DICTIONARY

Poland economy and financial market growth concept, 3D rendering

 

  • Business organization – FR – Organisation commerciale; ES – organización del negocio; DE – Geschäftsstruktur; IT – Organizzazione d’affari – An entity aimed at carrying on commercial enterprise by providing services or goods, in order to meet needs of the customers. All business organizations: have the common features such as formal structure, aim to achieve objectives, use of resources, requirement of direction, and legal regulations controlling them. The different forms of business organizations are Sole Proprietorship, General Partnership, Limited Partnership, Corporation, “S” Corporation, and Limited Liability Company.

  • Company  formation (LLC) – FR – Formation de l’entreprise;   ES – Formación de la compañía; DE – Firmengründung; IT – Costituzione di società – Limited company formation is the process of incorporating a business at Companies House in the structure of a limited company. Upon incorporation, a private limited company becomes a separate legal entity; an ‘individual’ that is completely distinct from its owners and responsible for its own finances, assets and liabilities. If a company becomes insolvent, the owners (shareholders or guarantors) cannot be held personally liable for debts or claims beyond the amount they have invested in shares or committed to pay in guarantees. This financial protection is known as ‘limited liability’ and it is one of the foremost reasons for choosing to operate as a limited company rather than a sole proprietorship.
  • Corporate complianceFR – Conformité de l’entreprise;  ES – Cumplimiento corporativo; DE – Corporate compliance;  IT – Conformità aziendale – The process of making sure your company and employees follow the regulations, standards, laws and ethical practices that apply to your organization. It does not really matter what industry your organization is in, corporate compliance is an essential part of operations. Effective corporate compliance will cover both internal policies and rules and general regulations of law. Enforcing compliance in corporate policy will help your company prevent and detect violations of rules. This can save your organization from fines and lawsuits, but the list of advantages is much longer.
  • Deal (Loan) StructuringFR – Structuration des transactions;  ES – Estructuración de transacciones; DE – Transaktionsstrukturierung; IT – Strutturazione delle transazioni – The design of a loan’s terms, conditions and security to meet the underlying financial needs of the borrower and the lender. Typical deal structuring measures are matching repayments to cash flow streams or having convenants sensitive to critical operating parameters so the banker is alerted early if something important is amiss. The structuring exercise is often the most creative and satisfying aspect of lending as the banker finds a smart way to meet the contrary objectives of both lender and borrower.

  • De-banking – The voluntary surrender of a bank charter to the regulatory authorities in order to move into business lines (such as insurance, underwriting) that are prohibited to banks. De-banking is primarily a phenomenon in the USA where sharp legal barriers prevent the mixing of banking and commercial activities. In the face of disintermediation trends, the value of a bank charter may be less attractive to financial institutions that no longer need to take deposits, make loans or transfer funds.
  • Debt Ceiling – FR – Plafond de la dette; ESTecho de la deuda;  DE – Schuldenobergrenze; IT – tetto del debito A self-imposed legal limit reated in 1917 on how much outstanding debt the US federal government can accumulate. The ceiling is unique to the United States (most countires will let their debts increase automatically when government spending outpaces tax revenue) and was designed to create a formal financial discipline on the the Federal government’s spending. The ceiling limits deficit spending that is financed by either borrowing money from investors through the issuance of treasury bills/bonds or borrowing from itself by tapping trust funds set aside by payroll taxes for future social security payments. The need to explicity raise the ceiling ensures that government deficits are part of the political system’s consciousness. Its power as a spending constraint has been diluted by a repeated pattern of Congriessionally-sanctioned increases, whenever there is a threat of shutting down government operations, The brinkmanship to stave off a “default” has tended to make breaching the ceiling a routine and predictable event.
  • Debt ConciliationFR – Conciliation de la dette; ES – Conciliación de Deuda; DE – Schuldenvermittlung; IT – Debito di conciliazione – A step taken in recovery work-outs where a lender, acknowledging that full repayment from either the going concern or security realiation is highly unlikely, will voluntarily forgive or convert to equity a certain protion of the debt. This is done in the hope of increasing the chances of a full recovery on the remaining, reduced portion. While debt conciliations may clearly make rational sense in those instances where reluctant to be forgiving. First, there are concerns about moreal hazard amongst other borrowers when they see a bank setting a precedent in the market of voluntarily forgiving debt when a borrower is in financial distress. There are also often deep suspicions about whether a concession is really what is says it is (see won’t pay or can’t pay). Finally, an insistence upon fully honouring debts might be pig-headedness guised in a sense of indignant righteousness.
  • Debt Counselling – FR – Counseling de la dette; ES – Consejería de Deuda; DE – Schuldenberatung; IT – Counseling debito –  Consumers who get “over their heads” in debt sometimes need advice on either personal finance (e.g. household budgeting, long term savings plans or debt consolidation loans etc.) or, on another level, even their personality traits that compel them to over-spend and get into excessive debt. Consumer debt, especially any-purpose “cash loan”, by design usually offers “convenient” payment amounts. This benefit can be accompanied by high interest rates, which many borrowers are insensitive to for small amounts or, worse, are not even aware of. In this way even modest individual debts can aggregate into a “debt bondage”, especially if there is “pyramiding” at work i.e. borrowing from one lender to repay another. Other consumer temptations are in lease financing (especially “aspirational” consumer items like cars) where lenders worry less about the repayment capacity knowing that they can recover through the asset itself. Typically, banks, even ethically conscious ones, don’t offer debt counselling. Their implicit motto is “let the borrower be wary”. Rather, by focusing on debt servicing capacity and the ability to comfortably handle debt loans they indirectly engage in “respondible finance by looking out for their own interests. Ideally, if a cautious bank is willing to lend you money, you can afford to pay it back. Other market participants – see loan sharks – are another matter. People in need of debt counselling often have to resort to either social welfare agencies or personal financial adviser.

