GLOSSARY

List of Financial Terms in alphabetical order:

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CAC-40 Index of the 40 most actively traded shares on the Paris Bourse (stock exchange).

Call In the financial services arena, the term generally refers to the optional right of an issuer to redeem bonds before the stated maturity, at a given price on a given date. When used in the context of a call option, the term refers to a contract allowing the holder to buy a given number of shares of stock (or financial instruments or stated assets) at a stated price on or before a given date.

Call Option Option to buy an asset at a specified exercise price on or before a specified exercise date.

Callable Bond Debt securities redeemable by the issuer before maturity at a specified price on, before or after a specified date. Typically, bonds are called when interest rates fall so that new bonds can be floated at a lower rate.

CAMEL Rating A measure used by bank supervisory agencies to evaluate the condition of a financial institution. The measure evaluates capital, asset quality, management, earnings and liquidity.

Cap A contract on a short-term interest rate in which the writer pays the buyer of the cap the increased borrowing cost for any interest period prior to expiration when the rate is fixed at a level above the ceiling rate specified in the cap. Cap also refers to a loan term that indicates that the interest rate that will be charger to the borrower will not exceed a specific rate.

Capacity An insurance term that refers to the maximum amount of insurance a company will write on one risk. In lending, it is one of the five C's of credit and refers to a borrower's ability (or capacity) to pay an obligation when it is due; also sometimes referred to as debt capacity.

Capital The funds raised by a company through the sale of stock (shares) or debt securities and retained earnings. In banking, it is also divided into primary or core capital (stockholders equity), secondary or supplementary capital (debt and loan loss reserves) and tertiary or market risk capital (short-dated subordinated debt).

Capital Adequacy The ability of a bank to absorb losses or a shrinkage in the value of assets. Banking supervisory agencies have set standards to ensure that a bank's capital is sufficient to absorb a reasonable degree of losses and remain a going concern. These standards have been established primarily to protect depositors and the global banking system as a whole.

Capital Asset Pricing Model (CAPM) A classic and widely used model of the relationship between expected risk and expected return for a marketable asset.

Capital Gains Income from the sale of assets when the assets are sold for more than the original purchase price. The capital gains are calculated by taking the sale price and subtracting the original purchase price.

Capital Markets Markets where debt and equity securities are issued and traded. The term includes primary and secondary markets and exchanges.

Captive An insurance company, formed and managed by a separate company to provide insurance for the parent company. The term can also refer to captive finance companies established to provide financing for the purchase of the company's products, such as automobiles (General Motors Acceptance Corporation

Captive Agents Insurance agents who work exclusively for one company. This is in contrast to an independent agent who sells policies offered by many different companies.

Carrier An insurance company or person who agrees to pay losses. A carrier can be organized as a stock, mutual or reciprocal company or as an association of underwriters.

Case Reserve referred to in the insurance industry as a liability for loss estimated to be paid in the future on an outstanding claim.

Cash Account A term used in the brokerage industry to signify an account that requires settlement in full in cash by the settlement date usually for securities purchased or sold. This settlement must occur without the use of margin or borrowed funds.

Cash and Due from Banks Includes what a bank has on hand to cover customer demand deposits and operational expenses, accounts at correspondent banks, cash items (checks and drafts) in the process of collection and deposits held at the central bank to meet reserve requirements.

Cash Equivalents Any assets that can be quickly sold for cash. These can typically include money market funds and government treasury bills.

Cash Market Instrument A cash market instrument is one in which a principal sum is paid upfront. In exchange for this upfront cash, the buyer obtains the right to interest and a return on that principal after a period of time, such as occurs in a loan, deposit or bond transaction, or the right to a part ownership of a company in the form of an equity share.

Cash Value Insurance A life insurance policy that generates a savings component over time. The policy has a cash value against which the policyholder can borrow.

Casualty Insurance A class of insurance that provides coverage for the cost of damage to property or persons as a result of accidents or other specific perils. The losses covered include automobile, general liability, theft and personal liability. It excludes life, fire and marine insurance.

CD See Certificates of Deposit.

Cedant Insurance or reinsurance company that is transferring risk to another reinsurance company.

