GLOSSARY
A
AAA
The highest credit rating given by debt agencies such as Standard & Poors and Moody's. An AAA rating allows a corporation or government to borrow at low interest rates.
absolute advantage
A country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another country.
absolute poverty
A definition of poverty that is set at an estimate of a family's minimum consumption needs.
ABX Index
An index that tracks the performance of a basket of credit default swaps based on 20 bonds that consist of U.S. subprime home mortgages. Credit default swaps are like insurance contracts that allow buyers and sellers to trade risk. ABX contracts allow traders and investors to take positions on subprime securities without actually holding them. A decline in the ABX suggests a decline in confidence that the underlying subprime mortgages will be repaid as expected.
aggregate
Any total (e.g., the gross national product; the sum of monthly sales).
agreement corporation
Corporation chartered by a state to engage in international banking: so named because the corporation enters into an "agreement" with the Fed's Board of Governors that it will limit its activities to those permitted an Edge Act Corporation. Typically organized as a subsidiary of a bank, an agreement corporation may conduct activities abroad that are permissible to foreign banks abroad but that may not otherwise be permissible for U.S. banks.
allocative efficiency
No resources are wasted—a situation where no one can be made better off without making someone else worse off.
amortization
The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.
annual percentage rate (APR)
The cost of credit on a yearly basis expressed as a percentage.
appraisal fee
The charge for estimating the value of property offered as security.
asset-backed securities
Bonds backed by cash flows from a pool of specified assets in a special purpose vehicle rather than by the general credit of a corporation. The asset pools may be residential and commercial mortgages, automobile loans, credit card receivables, student loans and other asset classes.
automated clearinghouse (ACH)
Electronic clearing and settlement system for exchanging electronic credit and debit transactions among participating depository institutions; such electronic transactions are substitutes for paper checks and are typically used to make recurring payments such as payroll or loan payments. The Federal Reserve Banks operate an automated clearinghouse, as do some private–sector firms.
automated teller machine (ATM)
Computer-controlled terminals located on the premises of financial institutions or elsewhere, through which customers may make deposits, withdrawals, or other transactions as they would through a bank teller. Other terms sometimes used to describe such terminals are customer-bank communications terminal (CBC) and remote service unit (RSU). Groups of banks sometimes share ATM networks located throughout a region of the country that may include portions of several states.
automatic transfer service account (ATS)
A depositor's savings account from which funds may be transferred automatically to the same depositor's checking account to cover a check written or to maintain a minimum balance.
B
balance of payments
An accounting statement of the money value of international transactions between one nation and the rest of the world over a specific time period. The statement shows the sum of transactions of individuals, businesses and government agencies located in one nation, against those of all other nations
balance of trade
That part of a nation's balance of payments dealing with imports and exports, that is trade in goods and services, over a given period. If exports of goods exceed imports, the trade balance is said to be favorable; if imports exceed exports, the trade balance if said to be unfavorable.
balloon payment
A large extra payment that may be charged at the end of a loan or lease.
Bank for International Settlements (BIS)
International organization established in 1930 and based in Basel, Switzerland, that serves as a forum for central banks for collecting information, developing analyses, and cooperating on a wide range of policy-related matters; also provides certain financial services to central banks.
Basel Committee on Banking Supervision
An international committee of bank supervisors, associated with the BIS, that is headquartered in Basel, Switzerland, and is composed of bank supervisors from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States.
bank holding company (BHC)
Company that owns, or has controlling interest in, one or more banks. The Board of Governors is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency (the Comptroller of the Currency or the Federal Deposit Insurance Corporation).
bank note
A term used synonymously with paper money or currency issued by a bank. Notes are, in effect, a promise to pay the bearer on demand the amount stated on the face of the note. Today, only the Federal Reserve Banks are authorized to issue bank notes, i.e., Federal Reserve notes, in the United States.
bank regulation
Actions to make and issue rules and regulations and enforce those rules and other laws governing the structure and conduct of banking.
bank run (bank panic)
A series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e., many depositors withdraw cash almost simultaneously. Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.
bank supervision
Oversight of individual banks to ensure that they are operated prudently and in accordance with applicable statutes and regulations. See Banking & Supervision.
banker's acceptance
Banker's acceptances are negotiable time drafts, or bills of exchange, that have been accepted by a bank which, by accepting, assumes the obligation to pay the holder of the draft the face amount of the instrument on the maturity date specified. They are used primarily to finance the export, import, shipment or storage of goods.
bankwire
An electronic communications network owned by an association of banks and used to transfer messages between subscribing banks. Bankwire also offers a clearing service called Cashwire that includes a settlement facility.
Basel Committee on Banking Supervision
An international committee of bank supervisors, associated with the BIS, that is headquartered in Basel, Switzerland, and is composed of bank supervisors from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States.
Beige Book
Eight times a year, prior to FOMC meetings, each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key businessmen, economists, market experts and other sources. The Beige Book summarizes this information by District and sector.
bilateralism
An international policy having as its objective the achievement of particular balances of trade between two nations by means of discriminatory tariffs, exchange, or other controls. The initiative is usually taken by the country having an 'unfavorable' balance of trade. Extensive bilateralism results in a shift of international trade away from channels that would result from the principle of comparative advantage. See also multilateralism.
Board of Governors
Central governmental agency of the Federal Reserve System, located in Washington, D.C., and composed of seven members who are appointed by the President and confirmed by the Senate. The Board, with other components of the System, has responsibilities associated with the conduct of monetary policy, the supervision and regulation of certain banking organizations, the operation of much of the nation's payments system, and the administration of many federal laws that protect consumers in credit transactions. The Board supervises the Federal Reserve Banks.
book-entry securities
Securities that are recorded in electronic records, called book entries, rather than as paper certificates. Ownership of U.S. government book-entry securities is transferred over Fedwire.
broker-dealer
Any person, other than a bank, engaged in the business of buying or selling securities on its own behalf or for others.
broker's loans
Money borrowed by brokers from banks for uses such as financing specialists' inventories of stock, financing the underwriting of new issues of corporate and municipal securities, and financing customer margin accounts.
bubble
Trade in assets with inflated values.
Bureau of Engraving and Printing (BEP)
The agency of the U.S. government that prints, and makes available for circulation, new Federal Reserve Notes.
Bureau of Labor Statistics (BLS)
A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables.
buydown
A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness.
