itemized Statement

An itemized statement is a detailed record of certain activity that has occurred in an account for a given period of time. Monthly bank statements for common checking accounts often are itemized statements. Read more

Jumbo CD

A jumbo CD is a certificate of deposit of $100,000, $1 million or more. Let's say Company XYZ is a retirement fund for a firefighters' union. Read more

Key Rate

A bank or other institution uses the key rate to determine the interest rate on debt.In the United States, there are two key rates: the discount rate and the Fed Funds rate. Read more

Kiting

Kiting is the illegal practice of exploiting settlement delays to transfer unavailable funds from one bank account to another.In the brokerage industry, kiting occurs when a securities firm fails to settle buy and sell orders by the proper settlement deadline. Read more

Lead Bank

In the securities industry a lead bank is a company, usually an investment bank, that helps companies introduce their new securities into the market by leading a syndicate of investment banks to issue the securities.  When a company decides it wants to issue stock, bonds, or other publicly traded securities, it hires an underwriter to manage what is a long and sometimes complicated process. Read more

Liquid Certificate of Deposit

A liquid CD allows you to withdraw money without penalty before the CD matures.These financial instruments are sometimes known as risk-free or no-penalty CDs.  Traditional CDs typically cannot be cashed out before a certain date, known to investors as the fixed maturity date. Read more

London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is the base lending rate banks charge each other in the London wholesale money market. LIBOR is an average of inter-bank deposit rates offered by members of the British Bankers Association (BBA). Read more

M Banking

M banking is the use of a smartphone or other cellular phone to conduct tasks such as monitoring account balances, transferring funds between accounts, bill payment and locating an ATM while away from a computer. M banking typically operates across all major U.S. Read more

Managed Currency

Managed currency is currency whose exchange rate is controlled by a central bank. Let's say Country X's currency is called the Widget. Read more

Market-Linked CD

A market-linked certificate of deposit (CD), also called an indexed or equity-linked CD, is a type of CD where the rate of return is based on either a market index, a basket of equities, or a combination of the two.When the market is doing well, so is the return on the CD. Read more

Merchant Bank

A merchant bank is a financial institution that engages in underwriting and business loans, catering primarily to the needs of large enterprises and high net worth individuals.In the British market, the term merchant bank refers to an investment bank. Read more

Mobile Banking

The broadest definition of mobile banking refers to any banking activities conducted on a cell phone.Common functions of mobile banking include receiving text alerts for fraudulent activities, accessing your account via the bank’s app, and using the bank’s website on your mobile device. Read more

Money Market Account

Money market accounts are a type of savings account that can be opened at any bank or credit union.Money market accounts usually offer higher interest rates than checking accounts and also allow individuals to write checks and use a debit card. Read more

Money Market Fund

A money market fund is a type of mutual fund that invests in high quality, short-term debt securities.Money market funds are characterized by high liquidity, meaning they can be readily converted into cash. Read more

Money Market Rates

Money market accounts (also known as high-yield savings accounts) offer a safe way to earn returns on your money while still keeping access to the funds.The returns you earn are based on the money market rate.  The money market rate, or interest your money can earn, makes these accounts a popular choice for storing short term savings (like an emergency fund). Read more

Mutual Savings Bank

A mutual savings bank (MSB) is a type of financial institution that functions much like a bank, but with a different ownership structure.Instead of shareholders owning marketable shares, a mutual savings bank is owned by its depositors, much like a credit union. Read more

National Bank Surveillance System

The National Bank Surveillance System is a computer system that collects financial information about banks. The U.S. Read more

Near Money

Near money is a term for highly-liquid assets that are quickly and easily converted into cash.They may also be referred to as cash equivalents.  Examples of Near Money  Examples of near money investments are interest-bearing savings accounts, certificates of deposit, money market accounts, marketable securities, short-term U.S. Read more

Negative Gap

A negative gap occurs when a bank's interest-bearing liabilities exceed its interest-earning assets. Let's assume Bank XYZ has $40 million of interest-rate sensitive assets (mostly loans) and $70 million of interest-rate sensitive liabilities (CDs, savings accounts, etc.). Read more

