Banker's Glossary


Early amortization event
A type of credit enhancement used in asset backed securities. One or more triggers, defined in the asset backed security's documentation require the termination of revolving periods, controlled amortization periods and/or accumulation periods. Once triggered, the early amortization provision requires that the monthly principal payments be distributed to investors as they are received. The most common trigger is a measure of how the portfolio yield net of charge-offs exceeds the base rate of servicing plus the investor coupon rate. Also called a payout event.

Earnings at risk (EAR)
The quantity by which net income is projected to decline in the event of an adverse change in prevailing interest rates. One measure of an institution’s exposure to adverse consequences from changes in prevailing interest rates. See value at risk (VAR) for an alternative measure.

Earnings credit rate
An interest rate applied to investable account balances to determine how much expense for bank services used by a depositor is offset by the deposits maintained by that depositor. The same calculation can work in the opposite way by applying the earnings credit rate to the actual service charges to determine how much deposit balance is needed to pay for the charges. The earnings credit rate is always expressed as an annual rate even though the calculations are usually done monthly. Also called earnings allowance rate.

Earnings retention rate
The percent of current period earnings retained by the firm as opposed to being paid out as dividends or partners’ withdrawals. The after-tax net income minus dividends then divided by the after-tax net income. Not to be confused with retained earnings, a name for the quantity on the balance sheet that includes the accumulated total of earnings retained.

Acronym for earnings before income taxes.

See Equal Credit Opportunity Act. Pronounced ee

Econometric models
Systems of mathematical formulas that attempt to represent the interaction of various macroeconomics variables. Some economists use these models to predict the alterations that will result from changes in one or more economic conditions. These models are sometimes used to predict interest rates. Rate forecasts made by econometric models are seldom correct.

Economic Development Corporation (EDC)
A special type of corporation established by a community solely to act as a conduit. The EDC can, as a municipal entity, borrow funds or sell securities that are, in most cases, exempt from federal income tax. Consequently, the EDC can raise funds at lower interest rates than businesses. The lower-cost funds are used by the EDC to buy fixed assets that are then leased to the business. The lease rate reflects the EDC’s low cost of capital. The EDC has no responsibility for the payment of interest and principal on the debt except to pass the business's rent payments through to the investors.

Economic value added (EVA®)
See shareholder value added (SVA). Since EVA is a registered mark, the phrase shareholder value added, or SVA, is often used instead.

Economic value of equity (EVE)
One measure of exposure to interest rate risk. The difference between the sum of the present values of all cash flows from assets and the sum of the present values of all cash flows from liabilities. This difference is a proxy or estimate used for capital when the sensitivity of capital to changes in prevailing interest rates is calculated. The rate risk exposure target focuses on the amount of change in the economic value of equity that might result from a change in prevailing interest rates. It is a long-term, economic target for measuring rate risk exposure. Previously known by the less-accurate name market value of portfolio equity or MVPE. Sometimes called net portfolio value (NPV).

See Economic Development Corporation.

Effective annual yield
A seldom-used expression to refer to the yield on an investment expressed on a compound interest basis.

Effective date
(1) The date on which funds will be transferred electronically from or to a customer’s account.

(2) The date on which cash flows due under a swap contract begin to accrue.

Effective duration
(1) One of several methods of expressing duration. More accurate than Macaulay duration or modified duration. See convexity, duration, Macaulay duration, and modified duration

(2) A synonym for empirical duration. See empirical duration.

(3) A synonym for option-adjusted duration. See option-adjusted duration.

Effective hedge
See hedge effectiveness.

