International Monetary Fund. Monetary and Capital Markets Department
Published Date:
April 2013
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Additional Tier 1 capital

The sum of (1) instruments issued by banks that meet the criteria for inclusion in Additional Tier 1 capital (and are not included in Common Equity Tier 1); (2) stock surplus (share premium) resulting from the issue of instruments included in Additional Tier 1 capital; (3) instruments issued by consolidated subsidiaries of the bank and held by third parties that meet the criteria for inclusion in Additional Tier 1 capital and are not included in Common Equity Tier 1; and (4) applicable regulatory adjustments. See also Common Equity Tier 1 and Tier 1 capital.

Advanced Basel II approaches

Basel II approach in which banks can use their internal ratings systems or models as inputs in the calculation of required capital for credit, market, and operational risks.

Agency debt

Debt obligations issued by government-sponsored enterprises (GSEs).

Alternative investment

A type of investment strategy or structure that falls outside of the boundaries of the traditional asset categories of equities, bonds, or cash, and includes, for instance, private equity, hedge funds, and financial derivatives.

Amortized cost

Debt held to maturity is shown on the balance sheet at amortized cost, which equals the cost of a security, plus or minus adjustments for any purchase discounts or premiums.

Asset-backed security (ABS)

Any security, including commercial paper, that is collateralized by the cash flows from a pool of underlying assets, such as loans, leases, and receivables. When the cash flows are collateralized by real estate, an ABS may be called a mortgage-backed security (MBS); when the cash flows are divided into tranches, an ABS may be called a structured credit product.

Asset manager

A financial institution that manages assets on behalf of investors.

Asset/foreign exchange swap

Interest rate swap or cross currency (foreign exchange) swap, converting cash flows from an underlying security (a bond or floating-rate note), from fixed to floating coupon, floating to fixed coupon, or from one currency to another. See also Foreign exchange swap.

Asset restructuring

Changing the terms of payment on a loan or other lending instrument by granting a concession to the borrower. This may include (1) the transfer from the borrower to the bank of real estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan; (2) a modification of the loan terms, such as a combination of a reduction in an agreed-upon interest rate, an extension of the final maturity, a reduction of principal, or a reduction of accrued interest; or (3) acceptance by the bank of the conversion of the borrower’s debt into equity to be held by the bank, in full or partial settlement of a debt.

Autoregressive conditional heteroskedasticity (ARCH) model

A model used in econometrics to characterize observed time series that exhibit time-varying volatility clustering, that is, periods of high instability followed by periods of relative calm. See also GARCH model.

Banking book

An accounting term that refers to assets held by a bank that are currently not being actively traded, and are intended to be held for an extended period of time. See also Trading book.

Basel Committee on Banking Supervision (BCBS)

A committee of banking supervisory authorities that provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee also develops guidelines and supervisory standards in various areas, including the international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.

Basel II

A 2004 accord among national bank supervisory authorities (the Basel Committee on Banking Supervision) that revised the Committee’s 1988 adequacy standards with regard to bank capital for credit risk and introduced capital requirements for operational risk. Basel II made the capital requirement more sensitive to variations in the riskiness of the bank’s assets. Basel II also revised its recommended supervision processes and increased disclosure by banks. Pillar 1 of the Basel Accord covers the minimum capital adequacy standards for banks; Pillar 2 focuses on enhancing the supervisory review process; and Pillar 3 encourages market discipline through increased quantitative and qualitative disclosure of banks’ risk exposures and capital adequacy.

Basel III

A comprehensive set of reform measures introduced in the aftermath of the global financial crisis to improve the banking sector’s ability to absorb financial and economic shocks, enhance banks’ risk management and governance, and increase banks’ transparency and disclosure. These measures revise the existing definition of regulatory capital under the Basel Accord, enhance capital adequacy standards, and introduce, for the first time, minimum liquidity adequacy standards for banks. See also Capital adequacy ratio (CAR).


The difference in the yields of two financial instruments that have similar risk characteristics and produce similar cash flows. Also refers to the difference between the price of a futures contract and the value of the underlying cash instrument or commodity.

Basis point (bp)

One-hundredth of one percent, that is, 1 bp = 0.01 percent = 0.0001.

Basis risk

The risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. In the context of longevity swaps, basis risk may exist if the payout is linked to an index of a sample population rather than the actual pool of retirees.

Bid-offer (or bid-ask) spread

The difference in prices at which an instrument is simultaneously quoted for immediate purchase (bid) and sale (offer or ask).

Brady bonds

Brady bonds were sovereign bonds that had been exchanged for previous defaulted bank loans to countries and that had partial collateral in the form of set-aside foreign reserves or guarantees.

“Breaking the buck”

A situation that occurs when the net asset value (NAV) of a money market fund falls below one dollar. This may happen when interest rates fall to very low levels.

Bubble or speculative bubble

A situation in which prices in a certain market are being driven higher than justified by the fundamental economic or intrinsic value as determined by a system of asset valuation.

Call (put) options

A financial contract that gives the buyer the right, but not the obligation, to buy (sell) a financial instrument at a set price on or before a given date.

Capital expenditures

Refers to firm expenses that create future benefits.

Capital adequacy ratio (CAR)

The ratio of regulatory capital to risk-weighted assets of a financial institution. Regulatory capital is the sum of Common Equity and Additional Tier 1 capital and Tier 2 capital. See also Basel III.

Capital requirements

The amount of capital a bank or other financial institution is required to hold as a buffer against possible losses. The requirement is usually imposed by law or by a regulatory agency.

Capital Requirements Directive (CRD)

The Directive issued by the European Union (EU) for the financial services industry that introduced a supervisory framework reflecting the Basel II rules on capital measurement and capital standards. See also Basel II.

Carve outs

Exceptions to the Basel II or Basel III rules.

