Dictionary - Banking Fundamentals
# 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

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

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 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 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 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

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

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

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

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

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

International Banking Facility (IBF)

An international banking facility (IBF) is a segregated branch of a domestic bank or financial institution available to only foreign customers. International banking facilities provide a range of lending and multicurrency depository services, but only to foreign residents and institutions. 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

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

Large Value Transfer System (LVTS)

The large value transfer system (LVTS) is a wire system in Canada that allows banks to transfer funds among each other. The Bank of Canada and the country's department of finance developed the LVTS, which is now owned by the Canadian Payments Association. 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

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

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

A national bank is a bank that is a member of the Federal Reserve system and the Federal Deposit Insurance Corp.In global terms, a national bank is a country's central bank. 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

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

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

Online Banking

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

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

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

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

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

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