Intermediate Banking Professional flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Net interest margin

Net interest income divided by average earning assets. It measures how profitably a bank intermediates between depositors and borrowers, and widens when asset yields rise faster than funding costs.

Liquidity coverage ratio

High-quality liquid assets divided by 30-day net stressed cash outflows. Basel III requires at least 100%, forcing banks to hold assets that can be sold quickly in a run.

Money multiplier

The theoretical maximum expansion of deposits from new reserves, approximated as one divided by the reserve ratio. A 10% ratio implies ten times expansion before leakages such as cash withdrawals.

Common equity tier 1

The highest-quality capital, mainly ordinary shares and retained earnings less deductions. Basel III sets a 4.5% minimum against risk-weighted assets, before the conservation and countercyclical buffers.

Banker-customer contract

A debt relationship in which the bank owes the customer the account balance and must follow the customer's mandate. The customer is a creditor, not the owner of specific banknotes.

Floating charge

Security over a shifting pool of assets, such as inventory and receivables, that the borrower may deal with until the charge crystallises on insolvency or enforcement.

Banker's right of set-off

The bank's ability to combine a customer's debit and credit balances. It requires mutual, due debts held in the same right, and is often restricted by contract or regulation.

Guarantee versus indemnity

A guarantee is a secondary obligation to pay another's debt and depends on that debt existing. An indemnity is a primary, independent promise to compensate, so it survives invalidity of the underlying obligation.

Beneficial ownership threshold

The ownership level at which a natural person must be identified during customer due diligence, commonly 25% of shares or voting rights, with lower thresholds for higher-risk customers.

Tipping off

Informing a customer or third party that a suspicious transaction report has been filed. It is a criminal offence because it can allow the subject to move assets or destroy evidence.

Leverage ratio

Tier 1 capital divided by total exposure, including off-balance-sheet items. Basel III sets a 3% minimum, acting as a backstop that does not depend on internal risk weights.

Three lines of defence

The business line owns and manages risk, a compliance and risk function monitors it independently, and internal audit provides assurance to the board.

Expected loss formula

Expected loss equals probability of default multiplied by loss given default multiplied by exposure at default. The result feeds risk-based pricing and loan loss provisioning.

Debt service coverage ratio

EBITDA divided by total debt service, covering interest and scheduled principal. A ratio below 1.0 means operating cash flow cannot meet payments without other funds.

Loan-to-value ratio

Loan amount divided by appraised collateral value. Higher ratios mean the bank absorbs more loss if the borrower defaults and the collateral must be sold at a discount.

Maintenance covenant

A financial test, such as maximum leverage or minimum interest cover, measured at set intervals throughout the loan. Breach gives the lender rights, typically default or waiver negotiation.

Cash conversion cycle

Days inventory plus days receivable minus days payable. It measures how long cash is tied up in operations, and a shorter cycle reduces working capital funding needs.

DuPont decomposition

Return on equity expressed as net profit margin times asset turnover times equity multiplier. It shows whether returns come from pricing, efficiency or leverage.

Weighted average cost of capital

The after-tax cost of debt weighted by debt share plus the cost of equity weighted by equity share. It is the discount rate for valuing projects and acquisitions.

Goodwill impairment

Under IFRS, goodwill is not amortised but tested annually for impairment. A write-down reduces profit and capital when the acquired business underperforms expectations.

Nostro account

A bank's own account held with a correspondent bank in another country and currency. It is used to settle payments locally and is reconciled daily against the bank's ledger.

Segregation of duties

Separating transaction initiation, authorisation, recording and reconciliation so no single person controls a full cycle. It reduces error and fraud risk in operations.

Straight-through processing

Passing a transaction from capture to settlement without manual re-keying. It lowers cost per payment and reduces errors and exceptions requiring investigation.

Recovery point objective

The maximum tolerable data loss measured in time, set in business continuity planning. A four-hour objective means backups must be frequent enough to lose no more than four hours.

Real-time gross settlement

A system that settles each payment individually and irrevocably in central bank money as it arrives. It is used for high-value interbank payments where finality matters.

ISO 20022

A structured messaging standard for payments and securities. The CBPR+ migration replaced legacy SWIFT MT payment messages, adding structured data and end-to-end tracking identifiers.

Interest rate swap

An agreement to exchange fixed and floating interest payments on a notional principal without exchanging the principal itself. Banks use it to manage repricing risk.

Herstatt risk

Settlement risk in foreign exchange, where one party pays its currency leg and the counterparty fails before delivering the other. It is named after a 1974 bank failure.

Value at risk

An estimate of the maximum loss over a set holding period at a given confidence level. It does not describe the size of losses beyond that confidence threshold.

Modified duration

A measure of a bond's price sensitivity to yield. A modified duration of 5 implies roughly a 5% price fall for a one percentage point rise in yield.

Reverse stress testing

Working backwards from a defined failure point, such as capital falling below the minimum, to identify which scenarios would breach the business model.

Customer lifetime value

The discounted contribution margin a customer generates over the relationship, minus acquisition cost. It guides retention spending and segment prioritisation.

Net promoter score

The percentage of promoters minus the percentage of detractors on a 0-10 likelihood-to-recommend question. It is used as a proxy for relationship health.