 

  • Debt reschedule FR – Rééchelonnage de la dette; ES – Reescalonamiento de deuda; DE – Schuldenumschuldung; IT – Reschedule debito – To stretch out the payment timetable and maturity date of a loan in the hopes that the borrower, given extra time to accumulate the necessary cash, can fulfil the original “loan agreement” if only a little late.  In the meantime, interest continues to accrue, Additionally, the borrower may provide consideration – fees, more security or operating improvements – in exchange for the bank’s exposure to further term risk. Sometimes rescheduling can be as simple as waiving a missed principal repayment and adding it to end of the loan. Rescheduling is undertaken on the confidence that the borrower is fundamentally sound and that slipping into default was due to a temporary liquidity shortage; say a profitable enterprise that has overspent on fixed assets or there is a temporary downturn in its market. In theory a company can run into solely financial difficulty, in which case the solution should also be purely financial. However, this is rare and banks must satisfy themselves about other reasons, which makres rescheduling the debt a means of buying time.

 

  • Debt Service CapacityFR – Capacité du service de la dette; ES – Capacidad del servicio de la deuda; DE – Schuldendienstkapazität; IT – Capacità di servizio del debito –  The ability of a borrower to “service” (i.e. pay interest and repay principal) a quantifiable maximum debt load based upon the dedication of future income flows over time. The notion of ‘service’ (as maintaining output capacity) suggests permanent sustainability; the notation of ‘capacity’ suggests a maximum amount. In all, DSC is an equilibrium concept in the sense that the borrower can manage all its obligaitons. In the case of a business borrower, DSC entails comparing an estimate of the future generation of cash flow operations to all other demands for cash. An important aspect of the DSC calculation in the recognition the money (for existing debt service, capital expenditures, working capital growth etc.) must also be spent to support future cash flow operations, especially if these are forecasted to be growing. Thus, the DSC of an individual is calculated after taking account of their living expences; a overnment’s DSC is after taking account of their public expenditures. In the case of business enterprise, incremental DSC is calculated by seeing how much discretionary cash flow will be available after meeting existing obligations.

 

  • Debtors’ RightsFR – Droits des débiteurs; ES – Derechos de Deuda; DE – Schuldnerrechte; IT – Diritti dei debitori – The legal rights of borrowers, both in common or statute law (e.g. bankruptcy) and spelled out in loan contracts and security agreements. Apart from any rights specifically contained in the loan contract, the debtor has the general rights that most of us have. Lenders must deal with them honestly, not bankrupt the debtor or seize its property without good reason etc. These rights are rarely spelled out in legislation but are upheld in the the courts in common law countries.

  • Deemed Trust (legal concept) – FR – Confiance présumée; ES – Confianza presunta; DE – Als vertrauensvoll angesehen; IT – Fiducia ritenuto – Any automatically binding trust obligation that may exist even without the benefit of a formal agreement. For example, deductions for value added tax, employee social security payments and employee income tax deductions at payroll source will usually be considered deemed trusts on behalf of the government. The collecting enterprise has not borrowed any non-remitted money but rather holds it on behalf of others. In a bankruptcy, deemed trusts have a higher priority than other debt obligations. If they are specified to be super-priorities, deemed trusts can even come ahead of secured lenders.

  • Direct debitFR – Prélèvement automatique; ES –  Domiciliación bancaria; DE – Lastschrift; IT – Addebito diretto – A payment out of a bank account made without writing a cheque/check. Account holders may initiate this through standing orders or by electronic banking transactions. Direct debits are especially conveninet for regularly repeated payments (e.g. mortgage payments, utility bills etc.) which can be planned in advance. 

 

  • Due Diligence (Lender’s) – FR – Prêteurs de diligence raisonnable; ES – Prestamistas diligencia debida; DE – Kreditgeber Due Diligence; IT – Istituti di credito di due diligence – Thoroughly checking the facts and circumstances of a borrower’s situation as part of a “credit analysis” with the ultimate aim of formulating a critical bankers’ judgment of a borrower’s “creditworthiness”. The term in rather formal and legalistic compared to the banker’s vernacular of “credit investigation”. In lending, it means being careful, detailed, sceptical and, especially, curious (to “join the dots” in a hidden pattern). The very word diligence (“to work hard”) cannotes energetically digging deep into the guts of things to go beyond superficial impressions. Due diligence is most important when a relationship or borrower is new and untested. For example, in the case of a first time borrower, it might include the following steps: investigating corporate identity and ownership, confirming legal status and authority to borrow, running industry reference and credit bureau checks, visiting premises and inspecting operations, gathering facts and statistics about the industry, scanning central security and corporate registries, obtaining a bank report on past conduct, reviewing pertinent legal documents e.g. sales contracts, communicating with company auditors, assessing a business plan, calculating debt repayment capacity, valuing security.

 

  • Entrepreneur –  FR – La Entrepreneur; ES – El Empresario; DE – Der Unternehmer; IT – Lo Imprenditore – Someone who exercises initiative by organizing a venture to take benefit of an opportunity and, as the decision maker, decides what, how, and how much of a good or service will be produced.An entrepreneur supplies risk capital as a risk taker, and monitors and controls the business activities. The entrepreneur is usually a sole proprietor, a partner, or the one who owns the majority of shares in an incorporated venture. From the French word entreprendre, which means “to undertake”. An entrepreneur is business person who has the independence, drive, energy, vision and risk tolerance to start their own business, usually as a small and medium enterprise. It its purest form, the entrepreneur is a smart, ambitious gambler with a clever idea worth exploiting. This is more of a negative stereotype than reality. All good business people, even bankers, will have some entrepreneurial flair – a creative eye for profit opportunities. Successful entrepreneurs balance this flair with the judgement of risk and prudence necessary to assure a going concern. The function of entrepreneurs is to reform or revolutionise the pattern of production by exploiting an invention, or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, reorganising industry. A common trait is that entrepreneurs may lack the administrative and management skills, or inclination, to run a business once it grows to a certain size. Hence, the high failure rate for start-ups. The ability of capital markets to finance entrepreneurs is a key determinant in an economy’s growth and productivity. For the same reason, progressive governents want a healthy social infrastructure.