Central counterparty (CCP)

An entity that interposes itself between counterparties, becoming the buyer to sellers and the seller to buyers in what would otherwise be bilateral arrangements between sellers and buyers.

Circuit breaker

A market mechanism that stops trading in certain specified financial instruments for a period of time in response to significant negative price or rate changes.


The process of transmitting, reconciling, and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of cash flows and the establishment of final positions for settlement. It can be bilateral or multilateral.

Clearing member (CM)

A CM is a member of a clearing house. In a CCP context, a CM clears on its own behalf, for its customers, and on behalf of other market participants. Non-clearing members use CMs to access CCP services. All trades are settled through a CM.


In regressions, the coefficient shows the size of the relationship between a regressor and the dependent variable. If the regression takes the form of Y = A + B X, then B is the coefficient for regressor X.


Assets pledged or posted to a counterparty to secure an outstanding exposure, derivative contract, or loan.

Collateralized loan obligation (CLO)

A type of collateralized debt obligation (CDO) that is backed by a pool of commercial and personal loans.

Commercial paper (CP)

An unsecured promissory note with a fixed maturity of 1 to 270 days.

Committee on Payment and Settlement Systems (CPSS)

Committee of the Bank for International Settlements that sets standards for payment systems oversight.

Common Equity Tier 1

The sum of (1) common shares issued by a bank that meet the criteria for classification as common shares for regulatory purposes (or the equivalent for non-joint-stock companies); (2) stock surplus (share premium) resulting from the issue of instruments included in Common Equity Tier 1; (3) retained earnings; (4) accumulated other comprehensive income and other disclosed reserves; (5) common shares issued by consolidated subsidiaries of the bank and held by third parties (i.e., minority interest) that meet the criteria for inclusion in Common Equity Tier 1 capital; and (6) applicable regulatory adjustments. See also Tier 1 capital.

Core Tier 1 capital ratio

The ratio of a bank’s core Tier 1 capital to its total risk-weighted assets (RWA). Core Tier 1 is a similar concept to Common Equity Tier 1 in Basel III, though there are some differences, such as the inclusion of preferred shares in core Tier 1 capital and in regulatory deductions. See also Common Equity Tier 1 and Tier 1 capital.

Contingent claims analysis (CCA)

A methodology that combines balance sheet data and market prices of traded securities to infer the implicit value of assets and contingent liabilities of a corporation. The method has been extended to the study of entire economic sectors and countries.


Adjustment to modified duration measure, to take into account a nonlinear relationship between bond prices and interest rates. See also Modified duration.


Degree of co-movement between two variables, taking values between +1 and –1, with +1 meaning they move together perfectly and –1 meaning they always move by the same amount but in opposite directions.


Indicates that an economic or financial quantity moves opposite to the economic cycle. For example, countercyclical capital buffers are built up during an economic upturn so they can be drawn down in a downturn.

Counterparty risk

The risk faced by one party in a contract that the other, the counterparty, will fail to meet its obligations under the contract.

Covenant-lite loan

Loans in which borrowers are not obliged to meet quarterly maintenance criteria.

Covered bonds

Debt obligations in which the originator’s or issuer’s obligation to make all interest and principal payments is secured by a dedicated reference (or “cover”) portfolio of assets.

Covered bond purchase programs (CBPP)

The programs launched by the European Central Bank to purchase euro-denominated covered bonds.

Credit default swap (CDS)

A credit derivative whose payout is triggered by a “credit event,” often a default. CDS settlements can either be “physical”—whereby the protection seller buys a defaulted reference asset from the protection buyer at its face value—or in “cash”—whereby the protection seller pays the protection buyer an amount equal to the difference between the reference asset face value and the price of the defaulted asset. A single-name CDS contract references a single firm or government agency, whereas CDS index contracts reference standardized indices based on baskets of liquid single-name CDS contracts.

CDS-bond basis

Difference in the credit spread on a credit default swap (CDS) and the underlying reference bonds. See also Credit default swap and Basis.

Credit derivative

A financial contract under which an agent buys or sells risk protection against the credit risk associated with a specific reference entity (or specified range of entities). For a periodic fee, the protection seller agrees to make a contingent payment to the buyer on the occurrence of a credit event (usually default in the case of a credit default swap).

Credit easing

The purchase by a central bank of certain assets to improve conditions in a specific market or markets. If credit easing is not sterilized, it increases the size of the central bank’s balance sheet and thus the amount of base money (reserve balances of banks and cash). Credit easing can also be indirect via the provision of long-term funding to banks by the central bank, instead of regular weekly liquidity provision.

Credit rating

A measure of the ability of a borrower to meet its financial commitments on a timely basis. Credit ratings are typically expressed as discrete letter grades. For example, Fitch Ratings and Standard & Poor’s use a scale in which AAA represents the highest creditworthiness and D the lowest.

Credit rating agency

A company that assigns credit ratings to borrowers as a measure of their ability to meet their financial commitments on a timely basis.

Credit rating outlooks, reviews, and watches

Credit rating agencies typically signal in advance their intention to consider rating upgrades and downgrades. “Reviews” or “watches” indicate that a change is likely within 90 days, and “outlooks” indicate the potential for a change within two years (one year in the case of speculative-grade credits).

Credit risk

The risk that a party to a financial contract will incur a financial loss because a counterparty is unable or unwilling to meet its obligations.

Credit spread

The difference in yield between a benchmark debt security and another debt security that is comparable to the benchmark instrument in all respects except that it is of lower credit quality and hence, typically, of higher yield.

Credit-to-GDP ratio

This ratio measures domestic credit to the private sector as a proportion of gross domestic product (GDP). Domestic credit to the private sector refers to financial resources provided to the private sector, such as through loans, purchases of non-equity securities, trade credits, and other accounts receivable, that establish a claim for repayment. For some countries these claims include credit to public enterprises.