Negative Verification

Negative verification is a bank method for verifying bank records. For example, let's assume Bank XYZ is performing an internal audit of the computer system that generates customers' monthly bank statements. Read more

Negotiable Certificate of Deposit (NCD)

A negotiable certificate of deposit (NCD) is a certificate of deposit that differs from a conventional CD in that its terms are negotiated with the issuer.Another difference is that it can be sold in the secondary markets before maturity. Read more

Negotiable Instrument

A negotiable instrument is a signed document that gives the bearer of the document permission to obtain a certain amount of money.  Checks are the most common negotiable instrument. Read more

Negotiable Order of Withdrawal (NOW) Account

A negotiable order of withdrawal account (NOW) is an interest-earning bank account in which the account holder can write checks against the balance.Most mutual savings banks, commercial banks, savings and loan associations, and credit unions offer NOW accounts. Thus a NOW account, in simple terms, can be considered a checking account that pays interest. Read more

Net Settlement

In banking, net settlement is simply the sum of the day's credits and debits. Let's assume XYZ Bank has the following activity today: Outflows:Cash withdrawals        $400,000Debit card transactions    $500,000Credit card transactions    $300,000 Total                $1,200,000 Inflows: Check deposits    $275,000 CD purchases        $100,000 Cash deposits        $125,000 Total            $500,000 Net settlement = $500,000 - $1,200,000 = -$700,000   Banks send their net settlement data to each other and to Federal Reserve bank banks in order to collect or pay amounts due from or to one another. Read more

New York Clearing House Association

The New York Clearing House Association, founded in 1853, is the country's first and largest bank clearing house.The Clearing House was created to streamline the bank settlement process, which had grown convoluted during America's "Expansionist" period of unregulated capitalism. Read more

No Penalty CD

A no penalty CD is a type of certificate of deposit.A certificate of deposit, or CD, is a financial product offered by banks and credit unions for personal savings and investing. Read more

Non-Sufficient Funds (NSF)

Non-sufficient funds (NSF) occurs when a bank customer writes a check that is presented on an account that doesn’t exist or that has insufficient funds to cover the amount of the check. Let’s assume that John Doe has $1,000 in his checking account today. Read more

Off-Premise Banking

Off-premise banking refers to regular banking transactions that happen outside of a physical bank, typically at automated teller machines (ATMs). For example, let's assume that Bank XYZ is headquartered in Denver, Colorado. Read more

Offline Transaction

An offline transaction, also known as a signature debit transaction, is a payment method that uses a debit card to transfer funds from a checking account to a merchant across a digital credit card network. When you pay for goods or services with your debit card, you have the option to process your payment in one of two ways: 1) as an offline transaction via a credit card processing network, or 2) as an online transaction via an electronic funds transfer (EFT) system. Read more

Online Banking

Since online banks usually don't have a network of physical locations they have lower operating costs. Read more

Online Transaction

Though it might seem straightforward, there are a few steps for you to understand about online transactions Read more

Overdraft

An overdraft, also called non-sufficient funds (NSF), occurs when a bank customer writes a check that is presented on an account that doesn’t exist or that has insufficient funds to cover the amount of the check. Let’s assume John Doe has $1,000 in his checking account today. Read more

Passbook Savings Account

A passbook savings account is the classic name for a traditional savings account.Though it may seem quaint now, tellers record the deposits, withdrawals, and interest earned for account holders in a small physical booklet called a passbook. Read more

Person to Person Payments (P2P)

Person to person payments allow you to transfer funds from your bank account or credit card to another individual. Read more

Retail Banking

Retail banking refers to the consumer-oriented services offered by commercial banks.These services include checking and savings accounts, mortgages and various types of loans and investment services relating to retirement and educational planning. Read more

Run

A run occurs when a flood of depositors withdraw their funds from a bank within a short time frame. It’s important to remember one thing about banks: They don’t keep your money in cash in a vault. Read more

Safe Deposit Box

A safe deposit box is a metal box, usually housed in a bank vault, that customers can rent in order to keep valuables, legal documents and other prized possessions in a secure location.  Obtaining a safe deposit box is usually as simple as going to a local bank and asking for one. Read more

