(1) A steady, noninstantaneous change in rates. Usually a projected change in rates with small, equal, incremental changes in each time period over a series of time periods until the full amount of the projected change is achieved.
(2) A term used in residential lending and in the analysis of mortgage backed securities to describe projections of monthly prepayment speeds which increase from a low initial rate over a series of time periods until the full amount of the expected, final prepayment speed is reached. See PSA model for an example.
See revenue anticipation note.
See accrual bond.
See risk-adjusted return on capital.
The cost of debt service paid by a borrower or issuer to a lender or investor. The rate is expressed as an annual percentage of the amount borrowed. For some notes and bonds that pay interest semiannually, the semiannual interest due to the investor used to be evidenced by a coupon that could be detached and sent for collection. Thus the cost to the issuer for notes and bonds paying semiannual interest is often called the coupon rate. Lenders or investors may receive a yield that is higher or lower than the rate.
A provision in the bond agreement or resolution that addresses the rate or method used to establish the fee(s) charged to users of the facility financed by the securities. Typically, a rate covenant promises that the fees will be adjusted when necessary to support the timely payment of interest and principal on the bonds.
The risk that the entity's earnings and/or its capital may be reduced by an adverse change in prevailing interest rates.
The exposure of either the bank's earnings or its market value to fluctuations caused by changes in prevailing interest rates.
Rate-sensitive assets (RSA)
The quantity of assets subject to repricing within a defined time period. Usually related to rate-sensitive liabilities in the ratio: RSA divided by RSL.
Rate-sensitive liabilities (RSL)
The quantity of liabilities subject to repricing within a defined time period. Usually related to rate-sensitive assets in the ratio: RSA divided by RSL.
An arbitrarily selected change in prevailing interest rates used to quantify either a change in profits or a change in capital associated with that size of a rate change.
Real bills doctrine
See commercial loan theory of liquidity.
See real property.
Real estate investment trust (REIT)
A trust used to hold ownership of real property for investors. The trust structure is used to benefit from tax code provisions.
Real estate mortgage investment conduit (REMIC)
The name of a type of mortgage-backed pass-through security. REMICs can take many forms. REMICs are typically multiclass securities. Unlike simple, non-REMIC CMOs, REMICs can separate mortgage pools into different risk classes as well as different maturity classes. Some of the most common forms of REMICs are sequential pay CMOs, planned amortization class (PAC) tranches, targeted amortization class (TAC) tranches, and companion tranches. REMICs may also have interest-only tranches, principal-only tranches, and residual tranches. Today almost all CMOs are issued in REMIC form to take advantage of provisions in the Tax Reform Act of 1986. However, even though REMICs are overwhelmingly dominant in the CMO market, the term "REMIC" is used far less often than the term "CMO." CMO is used to refer to all forms of MBSs other than simple pass-through MBS pools.
Real Estate Settlement Procedures Act (RESPA)
A Federal statute that requires lenders and persons who conduct real estate loan closings (settlements) to make certain disclosures. The law also prohibits certain practices such as kickbacks. The Department of Housing and Urban Development (HUD) has adopted Regulation X to implement this statute.
Informally used to refer to land or buildings. As defined by Federal banking regulations governing appraisals, real property is: an identified parcel or tract of land including improvements, easements, rights of way, undivided or future interests, and similar rights but excluding mineral rights, timber rights, or growing crops. Note that under state law in many states, growing crops, timber, and minerals that have not been separated from the land are also included in the definition of real property.
Volatility calculated using the actual movements of prices in financial markets. See volatility and implied volatility.
Name used by bankers to describe moneys owed to a business and yet to be received. Usually the amounts due from trade creditors who purchased goods or services on credit. Functionally equivalent to accounts or accounts receivable except that accounts is the only legally acceptable way to describe these assets for purposes of Article 9 of the Uniform Commercial Code.
Re-CMOs or re-REMICs
REMICs are created when tranches of existing CMO REMICs are combined and used to collateralize new securities. When this is done, the new securities are called re-REMICs, re-CMOs, or structured collateral. These may be more or less risky than the underlying tranches. See kitchen sink bonds.
The date set to determine the owner entitled to the next dividend, interest, or principal payment. The payment is due to the owner who owned the security on the record date.
The right to seek repayment of debt. Usually used to describe the right to seek repayment from an originator or prior endorser who sold or assigned debt to another party.
Term used to describe the illegal practice of refusing to lend to borrowers located in a defined geographic area.
See back-end load.