C
call report
Informal name for quarterly Reports of Condition and Income.
capacity utilization rate
The percentage of the economy's total plant and equipment that is currently in production. Usually, a decrease in this percentage signals an economic slowdown, while an increase signals economic expansion.
capital
In banking, the funds invested in a bank that are available to absorb loan losses or other problems and therefore protect depositors. Capital includes all equity and some types of debt. Bank regulators have developed two definitions of capital for supervisory purposes: tier 1 capital, which can absorb losses while a bank continues operating, and tier 2 capital, which may be of limited life and may carry an interest obligation or other characteristics of a debt obligation, and therefore provides less protection to depositors than tier 1 capital.
capital market
The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.
capital requirements
A bank regulation setting specific levels and types of capital to be held in reserve by the bank rather than invested or loaned to others.
cash
U.S. paper currency plus coin.
cease-and-desist order
An order issued after notice and opportunity for hearing, requiring a depository institution, a holding company or a depository institution official to terminate unlawful, unsafe or unsound banking practices. Cease-and-desist orders are issued by the appropriate federal regulatory agencies under the Financial Institutions Supervisory Act and can be enforced directly by the courts.
central bank
The principal monetary authority of a nation, which performs several key functions, including conducting monetary policy to stabilize the economy and level of prices. The Federal Reserve is the central bank of the United States. See U.S. Central Bank history.
central bank intervention
The buying or selling of currency, foreign or domestic, by central banks in order to influence market conditions or exchange rate movements.
certificate of deposit (CD)
A form of time deposit at a bank or savings institution that cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Large CDs of $100,000 or more are often in negotiable form, meaning they can be sold or transferred among holders before maturity.
check clearing
The movement of a check from the depository institution at which it was deposited back to the institution on which it was written, the movement of funds in the opposite direction and the corresponding credit and debit to the accounts involved. Check clearing also encompasses the return of a check (for insufficient funds, for example) from the bank on which it was written to the bank at which it was deposited, and the corresponding movement of funds. The Federal Reserve Banks operate a nationwide electronic check-clearing system.
clawbacks
Provisions that allow a government to revoke or require to repay incentives if a company doesn't achieve its promised objectives.
clearinghouse
An institution where mutual claims are settled between accounts of member depository institutions. Clearinghouses among banks have traditionally been organized for check-clearing purposes, but more recently have cleared other types of settlements, including electronic fund transfers.
Clearing House Interbank Payments System (CHIPS)
An automated clearing system used primarily for international payments. This system is owned and operated by the New York Clearinghouse banks and engages Fedwire for settlement.
closed-end credit
An agreement in which advanced credit plus any finance charges are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed-end agreements.
collateral
Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security interest.)
collateralized debt obligation (CDO)
A type of security whose value and payments derive from a portfolio of fixed-income assets; in this case, those assets would be contingent bonds.
Commerce Clause
Section 8, clause 3, of the U.S. Constitution: [Congress has power] "to regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Incentive opponents say Congress should use the Commerce Clause to enact legislation that prohibits states from using incentives to compete with one another for businesses. (See The Economic War Among the States.)
commercial bank
Bank that offers a variety of deposit accounts, including checking, savings, and time deposits, and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, which generally are involved in arranging for the sale of corporate or municipal securities, and broker-dealer firms, which buy and sell securities for themselves and others.
commodity prices
An index of commodities (such as oil and steel) traded in worldwide markets.
Community Reinvestment Act (CRA)
Enacted by Congress in 1977, the CRA encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations.
comparative advantage
A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than that of a competitor.
competitive bidders
One of two categories of bidders on Treasury securities: competitive and noncompetitive. Competitive bidders are usually financial institutions.
Comptroller of the Currency (OCC)
See Office of the Comptroller of the Currency.
consortium
A grouping of corporations to fulfill a combined objective or project that usually requires interbusiness cooperation and sharing of the goods.
Consumer Advisory Council
The CAC, established in 1976, is composed of 30 members who advise the Federal Reserve Board of Governors in the areas of consumer and financial services . The council meets three times a year in Washington, D.C.
consumer price index (CPI)
A measurement of the cost of living determined by the Bureau of Labor Statistics.
correspondent bank
A bank that accepts deposits of and performs banking services for other depository institutions.
cosigner
A term referring to a person, other than the principal borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.
cost-benefit analysis
Cost-benefit analysis is the examination of a public project and the evaluation of its total costs and benefits to all concerned.
credit
The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.
credit card
Any card, plate or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.
credit default swap (CDS)
A type of insurance that protects the lender if the borrower defaults. If the loan defaults, its liability becomes a credit for payment from the CDS issuer.
credit history
A record of how a person has borrowed and repaid debt.
credit scoring system
A statistical system used to determine whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
credit union
Financial cooperative organization whose membership consists of individuals who have a common bond, such as place of employment or residence or membership in a labor union. Credit unions accept deposits from members, pay interest (in the form of dividends) on the deposits out of earnings and use their funds mainly to provide consumer installment loans to members.
creditworthiness
A creditor's measure of a consumer's past and future ability and willingness to repay debts.
currency
Paper money that consists mainly of Federal Reserve notes. Other types of currency that were once issued by the United States but are now obsolete include silver certificates,
United States notes and national bank notes. (See History of Money.)
currency appreciation
An increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates, a unit of one currency buys more units of another currency.
currency depreciation
A decline in the value of one currency relative to another currency. Depreciation occurs when, because of a change in exchange rates, a unit of one currency buys fewer units of another currency.
currency devaluation
A deliberate downward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold.
currency revaluation
A deliberate upward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold.
current account balance
The difference between the nation's total exports of goods, services and transfers and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities.
cyclical unemployment
Unemployment caused by a low level of aggregate demand associated with recession in the business cycle.
D
day trade
Also known as a "daylight trade." The purchase and sale or the short sale and cover of the same security in a margin account on the same day.
daylight overdraft
A negative balance in an institution's Federal Reserve Bank account at any time during the operating hours of the Fedwire Funds Service.
daylight-overdraft posting rules
A schedule used to determine the timing of debits and credits to an institution's Federal Reserve Bank account for various transactions processed by the Reserve Banks.
debit card
A card that resembles a credit card but which debits a transaction account (checking account) with the transfers occurring contemporaneously with the customer's purchases. A debit card may be machine readable, allowing for the activation of an automated teller machine or other automated payments equipment.
default
Failure to meet the terms of a credit agreement.
deficit
The amount each year by which government spending is greater than government income.
definitive securities
Securities that are recorded on engraved paper certificates and payable to the bearers or to specific, registered owners. (Also called book-entry securities.)
demand deposit
A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.
depository institution
Financial institution that makes loans and obtains its funds mainly through accepting deposits from the public; includes commercial banks, savings and loan associations, savings banks, and credit unions.
Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA)
An Act that requires all banks and all institutions that accept deposits from the public to make periodic reports to the Federal Reserve System. Starting in September 1981, the Fed charged banks for a range of services that it had provided free in the past, including check clearing, wire transfer of funds and the use of automated clearinghouse facilities. (See "A New Law, A New Era," Federal Reserve Bank of Minneapolis 1980 Annual Report.)
derivative
A financial instrument whose value depends upon the characteristics and value of an underlying commodity, currency, or security.
direct deposit
A method of payment which electronically credits your checking or savings account.
dirty float
A type of floating exchange rate that is not completely freely floating because central banks intervene from time to time to alter the rate from its free-market level. It is still a floating rate because it has not been pegged at a predetermined par value.
discount payment
The difference between the face value and the price paid for a security.
discount rate
Officially the primary credit rate, it is the interest rate at which an eligible depository institution may borrow funds, typically for a short period, directly from a Federal Reserve Bank. The law requires that the board of directors of each Reserve Bank establish the discount rate every 14 days, subject to review and determination by the Board of Governors.
discount window
Figurative expression for the Federal Reserve facility that extends credit directly to eligible depository institutions (those subject to reserve requirements); so named because, in the early days of the Federal Reserve System, bankers would come to a Reserve Bank teller window to obtain credit.
discount window credit
Credit extended by a Federal Reserve Bank to an eligible depository institution. All discount window borrowing must be secured by collateral. Three types of discount window credit are available to eligible depository institutions:
-
primary credit
Credit extended to generally sound depository institutions at a rate above the target federal funds rate on a very short-term basis as a backup source of funding. -
seasonal credit
Credit extended by a Federal Reserve Bank to depository institutions that have difficulty raising funds in national money markets to help meet temporary needs for funds resulting from regular, seasonal fluctuations in loans and deposits. The interest rate charged is based on market rates. -
secondary credit
Credit extended to depository institutions ineligible for primary credit, at a rate above the primary credit rate, either on a very short-term basis (when consistent with a timely return to market sources funds) or for a longer term (to facilitate the orderly resolution of serious financial difficulties).
durable merchandise
Goods that have a relatively lengthy life (television sets, radios, etc.).
E
economic forecast
A prediction of future economic trends of key economic indicators.
economic growth
An increase in the nation's capacity to produce goods and services.
economic shocks
Events that impact the economy, come from outside it, and are unexpected and unpredictable (e.g., Hurricane Katrina in 2005, the rise in oil prices by OPEC).
Edge Act corporation
Corporation chartered by the Federal Reserve to engage in international banking. The Board of Governors acts on applications to establish Edge Act corporations and also examines the corporations and their subsidiaries. Typically organized as a subsidiary of a bank, an Edge Act corporation may conduct activities abroad that are permissible to foreign banks abroad but that may not otherwise be permissible to U.S. banks. Named after Senator Walter Edge of New Jersey, who sponsored the original legislation in 1919 to permit formation of such organizations.
Electronic Federal Tax Payment System (EFTPS)
A service offered free by the U.S. Department of the Treasury to help business and individual taxpayers conveniently pay all their federal taxes electronically.
electronic funds transfer (EFT)
Transfer of funds electronically rather than by check or cash. The Federal Reserve's Fedwire and automated clearinghouse services are EFT systems.
electronic funds transfer systems (EFTS)
A variety of systems and technologies for transferring funds (money) electronically rather than by check. This includes Fedwire, automated clearinghouses (ACHs), and other automated systems.
employment rate
The percentage of the labor force that is employed. The employment rate is one of the economic indicators that economists examine to help understand the state of the economy.
equilibrium real interest rate
The rate that would be consistent with the full employment of labor and industrial capacity, and with real GDP being at its long–run potential level. This rate is needed as a benchmark to judge whether a given real interest rate is expansionary or contractionary.
eurodollar deposits
Dollar-denominated deposits in banks and other financial institutions outside the United States; includes deposits at banks not only in Europe, but in all parts of the world.
excess reserves
Amount of funds held by an institution in its account at a Federal Reserve Bank in excess of its required reserve balance and its contractual clearing balance.
exchange rate
The price of the currency of one nation in terms of the currency of another nation.
exempted security
A security that is exempted from most provisions of the securities laws, including the margin rules. Such securities include U.S. government and agency securities, and municipal securities designated by the SEC.
expansionary fiscal policy
A policy to increase governmental expenditures and/or to decrease taxes.
expansionary monetary policy
A policy of the Federal Reserve System that is designed to expand the growth of money and credit in the economy. See Monetary Policy.
expected rate of inflation
The public's expectations for inflation. These expectations determine how large an effect a given policy action by the Fed will have on economic activity.
externality
An activity that causes incidental benefits or costs to others, and no corresponding compensation is provided to or paid by those who generate the externality.
F
Fannie Mae
Fannie Mae (the Federal National Mortgage Association) is one of the three federally sponsored enterprises charged with providing funding and expanding access to the housing-finance market. In addition to purchasing loans directly from mortgage banks and other lenders, Fannie Mae also guarantees pools of mortgages against default, thereby making the secondary mortgage market more liquid.
Federal Advisory Council (FAC)
Advisory group made up of one representative (in most cases a banker) from each of the twelve Federal Reserve Districts. Established by the Federal Reserve Act, the council meets periodically with the Board of Governors to discuss business and financial conditions and to make recommendations.
Federal Deposit Insurance Corporation (FDIC)
An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC promotes safety and soundness of insured depository institutions and the U.S. financial system by identifying, monitoring and addressing risks to the deposit insurance funds; minimizes disruptive effects from the failure of banks and savings associations; and ensures fairness in the sale of financial products and the provision of financial services.
Federal Financial Institutions Examination Council (FFIEC)
Group of representatives of the federal banking regulatory agencies—the Board of Governors, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration—established to help maintain uniform standards for examining and supervising federally insured depository institutions.
federal funds rate
Rate charged by a depository institution on an overnight loan of federal funds to another depository institution; rate may vary from day to day and from bank to bank.
federal funds transactions
Short-term transactions in immediately available funds—between depository institutions and certain other institutions that maintain accounts with the Federal Reserve—that involve lending balances at the Federal Reserve; usually not collateralized.
Federal Home Loan Banks
The Federal Home Loan Bank System provides a flexible credit facility for member savings institutions to promote the availability of home financing.
Federal Housing Administration
HUD's Federal Housing Administration insures loans so that if buyers default, the lenders get their money. This encourages lenders to give mortgage loans to people who might not otherwise qualify for a loan.
Federal Housing Finance Agency
The Federal Housing Finance Agency (FHFA) was created on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of 2008. The Act gave FHFA the authorities necessary to oversee vital components of our country's secondary mortgage markets—Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
federal margin call
A broker's demand upon a customer for cash, or securities needed to satisfy the required Regulation T down payment for a purchase or short sale of securities.
Federal Open Market Committee (FOMC)
Twelve-voting-member committee made up of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. Nonvoting Reserve Bank presidents also participate in Committee deliberations and discussion. The FOMC generally meets eight times a year in Washington, D.C., to set the nation's monetary policy. It also establishes policy relating to System operations in the foreign exchange markets.
Federal Reserve Act
Federal legislation enacted in 1913 that established the Federal Reserve System.