Effective interest amortization
A methodology for amortizing premiums or accreting discounts for MBSs that is required by FAS 91. Under this methodology, premiums are amortized and discounts are accreted into income over the average life of the securities. To accomplish this, a prepayment speed assumption (PPA) must be made when the MBS is purchased. An average life is then estimated from that prepayment assumption. Then an initial accretion or amortization schedule is determined to evenly spread the accretion or amortization into income over the estimated life of the MBS investment. If actual prepayments received during the life of the investment differ from the assumed speed, as they almost always will, the average life projection must be revised. When the average life projection is revised, a revised accretion or amortization schedule must be calculated for the entire period from the purchase date. In practice, many investors do not do this until the difference between the original speed assumption and a more accurate, current assumption, is material. An alternative system, level factor amortization, is often considered superior.

Effective margin
The effective margin is the average spread over the underlying index that the investor expects to earn over the life of a floating-rate security. For a floating-rate security selling at its par line, the effective margin is identical to the spread between the coupon rate and the underlying index. An advantage of using an effective margin measurement is that it applies equally well to floating-rate securities trading at discounts, at par, or at premiums. A security trading at a discount will have an effective margin greater than the difference between the coupon rate and the index.

Effective maturity
One description of the tenor of a CMO. The final date at which principal will be repaid based upon the prepayment speed assumption selected for the calculation.

Effective range
The spread between specified upper and lower limits for prepayments in a structured CMO such as a PAC.

Effective yield
A measure of the annual return from an investment. The Effective yield is calculated by dividing the coupon interest rate by the amount invested expressed as a percentage of the par value.

Efficient asset or efficient portfolio
An asset or portfolio of assets that earns the maximum possible return for its given level of risk. An asset or a portfolio of assets is considered to be efficient if no other asset or portfolio of assets offers a higher expected return with the same (or lower) risk or offers a lower risk with the same (or higher) expected return. This concept is part of a financial explanation sometimes called the Markowitz Portfolio Model or the Efficient Frontier Theory. The efficient portfolio is defined mathematically based upon the expected returns, the standard deviation of returns, and the covariance of returns for the portfolio.

See electronic funds transfer.

See Emerging Issues Task Force.

Electronic chattel paper
A document that includes both monetary obligation and a security agreement consisting of information stored in an electronic medium. A category of personal property collateral defined by the 2001 revisions to Article 9 of the UCC.

Electronic funds transfer (EFT)
An electronically based rather than paper-based system of transferring funds to and from accounts. Two main EFT remittance methods are wire transfers and automated clearing house (ACH).

Electronic Signatures in Global and National Commerce Act
A Federal statute that gives electronic signatures the same validity as handwritten signatures on paper documents. Actually, it is more accurate to say that under this law online contracts "may" have the same legal status as paper contracts. The e-sign law does not make electronic contracts enforceable it merely provides that courts cannot deem an electronic contract to be unenforceable solely because they are in electronic form. Enacted in 2000. Better known as the "e-sign law".

Eligible accounts
Receivables that are acceptable to the lender for the purpose of making advances to the borrower under a line of credit with an advance formula. The criteria for determining the eligibility of accounts must be set forth in the loan documentation.

Eligible banker's acceptances
Banker’s acceptances that meet Federal Reserve requirements and thus can serve as collateral for bank borrowings from the Federal Reserve. The accepting bank can sell eligible BAs without incurring reserve requirements. (When an accepting bank sells an ineligible BA, the sale is treated as a borrowing subject to reserve requirements.) See banker's acceptance.

See intercompany eliminations.

Embedded derivative instrument
Defined by FASB in FAS 133. An implicit or explicit term in a contract such as a bond, insurance policy, or lease, that meets the definition of a derivative even though the entire contract may not. Under FAS 133, the certain embedded derivatives must be separated from the host contract for purposes of reporting and accounting. See embedded option and FAS 133.