A term used in credit swap transactions to identify the underlying instrument. In the most simple structure, cash flow from the reference asset is paid by the asset owner called a protection buyer to a counter-party known as a protection seller. The reference asset is often a marketable, corporate bond rather than a corporate loan from the same obligor because the bonds provide price information than loans which are less homogenous and less marketable. See credit derivative and credit swap.
An interest rate used as an index rate. For example, if a loan pays interest at a rate of 50 basis points above the 6-month LIBOR, the reference rate is the 6-month LIBOR.
The replacement of existing securities using funds obtained from the issuance of new securities.
Bonds issued to replace outstanding bond issues. Usually used to replace callable bonds when interest rates drop.
Refunding escrow deposits (REDs)
Financial instruments similar to pre-refunding bonds. Tax law changes in 1984 restricted tax exempt pre-refundings for certain types of municipal debt including airport and convention center related debt. To circumvent those restrictions, a forward transaction, rather than a second bond issue, is used to lock in a lower cost of funding. Under this arrangement, funds dedicated to repaying higher cost debt at the next call date are held in escrow. See pre-refunding (pre-re).
Register of Deeds
The name used in some states for the public official responsible for receiving and maintaining public notices of liens such as financing statements. Usually a county official.
A form of ownership of certificated bonds. The name of the owner is listed on the certificate and in the records of the issuer's agent.
Regular way settlement
Buyers and sellers can negotiate settlement periods; however, standard time periods are usually used. For U.S. Treasury and agency debt securities, the customary settlement time, called regular way settlement, is the next business day. For municipal and corporate debt securities, the customary settlement period, often called corporate settlement, is three days. See net settlement and settlement.
Federal Reserve Regulation titled Unfair or Deceptive Acts or Practices. Provides for consumer complaints against banks and prohibits certain practices. See cascading late charges and late charges.
See Equal Credit Opportunity Act.
See Home Mortgage Disclosure Act.
A Federal Reserve Board regulation governing the availability of funds and collection of checks. The regulation sets legal limits on the time banks can take before making deposited funds available for withdrawal.
See Consumer Leasing Act.
A Federal Reserve Board regulation covering privacy of consumer financial Information. Regulation P governs the treatment of nonpublic personal information about consumers by financial institutions. The regulation also requires financial institutions to provide notice to customers about privacy policies and practices and the right of a consumer to prevent a financial institution from disclosing nonpublic personal information about him or her to nonaffiliated third parties by "opting out" of that disclosure.
Federal Reserve Regulation entitled Credit by Brokers and Dealers. Provides limits on the amount of credit that can be extended for the purpose of purchasing or carrying certain stocks and a few bonds. See margin stock.
Federal Reserve Regulation entitled Credits by Banks For the Purpose of Purchasing or Carrying Margin Stock. Provides limits on the amount of credit that can be extended for the purpose of purchasing or carrying certain stocks and a few bonds. See margin stock.
See Real Estate Settlement and Procedures Act.
See annual percentage rate, rescission and Truth-in-Lending Act.
See real estate investment trust.
The risk of a decline in earnings or capital resulting from the fact the interest and/or principal cash flows received by investors during the time that an investment is held must be reinvested at a lower than expected rate as a result of a decline in prevailing interest rates.
A phrase used to refer to whether or not a security's price is relatively cheap, relatively fair, or relatively rich (expensive) compared to prices for other securities.
A document or a process in which a secured party gives up its collateral interest in the property of the debtor. Releases may be for all of the property of the debtor or may be partial. For example, if a real estate developer has pledged 10 lots as collateral for a loan, a partial release may be used for each lot as it is sold. For personal property collateral, a release may be entered into the public record by using a standard form called UCC-3.
The predetermined amount of loan reduction that will be required by the bank before the developer can obtain a partial release of the bank's lien that covers the portion of the collateral that is being sold.
See real estate mortgage investment conduit.
Float due to the time a payment is in transit. This is often called mail float since its major component is the time it takes a remittance to move from the remitter to the recipient through the mail.
An arrangement by which an organization’s checks are drawn against funds in a bank that is located in a distant area. A cash management practice designed to increase disbursement float.
A portfolio of instruments with known rates and maturities that tends to closely duplicate the changes in a portfolio of instruments with administered rates and/or indeterminate maturities. Sometimes referred to as the "Rod Jacobs" method for the probable developer of this approach.
An informal name for a repurchase agreement.