Credit value adjustment (CVA)

The risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality (also referred to as the market value of counterparty credit risk). Under Basel II, the risk of counterparty default and credit migration risk were addressed but mark-to-market losses due to credit valuation adjustments were not. Basel III introduced a CVA capital charge in addition to the default risk capital requirements for counterparty credit risk.

Dealer banks

Term used to identify a set of large financial institutions that are significant dealers in securities and over-the-counter (OTC) derivatives. Dealer banks may have conventional commercial banking operations, and they might also have significant activities in investment banking, asset management, and prime brokerage. They typically operate under the umbrella of holding companies.

Debt-to-equity ratio (D/E)

A financial ratio that measures the extent of leverage in a company and indicates the relative proportion of debt used to finance the company’s assets, compared with shareholders’ equity.

Default fund

A pool of funds established by a central counterparty (CCP), contributed by clearing members to absorb the costs of clearing member nonperformance when the failed clearing member’s margin contributions and the CCP’s first-loss contribution are exhausted. It is also known as a guarantee fund.

Deferred tax assets

The amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carry forward of unused tax losses, and the carry forward of unused tax credits.


The reduction of the leverage ratio, or the percentage of debt in the balance sheet of a financial institution.


The theoretical change in the market value of a financial instrument with respect to a change in some underlying factor(s). For example, the delta of a bond might be with respect to its yield to maturity.

Deposit funding gap

A metric used for banks to denote the amount of funding that has to be raised from capital markets. The deposit funding gap is defined as the difference between bank loans and deposits.


Management actions that reduce or lower risk in a firm.


A financial contract whose value derives from underlying securities prices, interest rates, foreign exchange rates, commodity prices, or market or other indices. Examples of derivatives include stock options, currency and interest rate swaps, and credit default swaps.


A method used for estimating the impact of a policy on an outcome by computing a double difference, one over time (before and after) and one across subjects (between beneficiaries and nonbeneficiaries). In its simplest form, this method requires only aggregate data on the outcome variable; no covariates or micro-data are strictly necessary.

Direct credit easing

Direct purchases (or sales) by a central bank in specific credit market segments whose functioning is impaired.

Dividend recapitalization

Debt issued for the purpose of paying special dividends.

Dodd-Frank Act

U.S. law sponsored by Senator Christopher Dodd and Representative Barney Frank and passed on July 21, 2010, designed to improve regulation of the banking sector and prevent a recurrence of a financial crisis in which banks would once again have to be bailed out by taxpayer funding.

Earnings before interest, taxes, depreciation, and amortization (EBITDA)

A measure of a company’s operating cash flow obtained by looking at earnings before the deduction of interest expenses, taxes, depreciation, and amortization. This measure is used to compare profitability of companies after excluding the accounting and financing effects from different asset and capital structures. This measure can be of particular interest to creditors, because it is the income that a company has available for interest payments.


JPMorgan’s Emerging Market Bond Index, which tracks the total returns for traded dollar-denominated sovereign bonds issued by a selection of emerging market economies. The EMBI Global (EMBIG) is a broader version of the EMBI with less stringent market liquidity requirements.

Emerging markets

Financial markets in economies that are less than fully developed, but are nonetheless broadly accessible to foreign investors.


In a statistical model, endogeneity issues arise when an independent variable (regressor) is correlated with the error term. Endogeneity can be caused by, for example, omitted variables or simultaneity.


The Euro interbank offered rate (Euribor) is a daily reference rate based on the averaged interest rates at which Eurozone banks offer to lend unsecured funds to other banks in the euro wholesale money market (or interbank market).


Time deposits denominated in U.S. dollars at banks outside the United States, thus not under the jurisdiction of the United States Federal Reserve.

European Economic Area (EEA)

The European Union plus Iceland, Liechtenstein, and Norway.

European Financial Stability Facility (EFSF)

A special purpose vehicle set up by the euro area countries to preserve financial stability. The EFSF has the ability to issue bonds or other debt instruments in the market to raise the funds needed to provide temporary financial assistance to euro area member states in economic difficulty.

European Stabilization Mechanism (ESM)

An international organization that provides financial assistance to members of the euro area in financial difficulty in order to safeguard the financial stability of the euro area. The ESM is able to raise funds, for example, by issuing bonds or other debt instruments or entering into arrangements with member states.

Event study

A statistical method to assess the impact of an event, such as a corporate or policy announcement, by observing the change in variables of interest, such as the firm’s stock price or some other price (such as yield spread or exchange rate), around the time of the announcement.


The provision by banks of additional loans to stressed borrowers to enable them to repay existing loans or interest. This can keep a loan from becoming nonperforming, but further increases a bank’s exposure to a troubled borrower.

Excess reserves

Bank reserves in excess of the reserve requirement set by a central bank.

Exchange Rate Mechanism (ERM-II)

Framework for a subset of member states of the European Union that provides currency-fluctuation band limits for their currencies against the euro. A fixed exchange rate and fluctuation band between the non-euro-area member country’s currency and the euro is agreed, and the band is supported by coordinated intervention by the respective central banks. Membership in the ERM-II for at least two years is one of the preconditions for joining the euro area.

Exchange-traded fund (ETF)

An investment fund traded on stock exchanges, many of which track an index, such as the S&P 500. ETFs may be attractive to investors due to their low costs and tax efficiency.

Exchange-traded products

Financial products that are traded on exchanges and other organized trading platforms.

Exogenous factor

A factor that is determined outside (and not explained by) the model. In an econometric model, an independent variable is exogenous if it is not correlated with the error term.


The provision by banks of additional loans to stressed borrowers to enable them to repay existing loans or interest. This can keep a loan from becoming nonperforming, but further increases a bank’s exposure to a troubled borrower.

Fair-value estimates

Estimates that closely reflect the true market value of an asset.