Safekeeping Certificate

A safekeeping certificate is a document that proves that a person owns a security or a certificate of deposit (CD). An American Depository Receipt (ADR) is one of the most common forms of safekeeping certificates. Read more

Same-Day Funds

Same-day funds can be deposited and then withdrawn on the same day. Let's say John Doe gets paid every other Friday. Read more

Savings

In economics, savings is the amount that is left after spending.In banking, savings refers to savings accounts, which are short-term, interest-bearing deposits with a bank or other financial institution. Read more

Savings Account

A savings account is a low-risk, interest-bearing deposit with a bank or other financial institution. Technically, savings accounts are time deposits, meaning that a bank can require the account holder to give notice before withdrawing the funds or impose a penalty for withdrawal before a specified date. Read more

Savings Club

Savings clubs most commonly refer to a special type of account that provides a way to regularly save for a specific goal or event.These accounts historically came with a savings passbook with coupons which helped make the act of saving more convenient and automatic.  Christmas club accounts are an example of this type of account, which provide a way to save in advance for larger expenditures during the holidays. Read more

Signature-Debit Transaction

A signature-debit transaction, also known as an offline transaction, is a payment method that uses a debit card to transfer funds from a checking account to a merchant across a digital credit card network. When you pay for goods or services with your debit card, you have the option to process your payment in one of two ways: 1) as a signature-debit transaction via a credit card processing network, or 2) as an online transaction via an electronic funds transfer (EFT) system. Read more

Smartphone Banking

Smartphone banking is the use of a smartphone or other cellular device to perform tasks such as monitoring account balances, transferring funds between accounts, bill payment and locating an ATM while away from your home computer. Smartphone banking typically operates across all major U.S. Read more

Tax-Free Savings Account (TFSA)

In Canada, a tax-free savings account (TFSA) is a federal program that allows Canadians to avoid paying taxes on interest earned in specific savings accounts. Canadians with valid Canadian Social Insurance Numbers can open a tax-free savings account (TFSA). Read more

Term Deposit

Also referred to as a time deposit or a certificate of deposit (CD), a term deposit is a type of fixed-term deposit, typically at a banking institution.Term deposits will usually have short-term maturities that can range from a few months to a few years. Read more

Traveler's Check

A traveler's check is a certified note issued by a bank that may be used by travelers as a risk-free substitute for paper currency. When individuals travel, particularly abroad, they often need cash to cover certain expenses. Read more

Underbanked

A person is underbanked when he or she does not participate in the banking system very much and instead relies on the use of cash rather than checks or credit cards.In the securities world, underbanked can also mean that the underwriter of a security offering is unable to get more financial institutions to join the underwriting syndicate. Read more

Underwriting

Underwriting is the process that a lender or other financial service uses to assess the creditworthiness or risk of a potential customer.  Underwriting also refers to an investment banker's process of packaging and selling a security on behalf of a client. Read more

Uninsured Certificate of Deposit (CD)

An uninsured certificate of deposit (CD) is a certificate of deposit that is not covered by depositor’s insurance.Certificates of deposit (CDs) are insured up to the maximum allowable amounts by either the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) insurance if they are issued by U.S. Read more

Variable-Rate Certificate of Deposit

A variable-rate certificate of deposit (CD) is a CD with an interest rate that can change. A CD is an investment whereby the investor deposits a certain amount of money with a bank or credit union, which agrees to pay interest on that deposit for the duration of the deposit. Read more

Warehouse Financing

Warehouse financing occurs when a lender lends to a borrower who uses inventory as collateral. Let's assume Company XYZ wants to borrow $2 million to expand its operations. Read more

World Bank

The World Bank is an international financial institution dedicated to reducing poverty around the world through capital investment and the facilitation of trade. Based in Washington, D.C., the World Bank is funded and managed by several member countries, with the United States providing the majority of funding and holding the highest percentage of voting power. Read more

Yankee CD

A Yankee CD is a certificate of deposit issued by a foreign bank in the United States and denominated in U.S.dollars. Read more