 

  • Export Credit Agency (ECA)FR – Agence crédit à l’exportation, ES – Agencia de Crédito a la Exportación, DE – Exportkreditagentur , IT – Export Credit Agency  Government-sponsored entities (e.g. USA’s Eximbank, Germany’s Hermes etc.) that promote the exports of their own domestic industries. Multi-lateral aid agencies (e.g. World Bank etc.) can also engage in ECA-type activities for the sake of helping needy import dependent countries. In their capacity in promoting offshore investment, they are also known as ”Investment Insurance Agencies”. Most industrialised nations have at least one ECA, which is usually an official or guasi-official branch of their government. The motives are largely self-serving since export markets generate jobs and taxes back home. There are several roles for governmental intervention in the private capital market. Exporting, especially to poorer under-developed countries, has an inherent risk which the private sector (especially small and medium eterprieses with no global operations) needs help with. Official agencies are in a better position to resist political risk from expropriation, foreign exchange restrictions, etc. because governments think twice before offending another state. There are scale economies since most diplomatic missions abroadwith a commercial mandate can gather local market intelligence. A weaker justification is that a country’s national champion’s i.e. companies that governments conside “strategically” important, deserve export subsidies. Finally, a rationale that is perhaps unspoken that “the other guys are doing it” i.e. in the fierce competition for global market share, countries have to ‘play the game’ or lose out. An ECA will provide a variety of services to facilitate its country’s exports. The largest volume of ECA activity is support for short term trade credit to exporters (see graph below). Ideally, ECA assist exporters on a self-sustaining basis without relying on tax dollars. They will raise funds by charging fees for services and interest on their loans, as well as issuing debt in capital markets.

  • Facility, Credit or Loan (vernacular) – FR – Facilité, crédit ou un prêt ; ES – Instalación, crédito o préstamo ; DE – Einrichtung, Kredit oder Darlehen ; IT – Facility, credito o prestito – Any formal arrangement where a bank agrees to provide a specified range of credit related financial services in the future. Typically, this will be a loan in various currencies and borrowing options. The word’s roots come from “facilitating” something or allowing it to happen. It is synonymous, and s more formal, terminology for a committed line of credit with several built-in options. Facilities are usually associated with larger, more sophisticated corporate borrowers. Their inherent advantage to borrowers is in offering a flexible range of financing options that they can chose from within a single banking agreement. Facilities are documented by a formalised contract or a loan agreement and, by inference, detailed terms and conditions.

  • Financial Base (vernacular) –FR – Base financière, ES – Base Financiera, DE – Finanzbasis, IT – Base finanziaria – A term meant to convey an enterprise’s overall financialability to support its present operations and possible future expansion. While this could come from operating cash flow or third party creditors, financial base usually implies a combination of equity and working capital sufficient to build a sound business upon.

  • Financial Depth (of an Economy) – FR – Profondeur financière, ES – Profundidad financiera, DE – Finanztiefe, IT – Profondità finanziaria  The degree of intermediation in the economy between savers and investors through the financial sector. Basic categories of financial assets include equity securities (e.g. stock market), private debt (e.g. bond market), government debt and bank accounts. In 2005 the world’s average financial depth according to McKinsey amounted to 316% of GNP (see graph left). The composition and degree of financial depth will vary considerably from economy to economy. For example, American households tend to hold more equities than Europeans. In the case of banking assets, the average European economy’s financial depth is approximately 90-110% whereas emerging markets such as Poland are 30- 40% . Assuming a trend towards, emerging market banking sectors are thus riding two waves: growth in GNP and increasing financial depth as a share of GNP.Financial depth is both a reflection and a driver of economic development (see graph above right) When there are low levels of institutional infrastructure, savings and market transactions, most of a given economy’s households have little need for a bank account(see unbanked and mattress money). As intermediation flows increase through a sound banking system, an economy is given the stimulus that comes from increased consumption from consumer finance and enterprises that have better access to capital. That said, excessive, or distorted (e.g. too much sub-prime activity or speculation), financial depth can have deleterious consequences.

  • Financial Discipline (Bank Credit) – FR – Discipline financière, ES – Disciplina Financiera, DE – Finanzdisziplin, IT – Finanzdisziplin – Banks have a special role to play in fostering healthy financial discipline within a competitive economy. Their lending activities have many ‘externalities’ ( e.g. knock – on consequences beyond their own privately motivated actions ). By looking out for their own self –interests by having strong loan portfolios, other parties in the suppliers and customers ) will benefit as well. The behavioural impacts of qualifying for bank credit and ongoing dealings with a bank can be felt in a variety of ways, all of them beneficial to economies overall. To be of the greatest good to the economy, banks must be self- disciplined themselves. They need to use prudent and commercially viable banking practices. For example, aggressive lending and mispriced risk will tend not to discriminate on quality. When any one can get a loan some will inevitability by undeserving and ‘fool the market’ into thinking they are viable. Excessive credit can lead to asset bubbles, distort resource allocation by encouraging speculation and risk a consequent financial meltdown. Self- discipline is needed to lend and should be based primarily on an accurate assessment of financial viability and repayment capacity as opposed to a timid over –  reliance on collateral security ( an excessive dependency makes banks akin to pawn – brokers ). See also gatekeeper function and creative destruction.