Federal Open Market Committee (FOMC)

A committee within the Federal Reserve System that is responsible for the open market operations in the United States. See also Open market operations.

Financial fragmentation

A broad retrenchment in cross-border flows and assets so that private capital is invested and held more along national lines. In a currency union such as the euro area, fragmentation can lead to a breakdown in monetary policy transmission across the region’s banking and credit markets.

Financial futures contract

A derivative contract to buy or sell a financial instrument at a predetermined price in the future. Futures contracts usually are standardized and are traded on an exchange or organized trading platform. Some contracts settle with a cash payment based on an underlying reference price or interest rate.

Financial Stability Board (FSB)

An international body that coordinates, develops, and promotes the implementation of effective regulatory, supervisory, and other financial sector policies.

Fiscal sustainability

The ability of a government to sustain its current spending, tax, and other policies in the long term without defaulting on its liabilities or promised expenditures.

Fixed-rate full allotment (FRFA)

Under fixed-rate full allotment liquidity provisions, counterparties of a central bank will have their bids fully satisfied (against adequate collateral) at a predetermined price.


A temporary postponement of loan payments granted by a lender or creditor. Forbearance gives the borrower time to make up overdue payments on a loan.

Foreign Account Tax Compliance Act (FATCA)

U.S. legislation that requires disclosure of global holdings of assets by U.S. citizens.

Foreign exchange swap

A simultaneous purchase and sale of identical amounts of one currency for another with two different value dates.

Forward contract

See Futures contract.

Forward guidance

Central bank guidance on the likely future monetary policy interest rate path.

Free cash flow

A measure of financial performance of a company, calculated as the cash flow generated by the company’s operations minus capital expenditures needed to maintain or expand these operations. It represents the cash flow available for reducing debt or distributing dividends to equity holders.


In this report, the process by which banks issue or assume liabilities associated with assets on their balance sheets.

Futures contract (futures)

A standardized contract in which parties agree to trade the underlying assets at preset prices on preset future dates. They are traded on futures exchanges. When they are less standardized and/or do not trade on exchanges they are called forward contracts.

Generalized autoregressive conditional heteroskedasticity (GARCH) model

A statistical technique that adjusts a model’s estimates to account for the time variation in the volatility of shocks affecting the model. The (1, 1) in GARCH(1, 1) refers to the presence of the first-order forecast variance (the first term in parentheses) in the conditional variance equation and a first-order moving average ARCH term (the second term in parentheses). The latter reflects news about volatility from the previous period and is measured as the lag of the squared residual from the mean equation. An ordinary ARCH model is a special case of a GARCH specification since it does not contain lagged forecast variances. See also ARCH model.

Generalized method of moments (GMM)

A generalized statistical method, used primarily in econometrics, for obtaining estimates of parameters of statistical models; many common estimators in econometrics, such as ordinary least squares, are special cases of the GMM. The GMM estimator is robust in that it does not require information on the exact distribution of the disturbances.


Bonds issued by the government of the United Kingdom.

Global systemically important banks (GSIBs)

Large banking institutions with global operations that have the potential to impact the financial system. The Financial Stability Board (FSB) has tentatively identified 29 global banks as GSIBs. These banks were provisionally earmarked to be subject to additional loss absorbency, or capital surcharges, from 1 percent to 2.5 percent of the ratio of Common Equity Tier 1 capital to risk-weighted assets.

Globally systemically important financial institutions (G-SIFIs)

Financial institutions whose distress or disorderly failure, because of their size, complexity, and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.

Global systemically important insurers (GSIIs)

Insurers designated by the International Association of Insurance Supervisors as systemically important.

Gonzalo-Granger statistic

A measurement of the degree of price leadership of one asset relative to another, related asset. See also Hasbrouck statistic.


Identifiable intangible assets acquired in a business combination. It is usually the excess of the purchase price of a company over its book value.

Government-sponsored enterprise (GSE)

A financial institution that provides credit or credit insurance to specific groups or areas of the economy, such as farmers or housing. In the United States, such enterprises are federally chartered and maintain legal and/or financial ties to the government.

Gross nonperforming loan (NPL) ratio

This ratio is derived by dividing the value of nonperforming loans by the total value of the loan portfolio. See also Nonperforming loans.

Group of Twenty (G20)

The Group of Twenty Finance Ministers and Central Bank Governors established in 1999 as a forum for officials from systemically important advanced and emerging market economies to discuss key issues related to the global economy. It is made up of leaders from the European Union and the following 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, the Republic of Korea, Turkey, the United Kingdom, and the United States.


A discount applied to the market value of collateral to reflect its credit, liquidity, and market risk.

Hasbrouck statistic

A measurement of the degree of price leadership of one asset relative to another, related asset. See also Gonzalo-Granger statistic.

Hedge fund

An investment pool, typically organized as a private partnership, that faces few restrictions on its portfolio and transactions. Hence, compared with more regulated financial institutions, hedge funds use a wider variety of investment techniques—including short positions, derivatives transactions, and leverage—in their effort to boost returns and manage risk.


The practice of offsetting existing risk exposures by taking opposite positions in instruments or contracts with identical or similar risk—for example, in related derivatives contracts.

HP trend

Trend computed by applying a Hodrick-Prescott (HP) filter to a time series. The HP filter is commonly used in macroeconomics to separate the cyclical components of a time series from its long-term growth.

Hybrid instruments

A combination of two or more different financial instruments that generally have debt and equity characteristics.


Loss in value. See also Loan loss provision.

Indirect credit easing

Provision of long-term funding to banks by the central bank, instead of regular weekly liquidity provision

Inflation-indexed bond

A bond that has its coupons and principal indexed to inflation. With an inflation-indexed bond, the real rate of return is known in advance, and the nominal return varies with the rate of inflation realized over the life of the bond. Hence, neither the purchaser nor the issuer faces a risk that an unanticipated increase or decrease in inflation will erode or boost the purchasing power of the bond’s payments.