Federal Reserve balances
The amount of funds held by a depository institution in its account at its Federal Reserve Bank.
Federal Reserve Bank (FRB)
One of the 12 operating arms of the Federal Reserve System, located throughout the nation, that together with their branches carry out various System functions, including providing payment services to depository institutions, distributing the nation's currency and coin, supervising and regulating member banks and bank holding companies, and serving as fiscal agent for the U.S. government.
Federal Reserve District (Reserve District or District)
One of the 12 geographic regions served by a Federal Reserve Bank.
Federal Reserve float
Float is credit that appears on the books of the depository institution of both the check writer (the payor) and the check receiver (the payee) while a check is being processed. Federal Reserve float is present during the Federal Reserve Banks' check-clearing process. To promote efficiency in the payments system and provide certainty about the date that deposited funds will become available to the receiving depository institution (and the payee), the Federal Reserve Banks credit the accounts of banks that deposit checks according to a fixed schedule. However, processing certain checks and collecting funds from the banks on which these checks are written may take more time than the schedule allows. Therefore, the accounts of some banks may be credited before the Federal Reserve Banks are able to collect payment from other banks, resulting in Federal Reserve float. A dramatic increase in electronic payments, combined with faster electronic check clearing, has resulted in shorter float times and amounts.
Federal Reserve notes
Paper currency issued by the Federal Reserve Banks. Nearly all the nation's circulating currency is in the form of Federal Reserve notes, which are printed by the Bureau of Engraving and Printing, a bureau of the U.S. Department of the Treasury. Federal Reserve notes are obligations of the Federal Reserve Banks and legal tender for all debts. (See more about U.S. Money.)
Federal Reserve System
The central bank of the United States, created by the Federal Reserve Act and made up of a seven-member Board of Governors in Washington, D.C., 12 regional Federal Reserve Banks, and Branches of the Federal Reserve Banks.
Federal Reserve Regulatory Service
Monthly subscription service that includes all statutes and regulations for which the Federal Reserve has responsibility, Board of Governors interpretations and rulings, official staff commentaries, significant staff opinions and procedural rules under which the Board operates.
Fedwire Funds Service
Electronic funds transfer network operated by the Federal Reserve Banks. It is usually used to transfer large amounts of funds from one institution's account at the Federal Reserve to another institution's account. It is also used by the U.S. Department of the Treasury, other federal agencies and government-sponsored enterprises to collect and disburse funds.
fiat money
Money that has little or no intrinsic value as a commodity; it is costless to produce, usually taking the form of tokens or pieces of paper; and is not redeemable for any commodity. Federal Reserve notes are an example of fiat money.
finance charge
The total dollar amount paid to obtain credit.
financial holding company
A bank holding company that has met the capital, managerial and other requirements to take advantage of the expanded affiliations allowed under the Gramm-Leach-Bliley Act.
financial institution
Institution that uses its funds chiefly to purchase financial assets, such as loans or securities (as opposed to tangible assets, such as real estate). Financial institutions can be separated into two major groups according to the nature of the principal claims they issue: (1) depository institutions, such as commercial banks, savings and loan associations, savings banks, and credit unions, which obtain funds largely by accepting deposits from the public and (2) nondepositories, such as life insurance and property—casualty insurance companies and pension funds, whose claims are the policies they sell or their promise to provide income after retirement.
Financial Institutions Supervisory Act
Enacted in 1966, the act was intended to strengthen the powers of bank supervisors—the Comptroller of the Currency (OCC), the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Federal Home Loan Bank Board.
fiscal agency services
Services performed by the Federal Reserve Banks for the U.S. government and other organizations, including maintaining accounts for the U.S. Department of the Treasury, paying checks and making electronic payments on behalf of the Treasury, and selling and redeeming marketable Treasury securities and savings bonds.
fiscal policy
Federal government policy regarding taxation and spending, set by Congress and the President.
fixed exchange rate system
Exchange rates between currencies that are set at predetermined levels and don't move in response to changes in supply and demand.
fixed rate
A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.
flexible exchange rates
Arrangements in which the rate of exchange between countries' currencies (the foreign exchange rate) is allowed to fluctuate in response to market forces of supply and demand.
Flow of Funds
A set of accounts used to follow the flow of money within the economy. The Flow of Funds analyzes data on borrowing, lending and investment among households, businesses and government bodies. In the United States, the Federal Reserve tracks and analyzes the flow of funds and provides reports about 10 weeks after the end of a quarter.
foreign currency operations
Transactions in the foreign exchange markets involving the purchase of the currency of one nation with that of another. Also called foreign exchange transactions.
foreign exchange desk
The foreign exchange trading desk at the New York Federal Reserve Bank. The desk undertakes operations in the exchange markets for the account of the Federal Open Market Committee, and as agent for the U.S. Treasury and for foreign central banks.
foreign exchange rate
Price of the currency of one nation in terms of the currency of another nation.
forward exchange
A type of foreign exchange transaction whereby a contract is made to exchange one currency for another at a fixed date in the future at a specified exchange rate. By buying or selling forward exchange, businesses protect themselves against a decrease in the value of a currency they plan to sell at a future date.
Freddie Mac
Freddie Mac (the Federal National Home Loan Mortgage Corporation) is another federally -sponsored secondary-market agency. Like Fannie Mae, Freddie Mac both purchases loans directly from the primary mortgage market and guarantees loans that are sold on the secondary market.
frictional unemployment
Short-term joblessness associated with mobility. A person who leaves a job to find something better is considered frictionally unemployed. This type of unemployment characterizes workers subject to seasonal work (e.g., construction, agricultural, winter recreational workers, etc.).
Full Employment and Balanced Growth Act of 1978
(Humphrey-Hawkins Act) Federal legislation that, among other things, specifies the primary objectives of U.S. economic policy—maximum employment, stable prices and moderate long-term interest rates.
Futures
Contracts that require delivery of a commodity of specified quality and quantity, at a specified price, on a specified future date. Commodity futures are traded on a commodity exchange and are used for both speculation and hedging.
G
GAAP
Generally accepted accounting principles. GAAP is a code of accounting rules and procedures established by the American Institute of Certified Public Accountants.
globalization
The generalized expansion of international economic activity, which includes increased international trade, growth of international investment (foreign investment) and international migration, and increased creation of technology among countries. Globalization is the increasing worldwide integration of markets for goods, services, labor and capital.
gold exchange standard
A variant form of the gold standard under which a country pegged the value of its currency to the value of the currency of a "major" country, e.g., sterling or dollars, which was itself on a gold standard. The international monetary regime in force between 1958 and 1970 is frequently described as a "gold exchange standard" system because of the wide use of the dollar, itself pegged to gold, as a reserve currency and as an accepted medium of exchange internationally.
gold standard
A monetary system in which currencies are defined in terms of a given weight of gold.
government securities
Securities issued by the U.S. Treasury or federal agencies.
government-sponsored enterprises (GSEs)
GSEs are privately owned, federally chartered corporations with specialized lending powers created by the U.S. Congress to help the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent. GSEs enhance the availability and reduce the cost of credit to targeted borrowing sectors like agriculture, home finance and education.
graduated payment
Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.