  • Financial Institution FR – Institution financière ; ES – Institución financiera ; DE – Finanzielle Institution ; IT – Istituzione finanziaria – A broad grouping of enterprises ( e.g. banks, insurance companies etc.) offering financial s)ervices to the public. The word is rather formal. Compared to its alternative description as a “company” or a “business”, it also conveys certain connotations. Typically, (but not always) financial institutions are large and regulated with the implicit endorsement  of a government  or regulator. In the case of banks, they are even more intimately linked to governments via deposit insurance and access to a liquidity backstop from a central bank. Financial institutions are usually intermediary (see intermediating) as opposed to acting as agents of behalf of others. Hence, asset management firms such as mutual funds, hedge funds and private equity funds are generally not described as such. Access to capital from financial institutions can be contrasted to money coming  via the public capital markets. Due to their permanence, financial institutions tend to be relationship – oriented ( see originate and hold model) versus transaction – oriented.

 

  • Financial – Industrial GroupsFR – Financial – Industrial Groups ; ES – Financiero – Grupos Industriales; DE – Finanzielle – Industriegruppen; IT – Finanziaria – Gruppi Industrial – Financial institutions either combining themselves with industrial enterprises (e.g. USA’s General Electric) or holding large controlling shareholdings in industrial enterprises. In most developed market economies ( especially with an Anglo –Saxon heritage), such unity is considered unhealthy ( a concentration of economic power that can influence politics) or imprudent ( insider dealing threatening the objective stewardship of public depositors). Indeed, not only were financial – industrial groups outlawed but link – ups between different types of banks were often restricted. Another vision (German universal banks, Japanese zaibatsu, Korean chaebol) sees such groups as benign engines of economic growth, justified in catch –up or rebuilding  periods.
  • Fluctuations On Account –  FR – Fluctuations en compte; ES – Fluctuaciones en Cuenta; DE – Schwankungen auf Konto; IT – Fluttuazioni in conto – Transactional activity in a deposit account or line of credit that causes it to fluctuate. For example, in an overdraft, deposits will automatically reduce credit usage while withdrawals will increase it. Such a pattern (the wider the better) is considered healthy since it reflects behavior consistent with a viable going concern generating and consuming ample flows of cash. In particular, the periodic reduction in exposure from inbound deposits reflects  successful selling or collection activities which are an important source  of repayment in asset conversion loans. The alternative of account inactivity is a warning sign of a troublesome hard core loan. Fluctuation on account  is a common focus point for credit monitoring.

  • Global Financial InstitutionFR – Institution financière mondiale; ES – Institución Financiera Global; DE – Globales Finanzinstitut; IT – Istituzione finanziaria globale – A financial institution with a strategy to operate internationally with activities in a broad range of countries across the globe. Many banks may operate in regions close to their home market and may be active in the Euromoney market. They are the equivalent of an American super – regional. Relatively few banks try to offer seamless service it is often seen that way ( see league table below ). Truly global banks, in the sense of round-the-world retail presence, would be confined to, say , Citibank,  HSBC and a few  others. The term has tended be liberally used. Scotiabank uses the word  “ global” 103 times in its 2008 annual report. That said, even though it operates in 50 countries with an office on every continent, it unpretentiously refers to itself as an “ international bank “. Global institutions are a response to financial globalization in which multi – national corporations need a world-wide bank. They also try to capture economies of scale, diversification and arbitraging opportunities in international markets. Working against them are the perils of decentralization ( e.g. operating in markets with different languages and law ) and the tendency to be perceived as “foreign” in many markets. Regulators are collectively concerned about the potential for systemic risk in such organizations since national accounting, legal and supervisory systems may be inadequate to cope with the demands of global institutions.  Note that the term “international institutions “ can also refer to entities – such as the IMF or World Bank – established by more than one country and governed by international law.

  • Government – Sponsored Enterprises (GSEs)FR – Entreprises sponsorisées par le gouvernement; ES – Empresas Patrocinadas por el Gobierno; DE – Regierung – Sponsored Enterprises; IT – Governo – imprese sponsorizzate – A primarily American term for a hybrid enterprise that is privately owned and operated for profit but which also enjoys indirect but explicit government support. This is in contrast to a ”state – owned enterprise “ (a.k.a. “crown corporation” in some countries such as Canada) that is owned and operated by the government on commercial terms. Government backing tends to be implicit at best. Arguably any licensed or chartered entity – including, for example, a commercial bank – is a form of a GSE even if the government support is implicit. Two notoriously problematic GSEs in the USA are the institutions that were meant to encourage home ownership and be market – makers in mortgages. While these were legitimate mandates, they ended up feeding a mortgage lending frenzy that caused the sub – prime crisis.

  • Greenfield Project Greenfield Project   – FR – Projet Greenfield; ES – Proyecto Greenfield; DE – Greenfield-Projekt; IT – Progetto Greenfield – A project with a start – up phase that has no prior operating track record. The project has to be first constructed (hence the term describing building on a green field site) and then phased in before becoming operational at which point it will start generating cash flow. Thus there are inherent risks from technology (e.g. will it operate as designed?) and construction (e.g. cost overruns).

  • Group of Thirty (G30)FR – Groupe des Trente (G30); ES – Grupo de los Treinta (G30); DE – Gruppe von dreißig (G30); IT – Gruppo di Trenta (G30) – A non-profit think-tank, lobby group and influential informal network composed of the ‘great and the good’ from the world of global finance. Formally, it describes itself as a “consultative group on international economic and monetary affairs”. Its original interest was in promoting improvements in global settlement and clearing systems to reduce systemic risk and contagion. In the aftermath of the Credit Crisis of 2007 – 2009, the G30 now researches and advocates improvements in financial regulation and financial stability.

