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FTP: A method of measuring the performance of business units, conducted by banking organizations, that determines the values that each unit contributes to profitability. ALM: A technique companies employ in coordinating the management of assets and liabilities so that an adequate return may be earned. It involves 3 specific risks e.g. Interest rate risk, foreign exchange risk and liquidity risk; Conducted by ALCO. Interest Rate Swap: An agreement between two parties (known as counterparties) where one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (most often the LIBOR). Duration Gap: The difference between the duration of assets and liabilities held by a financial entity. It is used to measure their risk due to changes in the interest rate. Asset (Stored) liquidity management: storing liquidity in the form of holding of liquid assets predominantly in cash and marketable security. When liquidity is needed, selected asset are sold for cash until all the banks demand for cash are met. Borrowed liquidity management: Borrowing enough immediately spendable funds to cover all anticipated demand for liquidity. Hot money liability: Deposits and other borrowed funds that are very interest sensitive or that management is sure will be withdrawn during the current period. Deposit composition ratio: Demand deposit/ time deposit. Where demand deposit are subject to immediate withdrawal via check writing, while time deposit have fixed maturities with penalties for early withdrawals. It measures how stable a funding base each bank possesses. Upscale target pricing: The setting of prices and fees on deposit accounts in an effort to attract those customers who hold high balances and purchase other bank services. Cyclical component: It represents positive or negative deviations from total expected deposits and loans depending upon the strength and weakness of the economy in the current year. (Trend + seasonal). Seasonal components: It measures how deposits and loans are expected to behave in any given week or month due to seasonal factors, as compared to the most recent year deposit or loan level. Duration: Duration is a value-weighted measure of the maturity of a security or other income generating asset that takes into consideration the amount and timing of all cash flows expected from the assets. Interest Sensitive Gap: The interest sensitivity gap is the difference between interest-sensitive assets and interestsensitive liabilities maturing or repricing within a specific time interval. CMO: A CMO (collateralized mortgage obligation) is a bond backed by home mortgages. A type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches.
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