Initial margin

Deposits made by holders of contracts in proportion to their open positions that act as buffers against potential losses imposed on their counterparties.


The inability of a debtor to pay its debt.

Institutional investor

A bank, insurance company, pension fund, mutual fund, hedge fund, brokerage, or other financial group that takes investments from clients or invests on its own behalf.

Instrumental variables (instruments)

Alternative variables that are used in econometric analysis when the original variable can be either cause or effect. An ideal instrument is highly correlated with the original variable so that it behaves like the original variable, but should have little correlation with the dependent variable so that it is not considered to be affected by movements in the dependent variable.


An identifiable nonmonetary asset without physical substance.

Interbank money market

A market in which banks provide loans to other banks. Most interbank loans are of short maturity, typically one week or less, with the majority overnight (from one day to the next).

Interest coverage ratio

Defined as earnings before interest, taxes, depreciation, and amortization (EBITDA) divided by interest expense. It measures the ability of firms to service debt.

Interest rate derivative

A derivative contract that is linked to one or more reference interest rates.

Interest rate risk

The risk associated with changes in asset and liability valuation that are due to interest rate movements.

International Association of Insurance Supervisors (IAIS)

International standard setter for insurance supervision and regulation.

International Organization of Securities Commissions (IOSCO)

International standard setter for securities regulation.

Investment and Speculative Grade

An entity or transaction is considered investment grade if its credit rating is BBB– or better (Baa3 on the Moody’s scale). Otherwise it is considered speculative, or high-yield, grade.

Investment banks

Non-deposit-taking financial institutions that, among other capital markets activities, act as intermediaries between securities issuers and investors, facilitate mergers and other corporate reorganizations, and act as brokers for institutional clients.

Investment funds

Financial institutions that pool investments and parcel them out to investors for fees.

Large and complex financial institution (LCFI)

A systemically important financial institution that is involved in a diverse range of financial activities and geographical areas. Typically they are large and interconnected to other financial institutions.

Lender-of-last-resort facility

An institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty. Lender-of-last-resort facilities aim to prevent widespread panic in the financial system.


The proportion of debt to equity (also assets to equity or capital to assets in banking). Leverage can be built up by borrowing (on-balance-sheet leverage, commonly measured by debt-to-equity ratios) or by using off-balance-sheet transactions.

Leveraged loan

Loans to highly indebted companies that are either unrated or rated no higher than BB+ and that may have difficulty directly tapping the high-yield bond market.

LIBOR (London interbank offered rate)

An index of the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market.

Liquidity coverage ratio (LCR)

A liquidity standard introduced by Basel III. It is defined as the ratio of high-quality liquid assets to short-term liquidity needs under a specified acute stress scenario. Two types of liquid assets are included, both of which are supposed to have high credit quality and low market risk: Level 1 assets are meant to exhibit characteristics akin to the safest assets; those in Level 2 are subject to a haircut and a limit on their quantity in the overall liquidity requirement.

Liquidity requirement

The amount of liquid assets (assets that can be quickly converted into cash with minimal impact on the price received) a bank or other financial institution is required to hold in order to satisfy its obligations as they become due. The requirement is usually imposed by law or by a regulatory agency.

Liquidity risk

The risk that increases in assets cannot be funded or obligations met as they come due, without incurring unacceptable losses. Market liquidity risk is the risk that asset positions that are normally traded in reasonable size with little price impact can only be transacted at a substantial premium/discount, if at all. Funding liquidity risk is the risk that solvent counterparties have difficulty borrowing immediate means of payment to meet liabilities falling due.

Loan covenants

Provisions in a loan agreement binding the borrower or lender.

Loan loss provision

A reserve created to provide for losses (noncash charge to earnings) that a bank expects to take as a result of uncollectable or troubled loans. It includes transfer to bad debt reserves (Japan) and amortization of loans (Japan).

Logit model

A statistical binary response model in which the response probability follows a logistic distribution and is evaluated as a function of the explanatory variables.

Long-Term Refinancing Operations (LTROs)

Open market operations conducted by the European Central Bank to provide long-term liquidity to the financial system.

Macroprudential policies

Policies aimed at maintaining the safety and soundness of the financial system as a whole. Examples include countercylical capital buffers, limits to credit growth, etc.

Main Refinancing Operations (MRO)

Open market operations conducted by the European Central Bank to provide short-term liquidity to the financial system.

Margin (initial and variation)

The amount that the holder of a financial instrument has to deposit (with its broker or exchange) to cover some or all of the risk associated with that instrument. Variation margin covers day-to-day changes in instrument mark-to-market market values, and initial margin covers potential losses in excess of posted variation margin in the event of counterparty default. See also Mark-to-market valuation.

Market liquidity

The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

Market making

A trading activity by a bank or a broker-dealer firm that accepts the risk of holding a certain number of shares of a particular security in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Once an order is received, the market maker immediately sells from its own inventory or seeks an offsetting order.

Market risk

The risk of loss caused by changes in market prices.

Markov switching model

A statistical technique that estimates whether an observation is in a different (usually high, medium, or low) volatility state.

Mark-to-market valuation

The act of recording the price or value of a security, portfolio, or account to reflect its current market value rather than its book value.

Maturity (of a bond)

The number of years (or months) until a bond comes due. For example, a five-year bond has the maturity of five years, whereas a ten-year bond due in one year has a remaining maturity of one year.

Microprudential policies

Policies, comprising supervision and regulation, aimed at maintaining the safety and soundness of individual financial institutions. Examples are banks’ recovery and resolution plans, restrictions on executive compensation, limits on dividend distributions, etc.

Modified duration

A measure of bond price sensitivity to interest rate changes. See also Convexity.