Repositioning repurchase agreement
A funding technique often used by dealers who encourage speculation through the use of gains trading, pair-off, when-issued, and extended settlement ploys. When an investor agrees to purchase a security with the intent of quickly selling it for a profit, price movements do not always favor these speculations. The repositioning repurchase agreement is service offered by dealers to enable buyers to hold onto such speculative positions until prices change and the position can be closed out at a profit. In a repositioning repurchase agreement, the buyer pays the dealer a small margin that approximates the actual loss in the security. The dealer then agrees to fund the purchase of the security by entering into a repurchase/reverse repurchase agreement with the buyer. (The transaction is a borrowing called a repurchase agreement for the buyer. It is a loan called a reverse repurchase agreement for the dealer.) These transactions are deemed to be inherently speculative.
Taking physical possession of personal property collateral pledged to secure a defaulted loan.
(1) A contractual provision applicable to specific loans, investments, or deposits that changes the interest rate paid or received. For example, a loan may have an interest rate tied to the prime rate that changes every time the prime rate changes, or an investment may have a rate tied to the one-month LIBOR. It is immaterial which index, if any, the rate is linked to or when the rate adjusts.
(2) As used in asset liability management (ALM), refers to the timing of cash flow from the principal of an asset that is received by the bank or the timing of payment of the principal of a liability by the bank. For example, in the case of a 5-year, fixed-rate investment, the principal is received at the end of 5 years, therefore, the asset reprices at the end of the fifth year. Note that the end of the fifth year could be tomorrow if the investment was issued 4 years and 364 days ago. In the case of a car loan, an amount equal to the monthly principal payments made to the bank reprices each month. In the case of a certificate of deposit, repricing occurs at maturity.
See mismatch risk.
Repurchase agreement (RP)
A form of secured, short-term borrowing in which a security is sold with a simultaneous agreement to buy it back from the purchaser at a future date. The purchase and sales agreements are simultaneous but the transactions are not. The sale is a cash transaction while the return purchase is a forward transaction since it occurs at a future date. The seller/borrower pays interest to the buyer at a rate negotiated between the parties. Rates paid on repos are short-term money market interest rates and are completely unrelated to the coupon rate paid on the instrument being purchased. Informally known as repos. Sometimes called a classic repo to distinguish between these transactions and sell/buybacks. Every transaction where a security is sold under an agreement to be repurchased is a repo from the seller/borrower's point of view and a reverse from the buyer/lender's point of view. Repos and reverses are often used to finance investment purchases, especially by traders.
One of nine risks defined by the OCC and one of six risks defined by the Federal Reserve. The risk to earnings or capital arising from the possibility that negative publicity regarding the institution’s business practices, whether true or not, will cause a decline in its customer base, costly litigation, or revenue reductions. The Federal Reserve and the OCC define reputation risk in almost exactly the same way.
Request for proposal (RFP)
A written notification prepared by an organization requesting offers to provide certain services (e.g., banking service) and to specify prices for these services. RFPs are generally quite detailed as to the types of services needed.
Cancellation of a contract without penalty. Regulation Z provides circumstances under which a borrower may cancel loan transactions involving nonpurchase money liens on the borrower's principal place of residence. The regulation permits such rescissions during a three day period after the loan closing. Specific requirements apply to bank disclosures of the borrower’s right to rescind.
A type of credit enhancement used in some asset backed securities. The reserve account may be created by an initial deposit from the seller and may be augmented over time by the application of funds from excess servicing income. Credit is enhanced because withdrawals from the reserve account are made to reimburse investors when excess servicing is insufficient to cover charge -offs. Until needed, funds in a reserve account are invested.
The percentages of different types of deposits that banks are required to hold on deposit at the Federal Reserve or as cash in their vaults. These requirements are determined by the Federal Reserve Board and function as a tool to control monetary policy.
The maximum amount by which an adjustable-rate security’s coupon rate can change in any given period of time. Also called the periodic cap. For most ARMs and floaters, the maximum periodic or reset change is defined as an amount of change in each, consecutive 12-month period over the life of the security. Thus the term "annual" cap is also used to describe most periodic caps.
The point in time when the coupon rate for a variable rate or floating rate financial instrument is re-established to reflect changes in a benchmark index. Reset dates are typically monthly, quarterly, semi-annually or annually. See index.
(1) For sequential-pay CMO structures, a residual tranche is the CMO tranche that receives the excess cash flow that remains after all of the payments due to the holders of other tranches and all of the administrative expenses have been met. When the residual is an accrual bond, it is often called a Z tranche or a Z bond.
(2) In REMIC CMO structures, one class of each issue must be designated as the residual for tax purposes. Some REMIC residuals do not meet the traditional definition of a residual as the last tranche to be retired.
