"Banking" Terms
What is Ability to Pay?Ability to pay refers to a borrower’s capacity to make good on his loan obligations. In banking, ability to pay is often called “financial capacity.”How Does
What is an Account Balance?
An account balance is a statement of how much money is in an account.
How Does an Account Balance Work?
For example, let's say John Doe deposits $100 into a new
What is an Account Freeze?Also called an account hold, an account freeze occurs when a bank or other financial institution prevents any transactions from hitting an account.
How Does an Account
What is an 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.
How Does an Account Hold
What is Average Balance?Average balance is either the simple or the weighted average balance of a financial account during some period of time.How Does Average Balance Work?A simple average balance
What is Average Daily Balance Method?The average daily balance method is a way of calculating interest by considering the balance owed or invested at the end of each day of the period rather than the
What is the Bank Card Association?A bank card association is a company owned by one or more financial institutions that licenses credit card programs.
How Does the Bank Card Association Work?The two
What is Bank Credit?Bank credit is an amount of funds that a person or business can borrow from a bank.
How Does Bank Credit Work?All kinds of things can be bank credit: mortgages, credit card
What are Bank Debits?
Bank debits are reductions in customer accounts.
How Do Bank Debits Work?
Let's say you write a check at Target for $50. Your bank, Bank XYZ, will debit your account by
What is a Bank Deposit?In the finance world, a bank deposit is the placement of funds in an account with a bank.
How Does a Bank Deposit Work?In the banking world, there are two general types of
What is a Bank Deposit Agreement?A bank deposit agreement, also called a Bank Investment Contract (BIC), is an agreement between a bank and an investor where the bank provides a guaranteed rate of
What are Bank Deposits?A bank deposit is the placement of funds in an account with a bank.
How Do Bank Deposits Work?There are two general types of bank deposits: demand deposits and time deposits.
What is a Bank Draft?
A bank draft is a check that a bank guarantees.
How do Bank Drafts work?
Bank drafts are not common in the United States; they are more popular in Britain. The concept
What is the Bank Efficiency Ratio?A bank efficiency ratio is a measure of a bank's overhead as a percentage of its revenue.
How Does the Bank Efficiency Ratio Work?The formula varies, but the most
What is 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.
How Does Bank Endorsement Work?Let
What is Bank Examination?A bank examination is a regular process of ensuring that a bank or lending institution is financially stable and obeying regulations while avoiding excessive risk. The CAMELS
What is 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
What are Bank for International Settlements (BIS)?Based in Basel, Switzerland, the Bank for International Settlements (BIS) acts as a bank for central banks around the world.How Do Bank for
What Is a 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
What is a Bank Holiday?A bank holiday is a day on which a bank or banking system is closed.
How Does a Bank Holiday Work?In the United States, banks and financial markets generally cannot be closed
What is a Bank Identification Number (BIN)?A bank identification number (BIN) identifies and verifies parts of a bank transaction.
How Does a Bank Identification Number (BIN) Work?For example, when
What is a 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
What is a 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.
How
What is Bankruptcy?Bankruptcy is a legal process under which a borrower protects and/or liquidates assets in order to repay debts.
How Does Bankruptcy Work?In general, there are three "types
What is a 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.How Does a Bounced Check Work?Checks should
What is a Canceled Check?A canceled check is a check that has cleared or prevented from clearing.
How Does a Canceled Check Work?Let's say John Doe writes a $100 check to Jane Smith. She takes
What is a Capital Dividend Account (CDA)?A capital dividend account is a special account that companies use to pay tax-free dividends to shareholders.
How Does a Capital Dividend Account (CDA) Work?
What is a 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.How Does a Cashier's Check
What is a Central Bank?A central bank is an institution responsible for determining the monetary policy of a nation or group of nations. How Does a Central Bank Work?Exact duties vary by country
What is a Certificate of Deposit (CD)?A certificate of deposit (CD) is a relatively low-risk debt instrument purchased directly through a commercial bank or savings and loan institution.How Does
What is a Certified Check?A certified check is a check for which the issuing bank guarantees payment.How Does a Certified Check Work?Let's assume you want to rent an apartment from the XYZ
What is Collateral?Collateral is an asset pledged by a borrower to a lender, usually in return for a loan. The lender has the right to seize the collateral if the borrower defaults on the obligation.
What is a 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
What is Commercial Paper?Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations and foreign
What is a Credit Union?A credit union is a financial institution that is owned and controlled by its members rather than shareholders. The members of the credit union pool their deposits and provide
What is Debtor in Possession (DIP)?Debtor in possession (DIP) refers to the status of a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy
What is Debtor-in-Possession (DIP) Financing?Debtor-in-possession (DIP) financing refers to financing for a business that retains control of its assets and continues to operate while under the
What is the Euro Interbank Offered Rate (EURIBOR)?Euro Interbank Offered Rate (EURIBOR), is the rate at which European banks offer to lend unsecured funds to each other in the euro market.How Does
What is the Federal Reserve Bank?Federal Reserve Bank refers to any of the 12 branches of the Federal Reserve System overseeing the implementation of U.S. monetary policy. How Does the Federal
What is a Fixed Interest Rate?A fixed interest rate is a type of loan or mortgage for which the rate of interest does not fluctuate over the life of the loan.
How Does a Fixed Interest Rate Work?The
What is a 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.
Frozen Account ExampleA bank account is
What is 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.How Does Group
What is a High Street Bank?A High Street Bank is a retail bank in the United Kingdom that has many locations.