Monetary financial institutions (MFIs)

Defined by the European Central Bank as central banks, resident credit institutions as defined in Community law, and other resident financial institutions whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their own account (at least in economic terms), to grant credits and/or make investments in securities.

Money market mutual fund (MMMF)

An open-ended mutual fund that invests in short-term securities such as U.S. Treasury bills and commercial paper.

Monetary policy transmission mechanism

Describes the link between a change in the policy rate and the ultimate effect on prices and output. The transmission mechanism is composed of various channels, each one isolating a different link. Among these are the exchange rate channel, the wealth channel, and the bank lending channel.

Money market

Market for short-term trading of debt securities.

Money market funds

Investment funds that invest in short-term debt securities. Money market funds are also classified as monetary financial institutions. See also Monetary financial institutions (MFIs).

Mortgage-backed security (MBS)

A security, backed by pooled mortgages on real estate assets, that derives its cash flows from principal and interest payments on those mortgages. An MBS can be backed by residential mortgages (residential mortgage-backed securities, RMBSs) or mortgages on commercial properties (commercial mortgage-backed securities, CMBSs). A private-label MBS is typically a structured credit product. RMBSs that are issued by a government-sponsored enterprise are not structured.


Term used in this report to describe unconventional monetary policy measures. MP-plus includes direct and indirect credit easing, quantitative easing, and forward guidance.


Formerly known as Morgan Stanley Capital International, a company that calculates key market indices for many regions of the world.

National central bank (NCB)

Usually refers to central banks in the European Union member states or those in the euro area.

Net asset value

The value of a firm’s assets minus the value of its liabilities.

Net interest margin

Net interest income (interest income minus interest expenses) divided by (interest) earning assets.

Net stable funding ratio (NSFR)

The NSFR was introduced by Basel III to provide a sustainable maturity structure of assets and liabilities. It requires a minimum amount of stable sources of funding at a bank relative to the liquidity profiles of the assets as well as to the potential for contingent liquidity needs arising from off-balance-sheet commitments, over a one-year horizon. The NSFR aims to limit overreliance on short-term wholesale funding during times of buoyant market liquidity and encourage better assessment of liquidity risk across all on- and off-balance-sheet items.

Net worth

The difference between the value of all assets and the value of all liabilities.

Nonbank financial institutions

Financial institutions that do not have full banking licenses or are not supervised by a national or international banking regulatory agency. They facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering, and can include money market mutual funds, investment banks, finance companies, insurance firms, pension funds, hedge funds, currency exchanges, and microfinance organizations.

Nonperforming loans (NPL)

Loans for which the contractual payments are delinquent, usually defined as being overdue for more than a certain number of days (e.g., more than 30 or 60 or 90 days). The NPL ratio is the amount of nonperforming loans as a percent of gross loans.

Notional amount

On a derivative contract, the nominal or face value used to calculate payments and final settlement values, or the amount of an asset or commodity on which the final settlement is based.

Open market operations

The primary means by which a central bank is able to control the short-term interest rate and the supply of base money, and thus to implement monetary policy. They include outright securities transactions, securities transactions with repurchase agreements, and collateralized lending.

Operating income

Revenue from a firm’s ongoing operations.

Option-adjusted spread (OAS)

The difference between a risk-free rate and the yield on a risk asset adjusted for the cost of an embedded option.

Ordinary least squares (OLS)

A method for estimating the unknown parameters in a linear regression model. The method minimizes the sum of squared (to capture absolute value) vertical distances between the observed responses in the dataset and the responses predicted by the linear approximation. Also known as linear least squares.

Output gap

Deviation of actual real output from its potential level.

Outright Monetary Transactions (OMTs)

A program of the European Central Bank to purchase sovereign bonds in the secondary market, announced on September 6, 2012, aimed at safeguarding against monetary policy transmission throughout the euro area. Transactions will be based on the short end of the yield curve. A necessary condition for OMTs is strict and effective conditionality attached to an appropriate EFSF/ESM program. See also European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).

Overnight indexed swap (OIS)

An interest rate swap whereby the compounded overnight rate in the specified currency is exchanged for some fixed interest rate over a specified term.

Over-the-counter (OTC)

In the case of financial securities, those that are traded directly between two parties rather than on a financial exchange.

Over-the-counter (OTC) derivative

A financial contract whose value derives from an underlying reference value such as the price of a stock or bond, an interest rate, a foreign exchange rate, commodity price, or some index and that is negotiated and traded bilaterally rather than through a centralized exchange.

Panel regression

Econometric technique to estimate relationships among variables in a panel dataset. A panel dataset is two dimensional: one for the time dimension (year, quarter, month, etc.) and the other for the cross-sectional dimension (people, firms, countries, etc). Various estimation techniques can be used depending on the nature of these two dimensions.

Partial spin-off

The creation of an independent firm through the partial sale of an existing business of a parent firm; divestiture.

Payment-in-kind (PIK) toggles

Bonds in which issuers have the option of deferring cash interest payments.

Pearson’s correlation coefficient

A statistic measuring the linear relationship between two variables in a sample. See also Correlation.


German term (literally “letter of pledge”) for covered bonds, mainly used to refinance mortgages or public projects.

Portfolio flows

Capital flows into or out of foreign portfolio investments (equity, debt, or other).

Potential output

Maximum level of real output that can be sustained by an economy over the long term.

Price discovery, leadership

Econometric approach to examine which one of two related asset prices “leads” or adjusts faster (relative to the other asset) to news shocks (i.e., changes to the equilibrium relationship between these two asset prices).

Price impact of trade

A measure of market liquidity, showing the asset price return relative to the amount of trading in the secondary market over a given period. The higher the ratio, the more the market is influenced by trading and hence the less liquid the secondary market.

Price-to-book ratio (P/BV)

Used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the recent quarter’s book value per share.