Gramm-Leach-Bliley Act of 1999
Federal legislation that allowed affiliations among banks, securities firms and insurance companies under a financial holding company structure. The act reaffirmed the Federal Reserve's role as "umbrella supervisor" over organizations that control banks, while also requiring that bank regulators and functional regulators supervise subsidiaries within a financial holding company.
gross domestic product (GDP)
Total value of goods and services produced by labor and property located in the United States during a specific period. (Go to Bureau of Economic Analysis for current data.)
gross national product (GNP)
A country's total output of goods and services from all forms of economic activity measured at market prices for a calendar year.
Group of Seven
International group made up of seven leading industrial nations—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States—whose finance ministers and central bank governors meet occasionally to discuss economic policy. In 1994, Russia began attending the meetings, though it is not a full member.
Group of 20
Established in 1999, the G-20 is an expanded version of the G-7 that includes 12 other nations and the European Union. G-20 members represent both industrialized and developing countries and generally meet annually to discuss issues key to the global economy.
H
haircut
A percentage reduction from an asset's stated value (e.g., book value or market value) to account for possible declines in value that may occur before the asset can be liquidated. Haircuts are often applied to collateral pledged in repo contracts; the collateral is valued at less than market value in reflection of its perceived underlying risk.
Housing and Economic Recovery Act of 2008
The Act gave FHFA the authorities necessary to oversee vital components of our country's secondary mortgage markets – Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
Humphrey-Hawkins Act
Informal name for the Full Employment and Balanced Growth Act of 1978, from the names of the act's original sponsors.
inflation
A rate of increase in the general price level of all goods and services.
intellectual property rights
The right of an individual or a group to patent, copyright or in some other manner to claim ideas, creations, inventions or discoveries as one's own. Such protection provides an environment for entrepreneurs to safely market their products and services.
interest payments
The return expressed in percentages earned on an investment each year. These payments are issued every six months based on an annual rate.
interest rate
Percent paid on deposits and other investments determined by the interaction of the supply and demand for funds in the money market.
intermediate targets
An intermediate target is a variable (such as the money supply) that is not directly under the control of the central bank, but that does respond fairly quickly to policy actions, is observable frequently and bears a predictable relationship to the ultimate goals of policy.
international banking facility
Specially designated activities of a bank located in the United States that are treated as those of an offshore bank by U.S. regulatory authorities. Dollar deposits in such a facility are considered to be eurodollars.
International Monetary Fund (IMF)
International organization established for lending funds to member nations to promote international monetary cooperation among nations; to facilitate the expansion and balanced growth of international trade; and to finance temporary balance-of-payments deficits, usually in conjunction with macroeconomic adjustment programs.
J
joint float
An arrangement by which a group of currencies maintain a fixed relationship relative to each other, but move jointly relative to another currency in response to supply and demand conditions in the exchange market.
K
Keynesian economics
An economic theory originated by the British economist John Maynard Keynes and his followers. Keynes maintained that governments should use the power of the budget to maintain economic growth and stability and overcome the recessionary cycles common in most western economies.
key rate
The interest rate that controls, either directly or indirectly, bank lending rates and the cost of credit paid by borrowers.
Knightian uncertainty
After economist Frank Knight, who distinguished between risk and uncertainty in his 1921 book, Risk, Uncertainty, and Profit.
L
law of large numbers
A probability theorem describing the result of performing the same experiment many times. The average of results from a number of trials will become closer to the expected value as more trials are performed.
lender of last resort
As the nation's central bank, the Federal Reserve has the authority and financial resources to act as “lender of last resort” by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.
liquidity
Quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process. Sometimes used more broadly to encompass cash and credit in hand and promises of credit to meet needs for cash.
liquidity risk
In banking, the risk that a depository institution will not have sufficient cash or liquid assets to meet the claims of depositors and other creditors.
long-term interest rates
Interest rates on loan contracts—or debt instruments such as Treasury bonds or utility, industrial, or municipal bonds—having maturities greater than one year. Often called capital market rates.
M
M3
M1, M2 and M3 are (or were) measures of the nation's money supply reported by the Federal Reserve System. M1 includes currency and demand deposits at commercial banks. M2 is a broader measure that incorporates M1 but also includes assets such as commercial bank savings deposits, deposits at credit unions and noninstitutional money market funds, among other components. M3 was broader still, but publication of M3 figures ceased in March 2006 when the Fed determined that M3 no longer conveyed "any additional information about economic activity...not already embodied in M2." The Fed also ceased publishing one of M3's components, repurchase agreements.
macroeconomics
The study of economics in terms of whole systems with reference to general levels of output and income and to the interrelations among sectors of the economy.
margin account
A brokerage account that allows a customer to borrow cash from the broker in order to purchase securities. The Federal Reserve limits margin borrowing to at most 50 percent of the amount invested. Some brokerages have even stricter requirements.
margin requirement
Buying on margin refers to buying stocks or securities with borrowed money (usually borrowed from a brokerage firm or bank). The margin requirement is the minimum amount (expressed as a percentage) the buyer must put up (rather than borrow). The Federal Reserve Board sets margin requirements.
margin stock
Any stock listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or appearing on the Board's list of over-the-counter margin stock and most mutual funds.
market failure
The failure of a market to allocate resources in the way that most efficiently satisfies the needs and wants of society.
market interest rates
Rates of interest determined by the interaction of the supply of and demand for funds in freely functioning markets.
market prices
Prices set by the market and by the law of supply and demand.
matched sale-purchase agreements
An agreement in which the Federal Reserve sells a security outright for immediate delivery to a dealer or foreign central bank, with an agreement to buy the security back on a specific date (usually within seven days) at the same price. Matched sale-purchase agreements are the reverse of repurchase agreements and allow the Federal Reserve to withdraw reserves on a temporary basis.
member bank
Depository institution that is a member of the Federal Reserve System. All national banks are automatically members of the System; state-chartered banks may choose to apply to join the System.
Metropolitan Statistical Area (MSA)
Metropolitan and micropolitan statistical areas (metro and micro areas) are geographic entities defined by the U.S. Office of Management and Budget (OMB) for use by federal statistical agencies in collecting, tabulating and publishing federal statistics.
microeconomics
The study of economics in terms of individual areas of activity (as a firm, household or prices).
monetary aggregates
Aggregate measures through which the Federal Reserve monitors the nation's monetary assets: M1, M2, and M3.