How Does a High Street Bank Work?The term gets its name from the British equivalent of
What is Insolvency?In most usages, insolvency is the inability of a company or individual to meet its financial obligations as they come due. In the legal sense of the word, an entity is considered
What is Installment Debt?Installment debt refers to any loan that is repaid by the borrower in periodic (usually monthly) installments that include principal and interest.How Does Installment Debt
What is the 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
What are Interchange Fees?The term interchange fees, also known as swipe fees, refers to the hidden cost paid by merchants to card-issuing banks and credit card companies for processing credit card
What is an 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.How
What is an Investment Bank?An investment bank is a financial intermediary that specializes primarily in selling securities and underwriting the issuance of new equity shares to raise capital funds.
What is Investment Banking?Investment banking is a category of financial services that specializes primarily in selling securities and underwriting the issuance of new equity shares to help companies
What is the Johannesburg Interbank Agreed Rate (JIBAR)?JIBAR is a market indicator and a benchmark for various interest rates in South Africa.
How Does the Johannesburg Interbank Agreed Rate (JIBAR
What is a Letter of Credit?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.
What Is a Line of Credit?A line of credit (sometimes called revolving credit) is a pre-arranged amount of money lent by a financial institution. Unlike a traditional loan – which is usually a
What is Liquidation?
Liquidation refers to the selling of assets in return for cash.
How Does Liquidation Work?
The term liquidation is most often used in discussions about Chapter 7
What Is LIBOR?The London Interbank Offered Rate (LIBOR) is the base lending rate banks charge each other in the London wholesale money market.
How LIBOR WorksLIBOR is an average of inter-bank
What is Long-Term Debt?
Long-term debt is debt due in one year or more. It is a key item that appears on a company's balance sheet.
Long-Term Debt Example
Let's assume Company XYZ borrowed $
What is a 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
Mobile banking refers to the use of a smartphone or other cellular device to perform online banking tasks while away from your home computer, such as monitoring account balances, transferring funds
What is Mobile Phone Banking?Mobile phone banking is the use of a smartphone or other cellular device to accomplish tasks such as checking account balances, transferring funds between accounts, bill
What Is a 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
What is a 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
What is the National Credit Union Administration (NCUA)?The National Credit Union Administration (NCUA) is an agency of the United States government that charters and oversees federal credit unions.
What is Off-Premise Banking?Off-premise banking refers to regular banking transactions that happen outside of a physical bank, typically at automated teller machines (ATMs).How Does Off-Premise
What is an Official Settlement Account?An official settlement account is an account that records transactions of foreign exchange reserves, bank deposits and gold at a central bank.
How Does an
What is On Account?
On account is a term that describes situations in which a customer makes a partial payment for goods or services purchased.
How Does On Account Work?
In the business
What is Online Banking?Online banking enables bank customers to handle account management and perform account transactions directly with the bank through the internet. This is also known as
What is the Organization for Economic Cooperation and Development (OECD)?The Organization for Economic Cooperation and Development (OECD) is an international economic forum that pursues cooperative
What is the Past-Due Balance Method?The past-due balance method is a system for calculating interest charges based on loan or credit balances not paid prior to a specified due date.How Does the Past-
What is Paycheck-to-Paycheck?Paycheck-to-paycheck means a lifestyle in which a person does not save money and would incur significant financial stress if he or she does not receive his or her next
What is a PIN-Debit Transaction?A PIN-debit transaction, also known as an online transaction, is a password-protected payment method that authorizes a transfer of funds over an electronic funds
What is Prepackaged Bankruptcy?Prepackaged bankruptcy refers to a plan for reorganization under Chapter 11 that a company drafts in cooperation with its lenders.How Does Prepackaged Bankruptcy Work?
What is the Prime Rate?
The prime rate is the interest rate commercial banks charge their most creditworthy customers, which are usually corporations.
Prime Rate Examples and Historical Data
What is Quick-Rinse Bankruptcy?
A quick-rinse bankruptcy moves through the courts especially quickly.
How Does Quick-Rinse Bankruptcy Work?
Let's say Company XYZ is struggling to pay its
What is a Rain Check?
A rain check is a written promise from a seller to a buyer. It guarantees that a buyer can purchase a product for a certain price at a later date, usually because the item is
What is a Ratings Service?Ratings Service is provided by companies that evaluate the risks associated with debt securities. How Does a Ratings Service Work?Companies, such as Moody's,
What is a Repurchase Agreement (Repo)?A repurchase agreement is the sale of a security combined with an agreement to repurchase the same security at a higher price at a future date. It is also
What is 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
What is a Savings Account?A savings account is a low-risk, interest-bearing deposit with a bank or other financial institution.
How Does a Savings Account Work?Technically, savings accounts are time
What is a Shadow Banking System?The shadow banking system (or shadow financial system) is a network of financial institutions comprised of non-depository banks -- e.g., investment banks, structured
What is a 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
What is 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
What is Sovereign Debt?
Sovereign debt refers to the amount of money a country owes to the holders of its government bond.
In the United States, sovereign debt is issued by the Department of
What is Structured Finance?Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs. Generally, a simple loan will not suffice for the borrower so
What is Subordinated Debt?Subordinated debt is any outstanding loan that, should the borrowing company fail, it will be repaid only after all other debt and loans have been settled. It is the
What is a 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.
How Does a Traveler's Check Work?When
What is 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
What is Universal Banking?Universal banking refers to the practice of offering clients retail banking as well as investment services.How Does Universal Banking Work?Investment services and retail
What is Unsubordinated Debt?
Unsubordinated debt refers to loans and debt securities (e.g., bonds, CDs, collateralized securities, etc.) for which the repayment priority outranks other debts owed
What is a 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.How Does a World
What is a Zero Balance Account?A zero-balance account, sometimes called a "ZBA," is a business-oriented bank account that usually has a balance of $0.
How Does a Zero-Balance Account Work?Let's
What is a Zombie Bank?A zombie bank is a bank with liabilities that exceed its assets (in other words, it has a net worth of zero). They do not die (hence the nickname) because they receive