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.
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.
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.
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.
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.
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.
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Managed currency is currency whose exchange rate is controlled by a central bank.
Let's say Country X's currency is called the Widget.
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.
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.
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.
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.
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.
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.
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.
Since online banks usually don't have a network of physical locations they have lower operating costs.
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.
Person to person payments allow you to transfer funds from your bank account or credit card to another individual.
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.
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.
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.