Monetary Control Act of 1980 (MCA)
An Act which requires that all banks and all institutions that accept deposits from the public make periodic reports to the Federal Reserve System. Starting in September 1981, the Fed charged banks for a range of services that it had provided free in the past, including check clearing, wire transfer of funds and the use of automated clearinghouse facilities. For more, see the June 1992 Region.
monetary policy
Federal Reserve actions to influence the availability and cost of money and credit, as a means of helping to promote high employment, economic growth, price stability and a sustainable pattern of international transactions. Tools of monetary policy include open market operations, the discount rate and reserve requirements.
monetize
Action in which a central bank purchases an object that is not money (for example, gold) and pays for it by creating balances at the central bank. The action permits an increase in the money stock.
money
Anything that serves as a generally accepted medium of exchange, a standard of value and a means of saving or storing purchasing power. In the United States, currency (the bulk of which is Federal Reserve notes) and coin as well as funds in deposit accounts at depository institutions are examples of money. See more at U.S. Money.
money market
Figurative expression for the informal network of dealers and investors over which short-term debt securities are purchased and sold. Money market securities generally are highly liquid securities that mature in less than one year, often less than 90 days.
money supply
The amount of money (coins, paper currency, and checking accounts) that is in circulation in the economy.
moral hazard
The risk that a party to a transaction has not entered into a contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
multilateralism
An international policy intended to free international trade from the restrictions of bilateralism. Multilateralism represents an effort to permit nations to specialize in production and exchange in accordance with the principle of comparative advantage.
mutual savings bank
Savings bank owned by its depositors (contrasted with a stock savings bank, which issues common stock to the public).
N
National Association of Securities Dealers (NASD)
A self-regulatory organization with jurisdiction over certain broker-dealers. The NASD requires member brokers to register and conducts examinations for compliance with net capital requirements and other regulations. It also conducts market surveillance of the over-the-counter (OTC) securities market. National Association of Securities Dealers Automated Quotations (NASDAQ) is a subsidiary of the NASD, which facilitates the trading of approximately 5,000 most active OTC issues through an electronically connected network.
National Association of Securities Dealers Automated Quotations (NASDAQ)
An automated information network that provides brokers and dealers with price quotations on securities traded over the counter.
national bank
A commercial bank that is chartered by the Office of the Comptroller of the Currency, which is a bureau of the U.S. Department of the Treasury; by law, national banks are members of the Federal Reserve System.
National Credit Union Administration (NCUA)
An independent federal agency that supervises and insures both federal and state-chartered credit unions. NCUA is entirely funded by credit unions and receives no tax dollars.
national income accounts
An accounting framework used to measure a nation's aggregate economic activity. National accounts broadly present the production, income and expenditure activities of all economic actors (firms, households and government bodies). They present both flows during a period and stocks at the end of that period. In the United States, the national income and product accounts (NIPA) provide estimates for the money value of income and output respectively, including GDP.
national rate of unemployment
The rate of unemployment attainable without stimulating an increase in the inflation rate.
negative amortization
An increase in the principal of a loan, when the loan payments are insufficient to pay the interest due. The unpaid interest is added to the outstanding loan balance causing the principal to increase rather than decrease as payments are made. This situation typically occurs in an adjustable mortgage with an annual cap limiting any increases in the interest rate, and also in a graduated payment mortgage, which has low initial payments so moderate-income borrowers can afford to make the loan payments.
negotiable order of withdrawal account (NOW)
An interest-earning account on which checks may be drawn. Withdrawals from NOW accounts may be offered by commercial banks, mutual savings banks, and savings and loan associations and may be owned only by individuals and certain nonprofit organizations and governmental units.
New York Stock Exchange (NYSE)
Located on Wall Street in New York City, the NYSE is the largest stock exchange in the world, based on market capitalization of its listed securities.
nominal interest rates
Current stated rates of interest paid or earned.
nonmember bank
State-chartered commercial bank that is not a member of the Federal Reserve System.
nonmember depository institution
A depository institution (commercial bank, mutual savings bank, savings and loan association, credit union, or U.S. agency or branch of a foreign bank) that is not a member of the Federal Reserve System. Nonmember depository institutions that offer transaction accounts or nonpersonal time deposits are subject to reserve requirements set by the Federal Reserve, and have access to the Federal Reserve discount window and Federal Reserve services on the same terms as member banks.
numismatic
Pertaining to coins and the collection of coins, currency, and certain collectible trinkets and medals.
O
Office of the Comptroller of the Currency (OCC)
An independent bureau of the Treasury Department and the oldest federal financial regulatory body. The OCC oversees the nation's federally chartered banks and promotes a system of bank supervision and regulation that promotes safety and soundness by requiring that national banks adhere to sound management principles and comply with the law, and encourages banks to satisfy customer and community needs while remaining efficient competitors in the financial services market.
Office of Thrift Supervision (OTS)
A bureau of the Treasury Department, established in August 1989. The OTS has the authority to charter federal thrift institutions and serve as the primary regulator of federal and state-chartered thrifts.
open-end credit
A line of credit that may be used repeatedly up to a certain limit. Also called a charge account or revolving credit.
open-end lease
A lease that may involve a balloon payment based on the value of the property when it is returned. Also called finance lease.
open market operations
Purchases and sales of securities, typically U.S. Treasury securities, in the open market, by the Open Market Trading Desk at the Federal Reserve Bank of New York as directed by the Federal Open Market Committee, to influence interest rates. Purchases increase the supply of Federal Reserve balances to depository institutions; sales do the opposite.
OTC margin bond
A debt security not traded on the national securities exchange, which meets certain Regulation T requirements as to size of original offering, available information and status of interest payments. See also over the counter (OTC).
overdraft checking account
A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.
over the counter
Figurative term for the means of trading securities that are not listed on an organized stock exchange such as the New York Stock Exchange. Over-the-counter trading is done by broker-dealers who communicate by telephone and computer networks.
P
par value
The full face value of a security.
payments system
Collective term for mechanisms (both paper-based and electronic) for moving funds, payments, and money among financial institutions throughout the nation. The Federal Reserve plays a major role in the nation’s payments system through distribution of currency and coin, processing of checks and electronic transfer of funds; various private organizations also perform payments system functions.
permissible nonbank activities
Financial activities closely related to banking that may be engaged in by bank holding companies (BHCs), either directly or through nonbank subsidiaries. For example, a BHC might own finance companies or engage in mortgage banking. The Federal Reserve Board determines which activities are closely related to banking. Before making such activities permissible, the Board must determine that performance of the activities by bank holding companies is in the public interest.
points
In reference to a loan, points consist of a lump sum payment made by the borrower at the outset of the loan period. Generally, each point equals one percent of the loan amount. See also seller's points.
potential output
The level of real GDP(gross domestic product) that can be sustained in the long run and that is consistent with constant inflation.
premium
The amount by which the auction price of a bill, note or bond is higher than its face value.