Embedded option
A provision in a financial contract or financial instrument, such as a loan or a security, that allows one party to change the timing or amount of one or more cash flows associated with that contract or instrument. An options feature of minor importance in bank products or debt instruments. Sometimes called a hidden option. They are "hidden" not because they are in any way secret but because they are not separate, detachable features that banks or customers can add or subtract to customize individual transactions. Instead, they are one of a number of features, terms, or contract rights that are embedded in the contract or financial instrument. Examples include prepayment options on loans, early withdrawal options on certificates of deposit, annual and lifetime rate caps on ARMs, and call options in bonds. Embedded options make both the projected return and the interest rate risk of a financial instrument difficult to evaluate because the probability that the option will be exercised must be evaluated, and may vary with movements in rates. See embedded derivative instrument, option and option risk.

Emerging Issues Task Force (EITF)
A unit of the Financial Accounting Foundation that addresses accounting issues not yet addressed by a published FASB Statement of Financial Accounting Standards.

Eminent domain
The power of a government to acquire private property for public purposes. It is used frequently to obtain real property that cannot be purchased from owners in a voluntary transaction. When the power of eminent domain is exercised, owners normally are compensated by the government in an amount determined by the courts.

Empirical duration
A measure of duration calculated by "backing into" the duration value using changes in observed market prices resulting from changes in prevailing rate.

Empirical VAR
A measure of a financial instrument’s, a portfolio of financial instruments’, or an entity’s exposure to reductions in value resulting from changes in prevailing interest rates. Also known as simulation VAR, empirical VAR is one of several different methods for calculating VAR. Empirical or simulation VAR calculates VAR by modeling potential value changes for a defined time horizon over a large number of possible scenarios. The result of these hundreds or even thousands of simulations is a distribution of possible outcomes. VAR is then calculated from that distribution. This approach does the best job of capturing option risk. Unfortunately, it is the most computationally intensive of the three statistical techniques for calculating VAR. See correlation VAR, historical VAR and value at risk (VAR).

Employee Retirement Income Security Act of 1974 (ERISA)
Legislation mandating standards for vesting requirements and funding of pension plans.

End lender
See permanent lender.

End point analysis
A determination of the number and value of checks drawn on each transit routing number.

End user
A counterparty who intends to own the position. Contrast with a counterparty such as a dealer who intends to sell the position to an end user.

A written statement on a document, usually on the back of the document, in which the owner assigns his rights to an individual or entity named in the endorsement.

Technically, an endorser is anyone who signs the back of a financial instrument. In lending, the term is used as functional equivalent of a guarantor. A loan endorser usually signs a guaranty agreement included on the promissory note form, often on the back.

Funds or property that are donated with either a temporary or permanent restriction as to the use of principal.

Enterprise fund
(1) A fund established to account for government operations financed and operated in a manner similar to private business enterprises (e.g., water, gas, and electric utilities; airports; parking garages; or transit systems). In this case the governing body intends that costs (i.e., expenses, including depreciation) of providing goods or services to the general public on a continuing basis be refinanced or recovered primarily through user charges.

(2) A fund established because the governing body has decided that periodic determination of revenue earned, expenses incurred, and/or net income is appropriate for capital maintenance, public policy, management control, accountability, or other purposes.

Enterprise-wide risk management (ERM)
An integrated approach to measuring and managing risks within a financial institution. ERM, as opposed to traditional separate, "silo" based, risk analysis, recognizes that risks are inter-related and often have common drivers. For example, the macroeconomic conditions related to high interest rates impact credit risk in addition to interest rate risk. Moves to ERM are partially driven by the Basel II capital guidelines and related rules issued by national banking regulators.

Equal Credit Opportunity Act (ECOA)
A Federal statute that makes it illegal for creditors to discriminate in any aspect of a credit transaction on the basis of sex, marital status, age, race, national origin, color, religion, receipt of public assistance, or the exercise of rights under the Consumer Protection Act. The Federal Reserve Board of Governors has adopted Regulation B to implement this statute.

A category of goods defined by Article 9 of the UCC. Equipment is goods used primarily in the operation of a business. It includes professional equipment and farm equipment. Any personal property that is tangible and is not consumer goods, farm products, or inventory.

