GLOSSARY

List of Financial Terms in alphabetical order:

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RAA See Risk Adjusted Assets.

RAROC See Risk Adjusted Return on Capital.

Rate The charge per unit for determining the cost of insurance premiums. In lending the "rate" is also referred to as the quoted rate of interest that the borrower will pay annually for an outstanding loan.

Rate Making The statistical process used by insurers to determine rates for basic classes of insurance.

Rated Policy An insurance policy that carries a higher premium to cover for extra risk (e.g., life insurance when the insured is in a high-risk occupation). These types of policies are also referred to as "rated up" or "extra risk" policies.

Rating A letter grade signifying a security's investment quality. Typically a rating of A is highest.

Real Estate Investment Trust (REIT) A highly liquid investment that provides investors with the ability to invest in a portfolio of real estate properties. REITs are companies that buy, sell and manage real estate assets. Shares in REITs are traded on major exchanges.

Recapitalization The process of changing the capital structure of a company by either increasing or decreasing the amount of corporate debt and/or equity.

Recapture The process in which the cedant recovers the liabilities that have been previously transferred to a reinsurer.

Receiving Bank A bank or depository in any payment system that is eligible to send and receive transactions for credit and debit entries posted to customers' accounts.

Reciprocal Insurance Exchange Unincorporated group or group of organizations that write insurance for their members. Members are both policyholders and insurers and are usually engaged in similar types of activities.

Regional Bank A bank with branches in a certain regional area whose business is making loans to the customers in that area. Regional banks have a broader customer and geographical focus than community banks, but are smaller than a money center bank both in scope of business and geographical reach.

Registered Representative (RR) Individual in the investment banking and securities industry that has successfully completed the examination and licensing required by a self-regulatory organization.

Registrar Usually a trust company or bank that is responsible for preventing the issuance of more stock than is authorized for a company.

Regulatory Risk The risk incurred by a financial institution of not complying with regulatory requirements. Regulators can penalize financial institutions with monetary fines, give orders to financial institutions in how to operate and even close financial institutions down if certain regulations are not followed.

Reinsurance A transaction in which a reinsurer (assuming entity), for a consideration (premium), assumes some or all of a risk undertaken originally by another insurer (ceding entity). There are two major types of reinsurance: treaty that is based on a block of the ceding company's business and facultative which is based on individual risk.

Reintermediation The flow of funds from competing non-bank investments into banks. This happens when customers move funds from money market funds into bank accounts.

Reinvestment Risk The uncertainty around reinvestment rates at a future date. An example is the inability of a bondholder to reinvest his coupons at a higher or equivalent coupon rate when the bond matures.

REIT See Real Estate Investment Trust.

Reputation Risk The risk to capital or risk that would adversely affect profits as a result of negative publicity whether true or untrue. Reputation risk for financial institutions can cause loss of customers, reductions in profits and sometimes costly litigation.

Repurchase Agreement In a repurchase agreement, a financial institution “sells” securities to another institution with the promise to buy back the securities on a specific date (usually within a few days). For the seller, a repurchase agreement provides a source of short-term funding at a relatively low rate. The buyer (who is entering a reverse repurchase agreement) is providing a loan (for which it will receive interest) backed by collateral (i.e., the securities it is holding). Repurchase agreements are commonly referred to as “repos”, and transactions are usually for $1 million or more.

Repurchase Agreements See Repurchase Agreement.

Reserve Account Non-interest bearing account that contains the funds deposited by a financial institution to meet its reserve requirements. In the U.S., banks that are members of the Federal Reserve System deposit their funds at a Federal Reserve Bank. Non-member banks deposit their funds with either a Federal Reserve Bank or an approved correspondent bank. The combined funds in the reserve accounts enable the exchange of funds between depository institutions using the FedWire system.

Reserve Funds An allocation of the net profits in a specific accounting period that are set aside by banks to meet actual or anticipated future payments, needs or obligations. There are two types of reserves: primary reserves that include funds necessary to operate the bank and the interest-free deposits at a central bank to meet the reserve ratio and secondary reserve requirements.

Reserve Ratio The ratio of interest-free account balances held at the central bank to total deposits based on the reserve requirements.

Reserve Requirements Balances required of all depository financial institutions that must be maintained at a central bank or an approved correspondent bank. These funds cannot be lent nor do they earn interest. The amount of the reserves is set by the central bank, which has the right to impose special supplemental reserves as a means of controlling the money supply.

Reserves Funds kept by an insurer to provide for future obligations and claims under existing policies. In the United States, the amount of the reserve is established by law and companies must meet these requirements to be able to satisfy the solvency tests and licensing requirements of the state authorities.

Residual Markets Alternate channels where insurance coverage can be obtained for risks that insurance companies are unwilling to provide in the voluntary markets.