 

  • Guarantee (To) – FR – Une garantie; ES – Garantía; DE – Garantie; IT – Garanzia – To promise to repay another’s debt conditional upon the prime obligor’s  failure to do so ( usually triggered by some formal mechanism of demand following such a failure). Guarantees can either be for the full amount of whatever is outstanding (all monies ) or limited to a specific amount. To be useful as collateral security, a guarantee must be in writing to be an enforceable legal contract. Guarantees may even have an indemnity clause binding the guarantor even if there is a technical flaw in the contract. The beneficiary of a guarantee ideally wants a “ clean ( vs. conditional) instrument. Normally, all the beneficiary need do is to prove that guarantee was correctly called and not paid. The motive for guaranteeing maybe either for the sake of consideration, fee income, altruism or ownership. In general, most guarantees are issued in the calculated reckoning that they will never actually have to be honoured ( this “surprise factor” has consequences when they are called upon ). In the meantime, guarantors ( i.e. those who guarantee ) have certain legal rights (which will vary amongst legal regimes ). For example, they often need to know the nature and extent of their potential liability; be kept up-to-date about any significant deterioration in the primary debtor’s financial status; and they may have the right to approve material changes in the guaranteed obligation. As well, a creditor is often obliged to act responsibly in dealing  with the debt. All this means that lenders have to be ‘on their toes’ when relying on a guarantee.

 

  • Insolvency – The financial state of being unable to meet obligations when they are due for payment. Thus, insolvency means being both illiquid and unable to borrow from anybody. Defined this way, insolvency is time-sensitive. A company may have positive net worth yet be insolvent because it lacks the time to liquidate assets to pay off creditors. The other insolvency criterion is an absence of positive net worth. This ‘balance sheet’ test is really not that different than the criterion of meeting your obligations when they are due (also known as a ‘cash flow’ criterion). It is simply the cash flow criterion applied to a borrower who is wound down and liquidated. The balance sheet insolvency test tends to be more difficult to invoke since it requires a process of accounting to be done. This takes time and historical cost asset values may not reflect liquidation values. The more stringent test is payment default. In this regard, insolvency is also function of creditor confidence and a willingness to refrain from repayment by rolling over liabilities. A bank, for example, could easily be technically insolvent if all its depositors asked for their money back at once. So long as a bank can pull off is confidence game, depositors seldom do.

  • Interest Rate Risk (Borrower) –  FR – Risque de taux d’intérêt (Emprunteur); ES – Riesgo de tasa de interés (prestatario); DE – Zinsrisiko (Kreditnehmer); IT – Rischio di tasso di interesse (mutuatario) – The risk that a borrower with floating rate debt will suffer deterioration in income and cash flow due to a movement in the market’s interest rates. The impact will depend on the borrower’s  leverage and the interest rate elasticity of the borrower’s market demand. Interest rate risk can be reduced by using fixed rate debt or employing hedging instruments such as swaps. Because of the adverse impact on borrower debt service capacity, banks will generally react to higher interest rates by lending less. This is the prime mechanism which makes interest rates a monetary policy tool to “cool down“ or “heat up” an economy.

  • Investment BankFR – Banque d’investissement; ES – Banco de inversiones; DE – Investmentbank; IT – Investimento bancario – A kind of business bank that concentrates on intermediation in the form of underwriting, dealing in securities (either as a market- maker for short term liquidity or more speculative proprietary trading), asset management and rendering corporate finance advice (e.g. mergers and acquisition, privatisation etc.). The quintessential example might be America’s Wall Street bank Goldman Sachs. The distinction between the more common commercial bank and more exclusive investment bank is partly regulatory ( supervisors often want separation to avoid conflicts of interest and to diversify  business risk; see Volker Rule) and partly natural ( commercial banks hold illiquid assets on a relationship basis to maturity vs. the transactional, impersonal market trading of an investment bank). A fundamental difference  is that investment banks do not fund themselves with deposit liabilities that form part of the money supply. The distinction is eliminated with a universal bank which is the general provider of capital along a broad spectrum from short term debt to permanent equity. The twin forces of  deregulation and disintermediation are tending to move commercial banks towards investment banking as their traditional business base of lending is lost. In the absence of accepting deposits, investment banks tended to be less regulated and were generally exempt from the too big to fail doctrine. After the credit crisis of 2007-2009 and lessons from Lehman Brother’s failure, investment banks are perceived ass toointerconnected-to-fail.

 

  • Know the Borrower/Customer Rule (vernacular) – FR – Connaître la règle de l’emprunteur / client; ES – Conozca la Regla del Prestatario / Cliente; DE – Kennen Sie den Kreditnehmer / Kundenregel; IT – Conosci la Legge del Cliente / Cliente – An important rule-of- thumb in lending that says that lending bankers should be thoroughly familiar with their counter-parties. At the least, this means being able to answer some very basic but essential questions:

    – Who owns the borrower?

    – Where did the owners get their wealth?

    – How is their official status substantiated? Incorporation? legal registries?

    – Who manages the borrower: education, experience & track record?

    – What does the borrower do to earn money? customers? suppliers? activities? locations?

    – Can the bank identify, through credit analysis, what risks the borrower is taking?

    – Based on the above, what transactions will the bank be involved in?

    Know-the-borrower is a prerequisite to risk management. A bank cannot gauge risk unless it knows who it is dealing with. Investigating these things is the essence of due diligence. The know-the-borrower rule is particularly important in situations where a relationship does not already exist e.g. new customers in private banking or start-ups. It is also important even with depositing customers (i.e. “know-the-customer”). To quard against money laundering, a bank should know where the deposits come from.