Equipment trust certificates
A common type of secured corporate bond. For these bonds, a collateral interest in equipment or machinery provides extra protection for bond holders. In most cases, the equipment that is pledged to secure the bonds is equipment or machinery that is purchased from the proceeds of the bond issue. Typically, a trustee will purchase the equipment, issue the bonds, and lease the equipment to the end user. The end user's lease payments to the trustee are passed to the bond holders in the form of interest and principal. When the bonds are retired, the end user acquires title to the equipment. Airlines, railroads, and shipping companies are the most common issuers.

Equitable subordination
A legal term used in bankruptcy to describe a process in which a bankruptcy judge decides that fairness can only be achieved by giving lower priority (subordinating) the claims of one or more creditors (usually a secured bank) to the claims of other (usually unsecured) creditors.

Equity method
An accounting method used to reflect an investor's interest in a company. This method is used when the investor owns 20 percent or more of the investee and has significant influence over the investee. Under the equity method, the investment is originally recorded on the books of the investor at its cost. Subsequently, the asset value of that investment on the investor's financial statements is increased or decreased by the investor's proportionate share of the increase or decrease in the investee's net worth.

Equity security
Any security representing an ownership interest in the issuing entity. This includes common, preferred, or other capital stock. It also includes mutual funds and contractual rights to acquire or dispose of ownership interests at fixed or determinable prices such as warrants, rights, call options, and put options. Does not include convertible debt.

Equity tranche
One name for the lowest quality (highest credit risk) tranche in a CDO structure. Sometimes called junior subordinated notes, preferred stock or income notes. The contractual rules for the cash flow distributions in a CDO structure enable the senior tranches to receive high credit ratings by shifting risk to the equity tranche. See collateralized debt obligation and waterfall.

Equity value at risk (EVAR)
A less-commonly used synonym for value at risk. The quantity by which the assumed market value, or portfolio value, of an institution’s equity is projected to decline in the event of an adverse change in prevailing interest rates. One measure of an institution’s exposure to adverse consequences from changes in prevailing interest rates. See earnings at risk for an alternative measure.

Equivalent bond yield
See bond equivalent yield.

See enterprise-wide risk management.

Escrow accounts
Cash held in abeyance until an event occurs or does not occur. For example, funds paid monthly by a mortgagor to the mortgagee are held in escrow until they are due to the taxing authority.

E-sign law
See Electronic Signatures in Global and National Commerce Act.

A legal term describing the preclusion of a party from alleging in a legal action anything that is contrary to previous actions or admissions of that party. See estoppel letter or estoppel certificate.

Estoppel letter or estoppel certificate
A document used in commercial mortgage transactions where the lender is secured by property that is leased to tenants. Also known as tenant estoppel letters or tenant acceptance letters. Written admissions that are obtained by the lender prior to funding to create estoppel. In an estoppel letter, the tenants attest that they believe the lease to be valid and enforceable, that they are making lease payments as agreed, that the landlord is not in default of any lease provisions requiring landlord performance and that no rent has been prepaid. The estoppel letter gives the lender more rights and more flexibility for disposing of the property in the event that the borrower defaults. See estoppel.

Eurodollar CDs
One type of Eurodollar deposit. The certificates are more liquid than the time deposits and therefore trade at lower yields/higher prices.

Eurodollar deposits
Bank deposits denominated in U.S. dollars but held at locations outside of the U.S. Initially, the term only referred to dollar deposits in London; later it became applicable to dollar deposits anywhere in Europe or the Caribbean; now it often refers to dollar deposits at any offshore location. The deposits may be held by the foreign branches of U.S. banks or by non-U.S. banks. Eurodollar deposits may be Eurodollar certificates of deposit or simply Eurodollar time deposits.

European option
European-style option
An option that the holder can exercise only on the expiration date. See American option, Bermuda option and Asian option.