Cede To transfer all or part of a risk written by an insurer to a reinsurer.
Ceding An agreement, often called a treaty, between one or more reinsurance companies to transfer part of an insured risk.

Ceding Company A company that transfers all or part of an insurance risk to another company through reinsurance. Also called a primary company.

Central Bank A country's official bank that performs several functions, which include the administration of monetary policy. In some countries, the central bank acts as the main regulatory authority for banks. In the United Kingdom, the central bank is the Bank of England; in Japan, it is the Bank of Japan and in the United States, it is the Federal Reserve Bank.

Certificates of Deposit (CDs) negotiable instruments issued by a bank and payable to the bearer or the individual whose name appears on the certificate issued as evidence of a time deposit. CDs pay a stated amount of interest at a fixed rate and mature on a stated date. Maturities normally range from three months to five years. CDs may be bought and sold daily in the secondary market.

CHAPS See Clearing House Automated Payments System

Chartered Life Underwriter Chartered Life Underwriter (or CLU) is a professional designation in the insurance industry.

Chartered Property and Casualty Underwriter Chartered Property and Casualty Underwriter or a CPCU is a professional designation in the insurance industry.

CHIPS See Clearing House Interbank Payments System

City Banks A group of Japanese commercial banks with extensive assets and a large system of nationwide branch banking. Historically involved in serving industrial customers, they have diversified in recent years into retail and investment banking services.

Claim A demand for payment of a policy benefit because of the occurrence of an insured event such as death, disability, or an accident involving the insured.

Claim Adjusting The process of investigating, appraising, negotiating and sometimes settling claims.

Claim Reserves Funds set aside by an insurance company to pay existing or expected claims. The amount is calculated by actuaries and regulated by state law.

Claims expenses Expenses incurred to investigate and settle insurance claims (e.g., investigation, adjustment and legal fees).

Clearance and Settlement The actual exchange of securities and cash after a transaction has been booked (concluded). Regulations pertaining to the sales of securities govern clearance and settlement procedures.

Clearing Banks "Big Four" English (Barclays, Lloyds, Midland, which is now HSBC Bank, and National Westminster) and two Scottish (Bank of Scotland and Royal Bank of Scotland) commercial banks with the largest retail branch networks in the U.K. These banks were originally the main clearers of drafts and cheques in the U.K.

Clearing House The central location for matching security transactions of members to enable determination of minimum quantities to be received or delivered.

Clearing House Automated Payments System (CHAPS) A private computer-based clearing and settlement network established for interbank clearing of payments in British Pound Sterling. The system is operated by the BankersClearing House of London.

Clearing House Interbank Payments System (CHIPS) A computer-based clearing and settlement network established for international clearing of dollar payments and same day settlement. The system links international financial institutions with the system at the New York Clearing House (NYCH) offices in New York City. Final settlement is processed through the Federal Reserve Bank of New York.

Clearstream An international clearing system that holds and settles international securities such as Eurobonds.

CLSS See Continuous Linked Settlement Services

CLU See Chartered Life Underwriter.

CMO See Collateralized Mortgage Obligation

Co-branded Cards A type of affinity card jointly issued by a bank and a partner, such as a retail store or airline. The card contains the bank brand and that of the partner. Card customers receive special promotions and discounts to be used with the partner organization.

Coding The process in insurance of converting policy data into numerical form so that the data can be classified and analyzed.

Collar Upper and lower limits on the interest rate that can be charged on a floating rate bond.

Collateral An asset pledged by a borrower to ensure payment to the lender or performance of an obligation. Collateral may include such things as goods, securities, intangibles, real estate assets and cash.

Collateralized Mortgage Obligation (CMO) A bond backed by the cash flow from a pool of mortgages. The principal and interest payments from the mortgages are separated into different pools, creating several bonds with different interest rates. CMO's are considered high quality investments due to the low default rate on mortgages and often carry AAA bond ratings.

Collection Letter A document specifying the exchange of checks and other items requiring payment between twofinancial institutions. When cash letters are used the institutions agree to make the exchange without and intermediary.

Combined Ratio Used in the insurance business and it is the sum of both the loss ratio and expense ratio and it is used to measure underwriting performance.