 

  • Lending SpreadsFR – Spread de prêt; ES – Préstamos Spreads; DE – Ausleihungen; IT – Diffusione di prestiti – The nominal average difference between a bank’s borrowing and lending rates, without compensating for the fact that the amount of earning assets and borrowed funds may be different. (This is in contrast to the bank income statement’s net interest margin (NIM) which compares total interest earned versus interest paid on deposits (which won’t necessarily equal loans) as a percentage of loans). Thus, if a bank is charging interest on loans of, say, 10% on average  and paying interest of, say, 4% on average, the lending spread is 6%. The market transaction measure of lending spreads will impact reported financial statement results of NIM on the income statement. In fact, there are several spreads depending on which loans and which funding sources are selected.

 

  • Letter of Credit (L/C) FR – Lettre de crédit (L / C); ES – Carta de Crédito (L / C) ; DE – Akkreditiv (L / C); IT – Lettera di credito (L / C) – A broad, generic term for any banker’s letter authorising payments up to a specified conditions. For instance, before the days of traveller’s  cheques, a bank could authorise its correspondent bank to pay out funds to the home bank’s client in a foreign country. A basic distinction in L/Cs is between an “irrevocable” L/C which cannot be cancelled without the beneficiary’s consent whereas a “revocable “ can be. A “clean” in the sense of having no complications or clutter. Its absence of preconditions is meant, by design, to make it virtually as “good as money in the bank”.

 

  • Liability Management (LM) – Traditionally, the asset-liability management (ALM) function of the bank encompassed the ‘big picture’ of matching both sides of a bank’s balance sheet. On the liabilities side, some of the key On the liabilities side, some of the key objectives of ALM would be:
  • – demands for cash withdrawal can be met comfortably
  • – ensuring an adequate volume of funds to carry total assets
  • – minimising the interest costs paid to attract deposits
  • matching the maturity and interest rate structure (fixed vs. floating) of  deposits to assets
  • – finding the optimal mix between wholesale and retail deposits
  • – finding ways to capture and retain a core deposit base
  • – considering alternative funding sources e.g. subordinated debt, hybrids, preferred shares etc.
  • – using derivatives to hedge unmatched liabilities.

 

  • Lending Spreads – The nominal average difference between a bank’s borrowing and lending rates, without compensating for the fact that the amount of earning assets and borrowed funds may be different. (This is in contrast to the bank income statement’s net interest margin (NIM) which compares total interest earned versus interest paid on deposits (which won’t necessarily equal loans) as a percentage of loans). Thus, if a bank is charging interest on loans of, say, 10% on average  and paying interest of, say, 4% on average, the lending spread is 6%. The market transaction measure of lending spreads will impact reported financial statement results of NIM on the income statement ( see quote below ). In fact, there are several spreads depending on which loans and which funding sources are selected.

  • Letter of Credit (L/C) – A broad, generic term for any banker’s letter authorising payments up to a specified conditions. For instance, before the days of traveller’s  cheques, a bank could authorise its correspondent bank to pay out funds to the home bank’s client in a foreign country. A basic distinction in L/Cs is between an “irrevocable” L/C which cannot be cancelled without the beneficiary’s consent whereas a “revocable “ can be. A “clean” in the sense of having no complications or clutter. Its absence of preconditions is meant, by design, to make it virtually as “good as money in the bank”.

 

  • Liability Management (LM) – Traditionally, the asset-liability management (ALM) function of the bank encompassed the ‘big picture’ of matching both sides of a bank’s balance sheet. On the liabilities side, some of the key On the liabilities side, some of the key objectives of ALM would be:

    – demands for cash withdrawal can be met comfortably

  • – ensuring an adequate volume of funds to carry total assets

    – minimising the interest costs paid to attract deposits

    matching the maturity and interest rate structure (fixed vs. floating) of  deposits to assets

    – finding the optimal mix between wholesale and retail deposits

    – finding ways to capture and retain a core deposit base

    – considering alternative funding sources e.g. subordinated debt, hybrids, preferred shares etc.

    – using derivatives to hedge unmatched liabilities.

 

  • LIBOR – London Interbank Offered Rate is a reference rate of interest offered to be paid on wholesale deposits i.e. by takers of funds of various time periods (maturities ) in ten different currencies. LIBOR is calculated as a ‘trimmed average’ of the funding costs of the largest, most active banks operating in London’s Eurocurrency interbank money market. Baset on a concentration of lending and foreign exchange transactions in London, LIBOR thus represents the lowest real-world cost of unsecured funding and is a primary benchmark for short term interest rates globally. For purposes of transparency and neutrality, LIBOR is publicly quoted under the auspices of the British Bankers’ Association. A bank’s actual cost of funding will vary with is standing in the market (with a premium or discount being paid versus the LIBOR reference rate). LIBOR is the basis for loan pricing(i.e. LIBOR + ¾% etc.) to large corporate borrowers. As such, it removes any borrower dependency on a lender’s particular status in the market. LIBOR’s reference rate status is also the basis for settlement of interest rate contracts on many of the world’s major futures and options exchanges. It is also used for an increasing range of retail products, such as mortgages and college loans. Along with the default-credit-insurance market, LIBOR is a proxy for the state of confidence in the overall banking system.

  • Line of Credit – FR – Ligne de credit; ES – Línea de crédito; DE – Kreditlinie; IT – Linea di credito – A pre-established amount of credit for a specified period of time that a borrower can utilise if, as and when they need liquidity .When combined with a deposit current account, a line of credit or overdraft facility (British terminology) is a convenient and economical way to manage liquidity. Deposits serve to reduce the outstanding loan while withdrawals increase it. Borrowers like such a financial product because of is convenience (usually there are no restrictions on purpose), flexibility and reduced borrowing cost (interest accruing only on outstanding amounts). Since a line of credit’s utilisation can go up or down, the lender does not have the comfort of seeing a term loan’s consistent repayment. Indeed, to the extent that interest is paid by the line of credit itself, even capitalised interest can go unpaid. Therefore lines of credit should be granted based on the creditworthiness of borrower versus exposure (i.e. assuming a fully drawn line). Additionally, they should exhibit fluctuations on account, be continuously monitored and ideally have periodic clean ups.