price mechanism
The price mechanism is the method through which the market organizes and adjusts itself. Prices determine what is produced, how it's produced and who receives the product. If the market is working correctly, the workings of the price mechanism should result in the most efficient allocation of resources.
price stability
An economy with relatively consistent values of goods and services from year to year, all things being equal. When price levels are rapidly fluctuating, businesses and consumers don't receive clear signals about the buying power of the currency or the relative value of products available to purchase.
principal-agent problems
The difficulty of motivating one person, an agent, to act in the best interests of another, the principal. Problems arise because the agent's incentives differ from the principal's, and the principal is unable to fully monitor and direct the agent's actions.
principal payments
The face amount or par value of a debt instrument where interest is paid. The interest payment is not part of the principal.
private benefits
The share of the benefits from an activity (e.g. consumption of a good or service) received by the person(s) who pays for it.
private costs
The share of the costs caused by an activity (e.g. production or consumption of a good or service) that is paid for by the person(s) who carries out the activity.
productivity
The amount of physical output for each unit of productive input.
public good
A good that generates a social benefit that everyone can enjoy and that no one can be deprived of. Examples include national defense and clean air.
purchasing power parity theory
A theory by which the exchange rate between any two currencies adjusts to reflect changes in the price levels within the two countries.
purpose credit
Credit used for the purpose of buying, carrying or trading in securities.
R
real GDP
GDP (gross domestic product) adjusted for inflation. Real GDP provides the value of GDP in constant dollars, which is used as an indicator of the volume of the nation's output.
real interest rates
Interest rates adjusted for the expected erosion of purchasing power resulting from inflation. Technically defined as nominal interest rates minus the expected rate of inflation.
recession
A significant decline in general economic activity extending over a period of time.
reciprocal currency (swap) arrangements
Short-term reciprocal arrangements between a Federal Reserve Bank and individual foreign central banks. By drawing on a swap the foreign central bank obtains dollars that can be used to conduct foreign exchange intervention in support of its currency or to lend to its domestic banking system to satisfy temporary liquidity demands. For the duration of the swap, the Federal Reserve Bank obtains an equivalent amount of foreign currency along with a commitment from the foreign central bank to repurchase the foreign currency at a preset exchange rate.
renegotiable rate
A type of variable rate involving a renewable short-term “balloon” note. The interest rate on the loan is generally fixed during the term of the note, but when the balloon comes due, the lender may refinance it at a higher rate. In order for the loan to be fully amortized, periodic refinancing may be necessary.
Reports of Condition and Income
Quarterly financial report that all banks, savings and loan associations, Edge and agreement corporations, and certain other types of organizations must file with a federal regulatory agency. Informally called a call report. For more information, go to bank search.
repurchase agreement (RP or repo)
A transaction in which the Federal Reserve enters into an agreement with a primary dealer to acquire securities from the dealer for a specified principal amount at an agreed-upon interest rate and to return the securities on a specified future date. The maturity date may be the next day or many days later, with the maximum length set by the FOMC. These transactions permit the Federal Reserve to increase the supply of Federal Reserve balances for the length of the agreement.
required reserves
Funds that a depository institution is required to maintain in the form of vault cash or, if vault cash is insufficient to meet the requirement, in the form of a balance maintained directly with a Reserve Bank or indirectly with a pass-through correspondent bank. The required amount varies according to the required reserve ratios set by the Board and the amount of reservable liabilities held by the institution.
required reserve balance
That portion of its required reserves that a depository institution must hold in an account at a Federal Reserve Bank. This portion is the difference between the institution’s reserve requirement and its vault cash.
reserves
A depository institution's vault cash (up to the level of its required reserves) plus balances in its reserve account (not including funds applied to its required clearing balance).
resolution authority
Power to liquidate, in an orderly manner, the assets and liabilities of a failed financial institution. The Dodd-Frank Act designates the FDIC as the resolution authority for most financial institutions.
S
savings and loan association (S&L;)
Historically, depository institution that accepted deposits mainly from individuals and invested heavily in residential mortgage loans; although still primarily residential lenders, S&Ls; now have many of the powers of commercial banks.
savings bank
Depository institution historically engaged primarily in accepting consumer savings deposits and in originating and investing in residential mortgage loans; now may offer checking-type deposits and make a wider range of loans.
securities
Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).
Securities and Exchange Commission (SEC)
An independent, nonpartisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. The purpose of these laws is to protect investors and to ensure that investors have access to disclosure of all material information concerning publicly traded securities. The Commission also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies.
securitization
The process of financing whereby interests in loans and other receivables are packaged, underwritten and sold in the form of “asset-backed securities” (defined above). This is done through the creation of a "special purpose vehicle" (defined below) by segregating specified cash flows from loans originated by a firm and selling claims to these cash flows through the SPV to investors. Asset securitization began in the 1970s with the structured financing of mortgage pools. Since the mid-1980s, similar techniques have been used to finance a variety of nonmortgage assets, including car loans and credit card receivables.
security interest
The property or a portion of property offered as security.
seigniorage
The profit which results from the difference between the cost of making coins and currency and the exchange value of coin and currency in the market.
self-regulatory organizations
Associations of broker-dealers or others that have responsibility, under the oversight of the Securities and Exchange Commission, to regulate their own members through the adoption and enforcement of rules of conduct for fair, ethical, and efficient practices. Examples include the National Association of Securities Dealers and the New York Stock Exchange.
seller's points
In reference to a loan, seller's points consist of a lump sum paid by the seller to the buyer's creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount.
service charge
A component of some finance charges, such as the fee for triggering an overdraft checking account into use.
settlement
In banking, the process of recording the debit and credit positions of two parties in a transfer of funds. Also, the delivery of securities by a seller and the payment by the buyer.
shock
Unanticipated or unusual event that has a noticeable impact on the economy or a financial system.
short-term interest rates
Interest rates on loan contracts—or debt instruments such as Treasury bills, bank certificates of deposit or commercial paper—having maturities of less than one year. Often called money market rates.
social cost/social benefit
The cost/benefit of the production of a good or service to the producer/consumer including costs/benefits borne by other members of society.
special drawing rights (SDR)
Type of international reserve asset created by the International Monetary Fund and allocated, on occasion, to the nations that are members of the IMF.
special-purpose vehicle (SPV)
A legal entity established for narrow and often temporary objectives related to regulation, taxation or risk. An SPV is set up by a sponsoring firm specifically to achieve those objectives. An SPV is not an operating company in the usual sense, but rather a “robot” company—a set of rules without employees or a physical location.
spillover benefits
The benefit obtained neither by producers nor consumers of a good or service.
spillover costs
The cost of producing or consuming a good or service borne neither by the producers nor consumers of the good or service.
spot transaction
A foreign exchange transaction in which each party promises to pay a certain amount of currency to the other on the same day or within one or two days.
state bank
Bank that is chartered by a state; may or may not be a member of the Federal Reserve System.
state member bank
A bank that is chartered by a state and has elected to join the Federal Reserve System.
sterilization
Any form of monetary policy undertaken to maintain domestic money supply in the face of international capital flows. Often done to minimize currency appreciation and inflation due to such transfers.
structural unemployment
Long-term joblessness caused by shifts in the economy. Often structural unemployment occurs because of changes in technology.
sudden stops
A sudden slowdown or reversal in a country’s capital inflows.
surcharge
An extra charge imposed on those who purchase with a credit card instead of cash. (Currently, surcharges for credit card purchases are prohibited.)
swap
An agreement between two parties to exchange cash flows of underlying securities. For example, in an interest rate swap, the most common type of swap, one party agrees to pay a fixed interest rate in return for receiving a variable rate from the other party.
swap arrangements
See reciprocal currency (swap) arrangements.