Commercial Bank A term used to describe a bank that offers a full range of lending, deposit and other services for individual (retail) and business (wholesale) customers.

Commercial Lines Various types of commercial insurance coverage available specifically for businesses.

Commercial Loan Loans extended by banks to commercial entities. These may be short-term annually renewable loans to fund working capital needs, such as the purchase of raw materials, or medium-term loans to finance equipment purchases or plant construction. The interest rate on these loans usually involves a margin over a market rate (a base lending rate or an interbank rate).

Commercial Paper A short-term, unsecured promissory note issued by corporations in exchange for cash. Issuers must maintain a high credit standing to continue issuing this instrument. Commercial paper is considered to be a highly liquid and relatively safe investment.

Commitment Fee A fee paid by a borrower to a lender to ensure that credit in a specific amount and/or rate is available. The fee is typically charged only on the unused portion of the available credit line.

Commodities Bulk agricultural and natural resource products traded on an exchange or on the spot market. Examples of commodities may include pork bellies, unrefined oil or precious metals such as gold, silver and copper. Financial institutions commonly trade derivatives based on the commodities instead of trading the actual

Commodities Exchange Act A U.S. Federal Act passed in 1974 that regulates the commodities and futures markets. The act created the Commodities Futures Trading Commission (CFTC).

Commodities Futures Trading Commission (CFTC) The regulating body for commodities and futures trading in the United States.

Commodity Indices Indices that measure the price and performance of actual commodities based on the price of the futures contracts for those commodities.

Commodity Swap A transaction where two parties contract to the price at which they will sell and purchase a specific commodity during a fixed period of time. Essentially they exchange cash flows.

Common Stock or Common Shares A security that represents ownership interest in a public corporation. Stock or shares represent the last obligation to be paid by a company in a liquidation situation. In return for taking this risk, stockholders benefit from the appreciation (increase) of the stock price and/or from cash or stock dividends paid by the corporation.

Compensated Lines of Credit A commitment by a financial institution that allows a customer to draw down funds up to a pre-set limit in order to fund trading activity. The institution earns interest on the loan and may charge a fee for the use of the funds.

Compensated Overdraft A service that allows customers to overdraw their cash account (demand deposit, checking or current accounts) up to a predetermined limit. The bank receives interest on the drawn (borrowed) amount as compensation for providing the service. In some countries, banks are not permitted to provide direct overdraft lines linked to cash accounts. In these countries, a similar service is achieved by providing a separate line of credit account from which funds are drawn to cover overdrafts in the cash account.

Concentration account Cash management account located at one bank in a specific country into which funds held in accounts at different banks in the same country are consolidated. All of the accounts must be in the name of the same legal entity.

Confirming Bank Bank that adds its obligation to pay on behalf of the opening bank and will make payment under the Letter of Credit if the opening bank fails to pay for any reason.

Conservation Actions by the existing insurer or its agent to dissuade a policyholder from the replacement of existing insurance.

Consumer Credit Credit extended to individuals for personal needs (e.g. the purchase of a car, education, or home remodeling).

Contingent Liability A potential liability for a financial institution that is based on the action or default of an unrelated party. For example, if a bank discounts a note receivable, no immediate liability to pay the note is created. However, a contingent liability exists because the drawer (maker) of the note may default and the endorser (the bank) may be required to make payment on the note. Since these types of possible obligations are not existing liabilities until an event actually occurs, they are not recorded on the bank's balance sheet. Contingent liabilities are usually disclosed in the footnotes of the annual report.

Continuous Linked Settlement Services (CLSS) London-based organization composed of leading banks and financial institutions that provides a system of simultaneous payment/settlement of foreign exchange transactions to minimize settlement or delivery risk, commonly referred to as Herstatt risk.

Convergence A term that describes the integration of banking, insurance and securities firms into financial services companies. In futures trading, it is a term used to describe the movement of the price of a futures contract when the futures price and the cash price converge near the contract's expiration date.

Convertible Term A type of term life insurance that allows the insured to exchange the policy for a universal ordinary life policy without medical examination.

Convertibles Securities or bonds issued by a corporation that can be exchanged for a set number of securities of another form (e.g., bonds for common shares) at a predetermined price.