 

  • Liquidator – FR – Liquidateur; ES – Liquidador; DE – Liquidator; IT – Liquidatore – Any party engaged in selling a business’ assets as part of a liquidation. Liquidators work on behalf or owners or creditors. Depending on who retains them and what has to be sold, liquidators can be trustees in bankruptcy, receivers, auctioneers, real estate agents or collection agencies. They will work either for a fixed fee or percentage of the recovery. One of their core competencies must be the ability to get a reasonable (under the circumstances) sales price for the assets being sold.

 

  • Liquidity ( Asset ) – FR – Liquidité (actif); ES – Liquidez (Activo); DE – Liquidität (Vermögen); IT – Liquidità (Asset) – The capability of an asset to be converted to cash, usually by selling it at arm’s length into a market with a high volume of trading which continually adjusts prices in response to supply and demand. Furthermore, any sale must able to proceed with modest transaction costs and promptness. Money market assets are generally the most liquid because there is a large and active volume of trading. Real estate property assets, in contrast, are generally illiquid because trading is thin, selling costs ( valuations, commissions etc.) are high and value is uncertain. An asset’s liquidity is a function of not just the size of its market but also of the diversity of opinion of those trading in it. The less they disagree, the less liquidity there will be.

 

  • Liquidity Risk (Banks) – FR – Risque de liquidité (banques); ES – Riesgo de Liquidez (Bancos); DE – Liquiditätsrisiko (Banken); IT – Rischio di liquidità (banche) – The risk that an enterprise will be short of cash to meet obligations when they are due. In extremis, this can mean default and insolvency, leading to the demise of a business. This is clearly an unattractive situation. In the case of banks, liquidity risk is of particular concern since their very raison d’etre is to be a ‘rock- solid’ reliable supply of liquidity to the rest of the otherwise illiquid economy. Banks can face sudden and large demands for cash from a number of sources:
  • roll-over of large wholesale deposit liabilities at maturity
    withdrawals of deposits payable on demand, due to a run
  •   drawdowns in cash to fulfil loan commitments or derivative contracts
  • settlement of high volumes of receipt and payment transaction flows.

 

  • Loan Agreement – FR – Accord de prêt; ES – Acuerdo de prestamo; DE – Kreditvereinbarung; IT – Accordo di prestito – A contractually binding legal agreement that defines the terms and conditions of a loan. Loan agreements can be extensive, detailed and complex (“ memorandum”) or short, simple and general (“letter agreement”) depending on the circumstances. Ideally, as well being a legal document, they should be an useful tool to assist both lender and borrower in clarifying the nature of their business relationship. While they can contain a lot of boilerplate, the essential points typically addressed are:
  • – definitions of parties and language terminology
  • – borrower specification
  • – lender specification
  • – borrower representations & warranties
  • – amount and limits
  • – availability (currency, options & facilities) and conditions precedent
  • – interest rates
  • – repayment schedules
  • – covenants and financial tests
  • – remedies upon default, including those in the event of material adverse change
  • – prepayment options & penalties
  • – maturity
  • – dispute resolution

  • Maturity TransformationFR – Transformation de la maturité; ES – Transformación del vencimiento; DE – Maturity Transformation; IT – Trasformazione della maturità – Borrowing short term (at low interest rates) and lending longer term ( at higher interest rates ) and thereby earning a spread that is enhanced by the yield curve. Banks, in spite of a mission to intermediate by matching, can do this profitably and prudently for three reasons :

    – the ‘law of averages’ ensures that core deposits, even if on demand, will be relatively stabile

    liquidity reserves, ALM and inter-bank markets can satisfy any sudden or large withdrawals

    – access to central bank as a lender of last resort can guarantee cash in a panic.

 

  • Merchant BankingFR – Merchant Banking; ES – Merchant Banking; DE – Merchant Banking; IT –  Merchant Banking – Small, specialized banks engaged in equities investment, private banking, and  corporate finance advisory services such as valuations, privatisations and corporate restructuring. While they might compete with their big brother investment banks, merchant banks were typically highly specialised niche players confining themselves to activities or sectors where they had an advantage of superior market know-how. They tended to avoid trading and securities underwriting since they lacked a distribution network. The association with “merchant” is historical : its roots go back to commercial traders who, because of their intimate knowledge of an industry, were able to finance other players often by acceptance of their commercial paper. From there, they went into investing and advice-giving. The merchant banking business model was traditionally associated with an elite pack of British firms in the City of London. When the ‘Big Bang’ market reforms occurred in the late 1980s, most of the old established names (e.g. Morgan Grenfell, Warburg and Kleinwort Benson etc.) were gobbled up bigger investment banks although some independent players are now making a come-back.

 

  • Money LaunderingFR – Blanchiment d’argent; ES – Lavado de dinero; DE – Geldwäsche; IT – Riciclaggio di denaro – The fraudulent use of the banking system by crooks (drug dealers, the Mafia, tax evaders etc.) and terrorists to hide the gains from illegal activities that typically arise on a cash basis. Money laundering has three basic components: Placement –  Get “dirty cash into the banking system where it is “off the street”( and vulnerable to other predators ), physically out of sight and safely stored; Layering – Cover up the original source of questionable bank balances by a series of complex transfers from one account to another in order to eradicate an audit trail and make it difficult for any investigation to find the ultimate source of the money; Integration – Give ill-gotten wealth a legitimacy by artificially attributing it to some legal business activity or investment acting as a “front” and thereby creating an explanation for a wealthy lifestyle. Because of the international rise of crime and the willingness of the regulatory authorities is over ride respect for privacy, banks should be especially wary of anybody trying to make large, unexplained cash deposits. The banker’s best defence against being an unwitting accomplice to crime is a hard-nosed sense  of curiosity and faithful pursuit of the old adage of “knowing your customer”:

    -Do we know – from references, past history or public information – who they are?