Primary dealer

A financial institution that is authorized to deal directly with the central bank in the buying and selling of government securities.

Private-label securitization

Securitization products not issued or backed by governments and their agencies, that is, excluding those of government-sponsored enterprises and public sector entities.

Probit model

A statistical binary response model in which the response probability follows a normal distribution and is evaluated as a function of the explanatory variables.

Proprietary trading

Taking positions in the market using the firm’s own capital.

Proxy hedging

Hedging risk using instruments that are correlated with the instrument being hedged, instead of hedging with instruments whose performance is directly linked to the instrument.

Prudent measures

Comprised of microprudential and macroprudential measures. See also Macroprudential policies and Microprudential policies.

Quantitative easing (QE)

Direct purchases of government bonds by the central bank, usually when the official policy interest rate is at or near the zero lower bound.

Real estate investment trusts (REITs)

Specially designated corporations that invest directly in real estate, either through properties or mortgages. In some countries (e.g., the United States) REITs benefit from special tax treatment.

Refinancing operations

Open market operations involving repurchase agreements (repos) undertaken by central banks to manage liquidity in the banking system and control short-term interest rates.


Statistical technique for modeling and analyzing the relationship between different economic variables.

Regulatory arbitrage

Reducing regulatory capital requirements by taking advantage of differences in regulatory treatment across countries or across types of financial institutions, as well as of differences between economic risk and risk as measured by regulatory guidelines.

Repurchase (repo) transaction

A sale of securities coupled with an agreement to repurchase the securities at an agreed price at a future date. This transaction occurs between a cash borrower (or securities lender), typically a fixed-income securities broker dealer, and the cash lender (or securities borrower), such as a money market mutual fund or a custodial bank. The securities lender receives cash in return and pledges the legal title of a security as collateral.


Procedures and measures taken to solve the situation of an unviable institution. Bank resolution is a form of bankruptcy process managed by a government agency with the responsibility to manage an orderly liquidation and to avoid losses to insured retail depositors.

Risk premium

The extra expected return on an asset that investors demand in exchange for accepting its higher risk.

Risk reversals

A measure of the relative demand for upside/downside protection on an underlying asset, using out-of-the-money options pricing. It is estimated as the difference between the implied volatility on out-of-the-money call and put options and is also referred to as the volatility skew.

Risk-based supervision

A framework for supervision where the intensity and focus of supervision is determined by an assessment of where the risk is highest.

Risk-weighted assets (RWA)

The total of all assets held by a bank weighted by credit, market, and operational risk weights according to formulae determined by the national regulator or supervisor. Most regulators/supervisors adopt the Basel Committee on Banking Supervision (BCBS) guidelines in setting formulae for asset risk weights.


Regression results are said to be “robust” when the estimated coefficients change little among several differently specified regressions.

Safe assets

Assets that provide identical real payoffs under all possible circumstances; that is, the value of the asset is protected from credit, market, inflation, liquidity, currency, and idiosyncratic risks.

Scale economies

Cost advantages in a firm arising from expansion, including size.

Search for yield

The search by investors for investments with higher returns, usually within the context of a low-interest environment.

Securities Markets Program (SMP)

Interventions by the Eurosystem in public and private debt securities markets in the euro area to ensure depth and liquidity in those market segments that are dysfunctional.


The creation of securities from a reference portfolio of preexisting assets or future receivables that are placed under the legal control of investors through a special intermediary created for this purpose—a “special purpose vehicle” (SPV) or “special purpose entity” (SPE). In the case of “synthetic” securitizations, the securities are created from a portfolio of derivative instruments. See also Special purpose vehicle or entity.


The difference between interest earned on securities acquired in exchange for bank notes and the costs of producing and distributing those notes.

Shadow banks

Nonbank financial intermediaries that provide services similar to traditional commercial banks. These include hedge funds, money market funds, and structured investment vehicles (SIVs).

Short selling

The sale of a security that the seller does not own with the intention of buying it back at a lower price.

Single Resolution Mechanism (SRM)

A common banking resolution mechanism for euro area banks that ensures a failed bank can be resolved in an appropriate manner (as proposed by the European Commission in February 2013).

Single Supervisory Mechanism (SSM)

A common banking supervision framework under the aegis of the European Central Bank for the euro area banks, as proposed by the European Commission in September 2012.

Small and medium-sized enterprises (SMEs)

Small and medium-sized firms, which in Europe are classified based on the number of employees and balance sheet turnover (according to EU law).

Solvency II

A Directive of the European Union (Solvency II Directive 2009/138/EC) that codifies and harmonizes insurance regulations in the European Economic Area. As part of its provisions, the directive determines the amount of capital that insurance companies must hold to reduce the risk of insolvency.

Special purpose vehicle or entity (SPV or SPE)

Usually a subsidiary company with a balance sheet structure and legal status that makes its obligations secure even if the parent company goes bankrupt. See also Securitization.


See Credit spread. Other definitions include (1) the gap between the market bid and ask prices of a financial instrument; and (2) the difference between the price at which an underwriter buys a new security from the issuer and the price at which the underwriter sells it to investors.

Standard deviation

A measure of the degree of potential movement of a variable. The variance of a variable is constructed by (1) calculating each observation’s deviation from the mean; (2) taking squares for each deviation; and (3) calculating the average of them. The standard deviation is constructed by (4) taking the square root of the variance. In a regression analysis, the standard deviation is computed for each coefficient estimate.

Statistically significant

An outcome that is not merely the result of chance. For example, if the same policy spurs economic growth by 1 percent at least 95 times in 100 trials, the policy’s effect can be said to be statistically significant from zero at the 5 percent confidence level.


Placing a creditor at a lower priority for the collection of its debt from the obligor’s assets; for example, when new, more senior debt is issued as part of a debt restructuring.