Restructured Loan Loan refinanced at a concessionary rate, which reduces or eliminates interest, because the borrower cannot service (pay interest and principal) the loan on the basis of the original loan agreement terms.

Retail Banking Activities performed by a bank involving loans, deposits and fee generating services provided to individual customers and, in some cases, to small businesses.

Retained Earnings The portion of a company's annual earnings that is not paid out as dividends to stockholders and is reinvested in the company.

Retention The amount of risk that an insurer retains for its own account and is not reinsured.

Retrocession Process where a reinsurer obtains reinsurance from another reinsurance company.

Return On Assets (ROA) A ratio that measures how well a company is generating profit from its assets. It is calculated by dividing a company's annual earnings (net income) by its total assets.

Return On Equity (ROE) An indicator that measures a company's profitability relative to the equity invested in the company. It is calculated by dividing net income by average shareholders' equity.

Reverse Repurchase Agreements See Repurchase Agreements.

Reverse Swap A transaction that occurs on the secondary swap market. It is used to offset currency rate or interest rate exposure on an existing swap.

Revolving Credit A committed line of bank credit that may or may not be used at the borrower's discretion. With commercial revolving credits available to companies, interest is paid only on the amount of credit actually in use, while a commitment fee is typically paid on the unused portion. Through credit cards, individuals can access revolving credit lines that allow them to repeatedly use and pay back the credit without having to reapply each time that credit is used. When purchases are made or cash advances taken with a credit card, the cardholder draws against the available line of credit. The cardholder is then required to make a monthly payment based on the total amount of credit outstanding. The available credit line is restored as the cardholder makes the required payments or pays the balance outstanding in full.

Risk The uncertainty that a loss may occur or that an asset may fail to provide an expected rate of return. Since financial institutions invest most of their funds in interest sensitive assets, they monitor the following types of risks: capital, credit, delivery, exchange, interest rate, liquidity, operational, political, reinvestment, and payment systems risks. Alternatively, in the insurance industry referring to "risk" can mean that you are referring to what is insured or the risk assumed.

Risk Adjusted Assets (RAA) The values of assets after percentage risk weightings based primarily on the degree of default risk and, to a certain extent, country risk have been applied to each asset category. Risk-weighting factors are used in accordance with the capital adequacy requirements of the Basle Accord and are applied to each included category of both on and off-balance sheet assets. Risk-weightings for specific asset categories may vary from country to country within the broad guidelines of the BIS (Bank for International Settlements) agreement. Banks are required to keep a minimum of 8% capital against the value of their risk-adjusted assets.

Risk Adjusted Return on Capital (RAROC) Economic approach that includes a series of complex calculations that is used to measure returns based on the risk-adjusted capital of a financial institution. Many financial institutions use RAROC to provide a better measure of profitability based on the economic capital (capital to support the incurred risks of the institution).

Risk Based Capital Rules for establishing minimum required levels of capital for financial institutions. Capital is allocated to types of bank assets based upon weightings assigned to those assets in accordance with the capital adequacy requirements of the Basle Accord and are applied to each included category of both on and off-balance sheet assets. Risk-weightings for specific asset categories may vary from country to country within the broad guidelines of the BIS (Bank for International Settlements) agreement. Banks are required to keep a minimum of 8% capital against the value of their risk-adjusted assets.

Risk Management Function with responsibility for controlling and monitoring the probability of an adverse event so that the adverse event is within acceptable limits. Financial institutions are subject to an array of risks including credit risk, market risk and operational risk to name a few. Strategies for managing these risks include the use of derivatives for hedging risk, exposure monitoring systems and credit assessment processes.

Risk Weighted Assets (RWA) See Risk Adjusted Assets

ROA See Return on Assets.

ROE See Return on Equity.

Roll Rates Statistics used by collections management to monitor the movement of accounts from current status to various delinquent categories (30, 60, 90 days, etc.) based on a percentage of the amount outstanding in the previous time category.

Rollover Loans Bank loan for which the interest rate is updated at specified points in time based on current market rates. The interest rate on the loan for each period is the sum of a reference rate, such as the prime rate or a base lending rate plus a lending margin. At each the period that the borrower continues to borrower, the loan is said to have been "rolled over".

Real Time Gross Settlement (RTGS) Funds settlement system used in many countries, such as the G10 countries (in the U.S., the FedWire system uses RTGS), Hong Kong, Korea, Thailand and the Czech Republic, and planned for use by other country's payment transfer systems. Real-time refers to the transfer of ownership of the funds quickly or immediately upon receipt of evidence that an obligation is covered by an account balance, a credit line, which may be a daylight overdraft, or pledged collateral. Gross means that a specific obligation is paid in full rather than netted against offsetting obligations.

RTGS See Real Time Gross Settlement

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