    -Can we independently substantiate their identity?

    -where do they earn their money and does it appear to be by honest means?

    -Why are they dealing with us, especially if we are being offered a “favour”?

    – Are their dealings on a normal commercial basis which sense?

    Many countries have passed stringent anti – laundering laws that make it an offence to be a party to launders. In the UK, for example, individuals have a legal duty to notify the authorities of suspected laundering. Bankers, lawyers, accountants and advisors have to be careful, not only to protect themselves (since money launders do not want to do business so much as use the bank as a cover), but also to comply with law.

 

  • Payment Default – FR – Par défaut de paiement; ES – Pago predeterminado; DE – Zahlungsstandard; IT – Pagamento predefinito – A sub-set of default caused by failure to make either an interest or principal payment when it is due in accordance with the terms and conditions of a loan agreement. In the case of a loan that is on demand, payment default may only occur after a loan has been demanded and cannot be repaid. Compared of technical defaults, payment defaults defaults are serious trouble, especially if a borrower cannot even pay the interest. Compared to technical defaults, which are treated as warning signs of future trouble, payment defaults usually trigger harsher creditor remedies since they reflect weak repayment capacity and, hence, a deterioration in risk. In the case of corporate debt, payment defaults generally tend to be rare but can sharply spike up in periods of financial distress.

  • Personal GuaranteeFR – Garantie personnelle; ES – Garantía personal; DE – Persönliche Garantie; IT – Garanzia personale – An individual’s promise to pay another’s debt. A common example would be a SME business owner’s guarantee of the bank of his/her company. In the case of an individual guaranteeing its own business, the normal requirement for consideration is not necessary since there is an “existing duty”. Since people in their personal capacity typically have limited financial resources, the ability to pay on a personal guarantee deserves careful thought. In the lender truly needs a second way out, the personal guarantee should be backed by tangible collateral security. That said, unsecured personal guarantees are often taken as a test of the good faith an commitment to the enterprise whose fate is controlled by the owner/managers. In this way small business lending tries to address the asymmetric information problem i.e. only the ‘insider’ status of an owner/manager of the enterprise can know its true creditworthiness. In contrast to a corporate guarantee, individuals may need to have independent legal advice, especially if a spouse or relative is involved, in order for the guarantee to by enforceable. Personal guarantees are executed either by signing a promissory note or through a letter guarantee.

  • Preferential/ Preferred Creditor- FR – Créancier préférentiel / privilégié; ES – Preferente / Preferente Acreedor; DE – Bevorzugter / Bevorzugter Gläubiger; IT – Creditor preferenziale / preferito –  A creditor  that ranks ahead of unsecured creditors but usually behind most secured creditors  in a liquidation of accompany. Preference is conferred legally by bankruptcy laws that some creditors, even though they are not secured, have privileges that deserve special treatment. In addition, suspicion about the fairness of creditors’ rights (especially those bankers), prompts lawmakers to carve out a ‘piece’ for needy or innocence creditors. Examples of preferential creditors, which vary amongst legal regimes, include unpaid amounts for:

     payroll and entitlements to employees

      employee income tax with holdings

    –  social security payments

    –  income taxes

  • Pre-funded Debt (Repayments)- FR – Dette préfinancée (remboursements); ES – Deuda prefinanciada (Reembolsos); DE – Vorfinanzierte Schulden (Rückzahlungen); IT – Debito prefinanziato (rimborsi) – Setting aside money in advance of scheduled debt repayments in order to assure compliance to debt service obligations or to reduce balance sheet leverage. Funds are segregated from operating cash balances and invested in marketable securities. In effect, a borrower is prepaying debt although lenders might not allow any actual prepayment. Subject to satisfying the financial reporting criteria for defeasance, outstanding debt can be shown net of the funds set aside for repayment.

 

  • Private Bank – FR – Banque privée; ES – Banco privado; DE – Privatbank; IT – Banca privata – A small, often community based, bank owned by partners. The roots of private banking go back to the early 19 th century Britain when private banks were called “country bank” because of their location. Such banks, which were built on localized knowledge and trust, would evolve into modern commercial banking through consolidation. Because the personal assets of partners( who were often wealthy merchants) stood behind deposit liabilities , they were considered sound. In addition, the partners, who knew and relied, on one another, tended to make better decisions. But private banks had limitations: unlimited liability laws (introduced in 1870s) made banking too risky a business for most partners; being confined to a community.

 

  • Property Sales (by Banks) – FR – Ventes immobilières (par les banques); ES – Ventas de propiedades (por bancos); DE – Immobilienverkäufe (nach Banken); IT – Vendite di proprietà (da Banche) – When banks realize on their collateral security they must go through a process of repossession of the asset and its liguidation (see break-up value). Legally and morally, they are obliged to get a fair price for the asset since the  borrower has a legitimate vested interest in preserving his/her property value. To the extent that there is a surplus above the lender’s exposure and costs, it belongs to the pledging party; to the extent that is a shortfall, the borrower must make up the difference in the case of a full recourse loan. At the same time, inherent in its creditor rights, a bank has a right to sell even if at distressed price. In practice, this means that sale proceeds seldom match fair value(see quote below).The amount of value destruction that a court of law might sanction is a matter of degree. A banks is typically obliged to at least use its best efforts (e.g. obtain a valuation, publicly disclose a sale, use an auction process etc.) to look out for the debtor’s interest. To avoid the inherent conflict in interest in play, borrowers can always manage a property sale themselves and voluntarily prepay the debt.

 

 

Moderator: Jadziunia