An agreement between counterparties to exchange periodic payments based on different reference financial instruments or indices on a predetermined notional amount. When the swap agreement is based on fixed versus floating interest rates, it is called an interest rate swap. When the swap agreement is based on two different currencies, it is called a cross currency swap. See also Credit default swap, Swap spread, and Total return swap.

Swap spread

The difference between the government bond yield and the fixed rate on an interest-rate swap of the equivalent maturity. See also Swap.


Interest-rate instruments that allow investors to take a view on future interest-rate volatility, using options to trigger underlying interest-rate swap agreements. A 10-year by 10-year swaption allows an investor to buy/sell a 10-year option on an underlying interest-rate swaps contract with a 10-year term.

Systematically important

Having the potential to impact the entire financial system. See Global systemically important banks (GSIBs), Global systemically important financial institutions (G-SIFIs), and Global systemically important insurers (GSIIs).

Systemic risk

The risk that the failure of a particular financial institution would cause large losses to other financial institutions, thus threatening the stability of financial markets. In the context of central counterparties, systemic risk can be understood as the risk that the failure of one participant to meet its required obligations would cause other participants or financial institutions to be unable to meet their obligations when due.

Taylor rule

Monetary policy rule, first proposed by the American economist John Taylor (1993), linking the level of the interest rate set by the central bank to deviations of inflation from its target and of output from its potential. The Taylor rate refers to the policy rate obtained by applying such a rule.

Term premium

The premium that the investor expects to be paid for buying longer-dated securities compared to shorter-dated ones.

Tier 1 capital

Under Basel III, Tier 1 capital or going concern capital comprises Common Equity Tier 1 capital and Additional Tier 1 capital (for further details, see See also Common Equity Tier 1 capital and Additional Tier 1 capital.

Tier 1 capital ratio

The ratio of a bank’s Tier 1 capital to its total risk-weighted assets (RWAs). Under Basel III, banks in member countries are required to meet the minimum Tier 1 capital ratio requirement of 6.0 percent and Common Equity Tier 1 capital ratio of 4.5 percent by January 1, 2015 (see Tier 1 capital).

Time dummy

In panel regressions, to see the average effect not dependent on the specific nature of different time (e.g., year, month, etc.), time dummies are included in regressors. For example, time dummies for annual panel data from 2000 to 2010 should be 10 dummies for each year. A time dummy for 2000 takes the value of one for year 2000 the value of zero for other years.

Too important to fail (TITF)

Financial institutions considered to be so large, interconnected, or critical to the workings of the wider financial system that their disorderly failure would destabilize both the financial system and the wider economy. Hence, public funds would be deployed to prevent such a failure.

Total return swap

A type of credit derivative that exchanges periodic payments at a set fixed or variable interest rate, for variable payments based on the total return of an underlying reference asset. See also Credit default swap and Swap.

Trade repository

An electronic data storage center where records of trades are kept. It captures various contractual details, such as counterparty identifiers, payment dates, and calculation protocols.

Trading book

An accounting term that refers to assets held by a bank that are regularly traded, and are not intended to be held for an extended period. See also Banking book.

Tripartite (or tri-party) repo

A repo transaction in which a custodian bank or international clearing organization (the tri-party agent) acts as an intermediary between the two parties. The tri-party agent is responsible for the administration of the transaction, including collateral allocation, marking to market, and substitution of collateral.

Turnover ratio

A measure of market liquidity showing the degree of trading in the secondary market relative to the amount of bonds outstanding. The higher the ratio, the more active the secondary market.

Unconventional monetary policies

Policies implemented by central banks that are not part of the conventional central bank toolkit, such as forward guidance on interest rates, long-term provision of liquidity to banks, and large-scale asset purchases.


The process that a financial institution, such as a bank or insurer, uses to assess the eligibility of a customer to receive a financial product, such as credit or insurance.

Value-at-Risk (VaR)

An estimate of the loss, over a given horizon, that is statistically unlikely to be exceeded at a given probability level, usually based on historical returns, covariances, and volatilities.

Vector error correction model (VECM)

A system of equations using variables that are known to be related (co-integrated). This restricts the behavior of the variables so that they converge to their long-term (co-integrating) relationship, while allowing for short-term adjustment dynamics. The latter occurs through a gradual correction of the deviation from the long-run equilibrium.

Vienna Initiative

The European Bank Coordination “Vienna” Initiative (EBCI) was launched in January 2009 to provide a framework for coordinating the crisis management and crisis resolution that involved large cross-border banking groups systemically important in emerging Europe. The European Bank for Reconstruction and Development, the IMF, the European Commission, and other international financial institutions initiated a process aimed at addressing the collective action problem. In a series of meetings, the international financial institutions and policymakers from home and host countries met with commercial banks active in emerging Europe to discuss what measures might be needed to reaffirm their presence in the region in general, and more specifically in countries that were receiving balance of payments support from the international financial institutions.


Chicago Board Options Exchange Volatility Index that measures market expectations of financial volatility over the next 30 days. The VIX is constructed from S&P 500 option prices.

Volcker Rule

Section of the Dodd-Frank Act seeking to restrict banks from using depositor funding to conduct proprietary trading and other activities that could expose banks to excessive risk.

Wholesale funding

The funding of banks in private markets, which is used in addition to deposits from customers, to finance bank operations. Wholesale funding sources include, but are not limited to, debt issuance, short-term instruments such as certificates of deposit and commercial paper, repo transactions, and interbank borrowing.

Wrong-way risk

The risk that the default risk associated with a financial contract is positively correlated with the risk of counterparty default. See also Counterparty risk.

Yield curve

The relationship between the interest rate (or yield) and time to maturity for debt securities of equivalent credit risk.


Standardized metric used to compare values across variables and time. It is derived by subtracting the population mean from the data point of interest and then dividing the difference by the population standard deviation.

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