The act or process of estimating the market value of real estate when a transaction secured by real estate falls within one or more of the exemptions set forth to the requirements for obtaining a full appraisal. If a transaction falls under one of three exemptions, an evaluation is required. If the transaction is exempted under one or more exemptions not including one of the three that require an evaluation, an evaluation may still conducted if the lender considers it prudent. An evaluation may be conducted by independent bank personnel or by an appraiser. When an appraiser conducts such an estimate of value, it is called a limited appraisal and must meet requirements for limited appraisals. See limited appraisal and Uniform Standards of Professional Appraisal Practice (USPAP).

See shareholder value added (SVA). Since EVA is a registered mark, the phrase shareholder value added, or SVA, is often used instead.

See equity value at risk.

See economic value of equity.

Event of default
An event described in a promissory note, security agreement, or loan agreement that triggers rights of the lender to take remedies set forth in the documents. The most common event of default is the debtor’s failure to make required interest and/or principal payments to the bank when they are due. Often, the remedy permitted to the bank when an event of default occurs is the right to declare the debt to be due and payable in its entirety. Formal loan agreements frequently include numerous events of default.

Event risk
The risk of an unexpected, future decrease in credit quality that is a result of events such as a corporate acquisition or material changes in taxes, laws, or regulations.

Excess servicing
Excess spread
A term used in asset backed securities to describe the amount by which the yield from the loan collateral, net of charge-offs, exceeds the sum of the servicing fee and the interest paid to holders of the security.

Exchange traded
An expression used to refer to financial instruments that are purchased and sold in securities exchanges such as the Chicago Board of Trade. It excludes instruments that are actively traded in over-the-counter (OTC) capital markets.

Exchange-traded derivative contracts
Some derivatives are traded on organized exchanges. These derivatives usually have margin requirements. Common exchange-traded derivatives include futures and options. Other derivatives, such as swaps, are not exchange traded but are traded in over-the-counter (OTC) capital markets.

The implementation or use of a contractual right, for example, a call option holder’s purchase of the underlying security.

Exercise price
The price at which an option may be used. The price at which the owner of the option has the right to buy or sell whatever the option contract is for. Sometimes called the strike price.

Expectations hypothesis
The theory that the shape of yield curves is determined by investors' collective expectations of future interest rates. See implied forward rates. Also see liquidity preference for a modification of this interest rate theory.

Expected loss or expected risk
The portion or component of risk or loss that is predicted by statistical analysis.

Decreases in net financial resources. Expenditures include current operating expenses requiring the present or future use of net current assets, debt service, and capital outlays, intergovernmental grants, entitlements, and shared revenue.

Outflows or other reductions of assets or increases in liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.

Expiration date
The final date on which an option may be used. See American option and European option.

Extension risk
The risk that rising interest rates may slow prepayment speeds and therefore cause an investment in a pass-through or CMO MBS to last longer than the investor anticipated. By taking longer to return the investor's principal, the extension of the MBS prevents the investor from taking advantage of higher rates available from other investments.

External liquidity risk
A term defined by the Federal Reserve. The risk that a bank will experience funding problems as a result of factors outside of its direct control. The Federal Reserve defines three types of external liquidity risk. These are geographic (such as the premiums required on deposits at many Texas banks in the late 1980s), systemic (such as the adverse effects upon several large banks caused by the near failure of Continental Illinois Bank in 1984), or instrument-specific (such as the collapse of the perpetual floating-rate note market in 1986.) See bank-specific liquidity risk and systemic liquidity risk.

See discharge.

Extraordinary items
Accounting income, gains, expenses, or losses resulting from transactions or events that are both unusual in their nature and infrequent in their occurrence. The GAAP requirements for defining something as extraordinary are strict. The exact language, found in APB Opinion No. 30, paragraph 20, states in order for extraordinary items to be considered unusual... "the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates ....". Thus the same transactions or events can be extraordinary for one firm but ordinary for another firm. When extraordinary items are reported, they are shown on the income statement net of applicable income taxes.