System Open Market Account
The Federal Reserve’s portfolio of U.S. Treasury securities. Purchases and sales in this account—open market operations—are under the overall supervision of the manager of the System Open Market Account, subject to the policies and rules of the Federal Open Market Committee.
systemic risk
Risk that a disruption at a firm, in a market segment, to a settlement system or in a similar setting will cause widespread difficulties at other firms, in other market segments or in the financial system as a whole.
T
targeted incentives
Incentives that benefit a specific company (e.g., loans at below-market interest rates or tax breaks) not general economic policies of the government that improve the business climate (e.g., corporate tax reductions).
tax-increment financing (TIF)
TIF is a real estate redevelopment technique that allows a company to finance land acquisitions or improvements by borrowing money tax free (thus reducing interest rates) and lets companies purchase renovated sites or buildings at below-market costs.
tender
An application or offer to purchase a U.S. Treasury bill, note or bond.
thrift institution
A general term encompassing savings banks, savings and loan associations, and credit unions.
Thrift Institutions Advisory Council (TIAC)
Group established by the Board of Governors to obtain information and opinions on the needs and problems of thrift institutions. Made up of representatives of savings and loan associations, savings banks, and credit unions.
time deposit
Funds deposited in an account that has a fixed term to maturity and technically cannot be withdrawn before maturity without advance notice (for example, a certificate of deposit). Time deposits may earn interest.
too-big-to-fail
Government practices that protect large banking organizations from the normal discipline of the marketplace because of concerns that such institutions are so important to markets and their positions so intertwined with those of other banks that their failure would be unacceptably disruptive, financially and economically. For more information, go to Special Studies.
trade deficit
The amount by which merchandise imports exceed merchandise exports.
trade policy
Indicates a country's level of freedom in trading with other countries. Tariffs may be added to goods and services to collect government revenue or to encourage purchases of one product over another (typically a domestically produced one over an imported one).
trade-weighted value of the dollar
The value of the dollar pegged to, or expressed relative to, a market basket of selected foreign currencies. The Federal Reserve calculates a trade-weighted value of the dollar based on the weighted-average exchange value of the dollar against the currencies of 10 industrial countries.
Trading Desk (the Desk)
The group at the Federal Reserve Bank of New York that conducts open market operations for the Federal Reserve System and intervenes in foreign currency markets for the Federal Reserve and Treasury.
tragedy of the commons
The overuse of a resource, such as water, land or air, due to poorly defined property rights.
tranching
Dividing into portions, usually by level of risk.
transaction account
A checking account or similar deposit account from which transfers of funds can be made. Demand deposit accounts, NOW (negotiable order of withdrawal) accounts and credit union share draft accounts are examples of transaction accounts.
Troubled Asset Relief Program (TARP)
The Emergency Economic Stabilization Act of 2008 authorized by the Secretary of the Treasury to establish TARP to purchase, and to make and fund commitments to purchase, troubled assets from financial institutions.
troubled assets
Under the Emergency Economic Stabilization Act, Congress authorized the Treasury to use up to $700 billion to purchase “trouble assets,” that is residential or commercial mortgages and any securities, obligations or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary of the Treasury determines promotes financial market stability and any other financial instrument that the Secretary, after consultation with the Fed chairman, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.
U
unemployment rate
Percentage of the labor force that is unemployed and actively seeking a job. For more information, see Bureau of Labor and Statistics.
U.S. Treasury securities
Obligations of the U.S. government issued by the U.S. Department of the Treasury as a means of borrowing money to meet government expenditures not covered by tax revenues. All marketable Treasury securities have a minimum purchase amount of $1,000 and are issued in $1,000 increments. There are three types of marketable Treasury securities: bills, notes and bonds.
-
Treasury bill (T-bill)
Short-term U.S. Treasury security having a maturity of up to one year. T-bills are sold at a discount. Investors purchase a bill at a price lower than the face value (for example, the investor might buy a $10,000 bill for $9,700); the return is the difference between the price paid and the amount received when the bill is sold or it matures (if held to maturity, the return on the T-bill in the example would be $300). -
Treasury note
Intermediate-term security having a maturity of one to 10 years. Notes pay interest semiannually, and the principal is payable at maturity. -
Treasury bond
Long-term security having a maturity of longer than 10 years. Bonds pay interest semiannually, and the principal is payable at maturity.
The Treasury Department also issues several types of nonmarketable securities, including savings bonds.
V
variable rate
A variable-rate agreement, as distinguished from a fixed rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.
vault cash
Cash on hand at a depository institution to meet day-to-day business needs, such as cashing checks for customers. Can be used to satisfy the institution’s reserve requirement.
velocity
The rate at which money balances turn over in a period for expenditures on goods and services (often measured as the ratio of GNP—gross national product—to the money stock). A larger velocity means that a given quantity of money is associated with a greater dollar volume of transactions.
vol swap
An abbreviation for "volatility swap," a futures contract based on the realized volatility of an underlying asset.
W
wire transfer
Electronic transfer of funds; usually involves large dollar payments.
wraparound
A financing device that permits an existing loan to be refinanced and new money to be advanced at an interest rate between the rate charged on the old loan and the current market interest rate. The creditor combines or “wraps” the remainder of the old loan with the new loan at the intermediate rate.
Y
yield
The return on a loan or investment, stated as a percentage of price.
Z
zero-coupon mortgage
A long-term commercial mortgage that defers all payments of principal and interest until maturity.
zero-sum game
A situation in which some gain, some lose and in the end there is no overall gain or loss. A positive-sum game results in some losing and some gaining with an overall gain, while a negative-sum game results in some losing and some gaining with an overall loss. Incentive opponents use the zero-sum game and negative-sum game theories to argue that targeted incentives don't improve the national economy and may even hurt it. Incentive supporters use the positive-sum game theory to argue that targeted incentives improve the national economy.
zombie lending
Otherwise known as “forbearance lending,” the term refers to the practice, prevalent in Japan in the early 1990s, of banks continuing to lend to otherwise insolvent firms (“zombies”).