Term used to describe the market or sale value of leased equipment (net of removal or disposal costs) at the end of the lease term. In most cases, it is projected or estimated. Sometimes called salvage value. With some exceptions, national bank lessors are subject to a rule that limits the residual value assumption made at the time the lease is created to 25 percent of the equipment's cost. Bank holding company leasing subsidiaries are subject to a 20 percent limit on the residual assumption.
See key rate duration.
See Real Estate Settlement Procedures Act.
Restricted appraisal reports
One of three types of real estate appraisal reports defined under Uniform Standards of Professional Appraisal Practice (USPAP) rules. A restricted appraisal report is the least detailed of the three report formats. Given a bank’s need to meet both regulatory requirements and the needs of prudent loan underwriting, more detailed reports are almost always preferable.
Cash held subject to limitations on how or when it may be used. For example, refundable customer deposits, cash in escrow accounts, and debt sinking funds.
Restricted stock is stock purchased from the issuer or from a person in a controlled relationship to the issuer in a nonpublic or private transaction. The right to sell restricted stock is limited by provisions in the Securities and Exchange Act.
(1) Deposits or deposit account balances in amounts of $100,000 or less.
(2) Deposits obtained from individuals and small businesses in the bank's local trade area(s).
The portion of the payment due to a contractor or equipment builder that is withheld until final inspection and acceptance of the work. Also called a holdback.
Earnings of a corporation from the current as well as prior years that have neither been distributed to the shareholders as dividends nor transferred to the surplus account. Corporate earnings accumulated over time. One of a corporation’s equity or capital accounts.
Portions of contracts that are not paid until all contract provisions are satisfied. Sometimes called holdbacks.
Return on assets (ROA)
A percentage calculated by dividing net income after tax by total assets. Annual income is usually used in the numerator; however, the annualized income for a month, quarter, or half year can be used. Period-end assets is often used in this calculation; however, average assets for the period is more accurate. This ratio is a measurement of how profitably assets are used in an enterprise. Firms in different industries usually have quite different returns on assets. This ratio is best used to compare firms in the same industry.
Return on capital
The return earned by an investor from a specific investment or group of investments measured in terms of a percentage return on the amount of capital invested. See return on equity.
Return on equity (ROE)
A measure of the return realized by the owners of an enterprise. Calculated by dividing an enterprise’s annualized net income by its average capital for the period. Alternatively, it can be calculated by multiplying the enterprise’s ROA by its leverage/equity multiplier. ROE indicates how effectively the enterprise is using its capital to produce income.
Reductions to gross sales that occur when customers are given credit for sold goods that are returned to the firm.
Revenue anticipation note (RAN)
A short-term note sold by a public entity that will be repaid from the proceeds of anticipated nontax income.
A bond or note for which the payments of principal and interest made to the investors by the issuer are payable exclusively from the earnings of the underlying project. For example, turnpike bonds repaid from tolls.
An informal name for a reverse repurchase agreement.
Reverse repurchase agreement, reverse repo
A form of secured, short-term investment in which a security is purchased with a simultaneous agreement to sell it back to the seller at a future date. The purchase and sales agreements are simultaneous but the transactions are not. The purchase is a cash transaction while the return sale is a forward transaction since it occurs at a future date. Informally known as a reverse. The buyer/investor/lender earns interest paid at rate negotiated between the parties. Rates paid on reverse repos are short-term money market interest rates and are completely unrelated to the coupon rate paid on the instrument being purchased. Every transaction where a security is sold under an agreement to be repurchased is a repo from the seller/borrower's point of view and a reverse from the buyer/lender's point of view. Repos and reverses are often used to finance investment purchases, especially by traders.
Reverse TAC tranche
The opposite of a TAC tranche. Bonds created in scheduled-pay CMO structures. A reverse TAC tranche is structured to avoid prepayment volatility. Each TAC has a designated target speed. When prepayments fall below the targeted speed, excess cash flow is diverted to the reverse TAC tranche. Unlike a PAC, a TAC tranche is not protected from call risk if prepayments are faster than expected. For this reason, TACs can be viewed as half PACs. Reverse TACs offer investors protection (but not immunity) from extension risk but no protection from call risk. Sometimes called contraction bonds because of their call risk.
Financial statements prepared by an independent CPA that have been subject to some examination but have not been audited. The CPA is required to consider the reasonableness of the information. If any number appears questionable, the CPA must make inquiries, apply analytical procedures or take other appropriate actions to provide the CPA with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP. Any departure from GAAP in reviewed statements should be noted in the transmittal letter and detailed in a footnote.