Cooperative Banks Term used to describe banks that were originally created to provide low cost loans and pay interest on pooled deposits (e.g., credit unions and some state chartered savings associations). These banks now offer many of the same services as retail banks.

Core Capital another term for Tier I capital under the Basle Accord Capital Adequacy agreement. Core capital consists of equity capital (permanent shareholders' equity in the form of issued and fully paid ordinary shares/common stock and perpetual non-cumulative preference shares) plus disclosed reserves, which include share premiums (paid-in-capital), retained earnings, general loan loss reserves and legal reserves. The definition excludes revaluation reserves and cumulative preference shares.

Core Deposits The level of primarily retail time deposits and non-interest bearing demand deposits that remain with a bank over an extended period of time. These are the funds that banks rely on as a stable source of funding for lending, investment and trading activities.

Corporate Actions Activities performed by a corporation that affect the marketability of its securities. These actions include repurchase of stock, stock splits and mergers.

Corporate Finance Financing services used to enable large corporate purchases, capital investments (equipment, plant, premises) and trade financing.

Correspondent Banks Banks that regularly provide services to each other (e.g., check collection, data processing, credit services). The term also refers to banks that maintain nostro/vostro account relationships with each other.

Cost/Income Ratio Measure of a bank's efficiency in using expenses to generate revenues. The ratio is calculated by dividing operating costs, both interest and non-interest expenses, by operating revenues.

Cost/Income Ratios See Cost/Income Ratio.

Country Risk Risk that changes in the business environment within a specific country will occur, reducing the profitability of conducting business in that country. These changes can potentially affect asset values as well as operating profits. Country risks include political changes, inflation, high interest rates, labor unrest and war.

Coupon Bond Debt security in which the bond certificates come with detachable coupons that must be removed (clipped) and presented either semi-annually or annually for the payment of interest.

Coupon Rate The interest rate stated on a bond.

Covenant Agreement in a loan or bond contract concerning the borrower's future conduct. Covenants may involve such things as the agreement to maintain certain balance sheet ratios or to adhere to certain IMF program requirements.

CPCU See Chartered Property and Casualty Underwriter.

Credit Card Association Association involving financial institutions that jointly operate a credit card business and share common processing and administrative facilities.

Credit Portfolio Management The management of credit risk in the lending portfolio of a financial organization. Managers monitor various factors associated with the loan portfolio (such as liquidity of loans) and use various techniques to minimize risk.

Credit Rating Independent assessment of the creditworthiness of any security of indebtedness (e.g., bond or note) by a credit rating agency. For investment grade securities, the ratings run from "triple A" as the highest and "triple B" as the lowest. Any security rated below triple B is considered non-investment grade and is commonly known as a "junk bond."

Credit Rating Agency Provides research, opinions, and ratings on securities and other credit obligations. Investors use this information to analyze the credit risks. Popular debt rating agencies include Moodys and Standard and Poor's Rating Services.

Credit Risk Risk that a borrower will not pay what is owed resulting in a loss to a financial institution.

Credit Scoring Methodology used to determine the creditworthiness of an applicant. The method involves the assignment of points to specific characteristics and behaviors of a potential or existing borrower. These points are then added to arrive at an overall credit score helping the financial institution to evaluate the credit risk for that particular borrower.

CRM See Customer Relationship Management

Cross-Currency Interest Rate Swap A type of derivative combining the features of a currency and an interest rate swap. In this type of swap, the fixed rate cash flow in one currency is swapped (exchanged) for the floating rate cash flow in another currency.

Currency Risk The risk posed to an investment by fluctuating worldwide exchange rates. A common risk is when an investment in one country currency is converted to another country currency losing value due to that conversion.

Currency Swap A type of derivative that is a contract between two parties to exchange both the principal amount and the interest rate payments on their respective debt obligations in different currencies. An exchange of principal of the two different currencies occurs at the beginning of the swap, interest payments are exchanged over the life of the contract and the principal amounts are repaid either on the maturity date of the deal or according to an agreed amortization schedule.

Customer Relationship Management (CRM) Defines enterprise-wide software applications that allow a company to manage all aspects of their customer relationships including sales, marketing, and customer support. Companies use these systems to build and strengthen customer satisfaction, service and loyalty.

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