Revolving line of credit
A type of credit facility. A term that can be confusing, with different banks using the term to describe different types of credit facilities.
In some banks, "revolving line of credit" refers to a credit facility that permits the borrower to draw down and/or repay amounts up to a specified maximum at any time. Called a line of credit by other banks.
In other banks, the name "revolving line of credit" is used to distinguish between "regular lines of credit," (situations in which the bank is not legally committed to make advances) and "revolving lines," (situations in which the bank is legally committed to make advances.) This usage is outdated, wrong, and might expose the bank to legal liability.
Large banks, primarily, use the term to refer to a combination of a line of credit and a term loan. Typically it starts out as a line for a one-to-three year period, after which, on a previously determined date, the outstanding balance converts to an amortizing term loan.
A term used for asset backed securities to describe a period of time during which principal payments received from the underlying loan collateral are reinvested in new loan receivables thereby enabling the investor/ABS balance to remain constant. A revolving period may be prematurely terminated by an early amortization event.
See request for proposal.
A Greek letter used in the financial industry to represent the sensitivity of an option’s price to changes in interest rates.
Land that has been created by natural or manmade filling in or by moving of water.
(1) Noun — The possibility of loss.
(2) Noun — The uncertainty of whether events, expected or otherwise, will have an adverse impact. In this context, the adverse impact is usually a quantity of return (income) or value at risk.
(3) Noun — the compound estimate of the probability of, and the severity of, an adverse event. The amount of risk is the product of the probability of the adverse consequence and the potential severity of that adverse consequence.
(4) Verb — to incur the possibility of loss, to create or accept the possibility of uncertain returns, or to create or accept volatility.
Risk-adjusted return on capital (RAROC)
An economic approach to measure unit and product profitability within a financial institution. Returns, adjusted to reflect normalized or expected losses, are divided by an amount of capital that is carefully quantified to reflect the risk or risks incurred to generate those returns. The total risk-adjusted capital for an entire financial institution reflects its calculated economic capital. Economic capital is the capital required to support the incurred risks. Economic capital will rarely, if ever, equal accounting or book-value capital. The risk-adjusted return on capital is usually compared to a standard or hurdle rate of return. When such comparisons are made, products or units with returns exceeding the hurdle rate are said to add value while products or units with returns below the hurdle rate are said to destroy value. RAROC is not always defined and applied exactly the same way by different financial institutions but must be defined and applied consistently throughout each financial institution that uses it. Often referred to by the acronym RAROC, pronounced "ray-rock."
Risk-adjusted rate of return
The profit, often but not always expressed as a percentage rate of return on allocated capital, after recognizing applicable costs for credit risk, interest rate risk, liquidity risk and/or other financial risks. In some measures, risk costs are treated as expenses. In other measures, they are reflected in the amount of capital allocated in the denominator of the return on capital ratio.
Rules for establishing minimum required levels of book capital for financial institutions. Capital is allocated to types of bank assets based upon weightings assigned to those assets. For example, U.S. Treasury obligations and some U.S. Agency obligations require no capital. Most other U.S. Agency obligations are given a 20 percent weighting for the purpose of calculating risk-based capital. Corporate obligations have a 100 percent weighting.
The practice of charging different rates to different borrowers based on differences in their credit worthiness. Typically, all other loan terms remain the same. See Fair and Accurate Transactions Act (FACT Act) for limitations on the application of risk-based pricing to consumer loans.
Controlling the probability, and/or the severity, of a potential adverse event so that the consequences of that event are within acceptable limits. Since all risks have, by definition, the potential to generate losses, and since capital is the ultimate protection against failure resulting from losses, the underlying basis of risk management is equivalent to managing solvency risk.
Risk measurement unit (RMU)
A defined quantity or unit of risk. Quantities of risk may be defined for the purposes of setting risk exposure limits or for the purposes of allocating capital to measure risk-adjusted returns on capital. RMUs are often defined in terms of the amount of change or volatility that is equal to one standard deviation of the volatility.
See Robert Morris Associates.
See risk measurement unit.
See return on assets.
Risk-adjusted rate of return
A national organization of bank commercial loan and credit officers.
Rod Jacobs method
A methodology for evaluating the rate sensitivity of indeterminate deposits. See replicating portfolio(s).
See return on equity.
The paying off of existing debt, usually debt about to mature, through the issuance of new debt. Can also refer to the rolling over of an investment, such as a certificate of deposit at maturity, to another investment.
See yield curve risk.
See repurchase agreement.
See rate-sensitive assets.
See rate-sensitive liabilities.
See SEC Rule 144.