Loans to borrowers that under normal credit assessment standards would not have the capacity to repay.
Eurozone (Sovereign Debt) Crisis
The economic and international financial crisis that followed the GFC.
Comprises a range of financial institutions, instruments and markets.
Overseen by central bank.
Supervised by prudential regulator.
Issued by a party raising funds, acknowledging a financial commitment and entitling the holder to specified future cash flows.
Flow of Funds
Movement of funds through a financial institution.
Savers or providers of funds.
Funds are available for lending or investment.
Rate of Return
The financial benefit gained from investment of savings (%).
The total financial benefit received (interest and capital gain) from an investment (%).
The possibility or probability that an actual outcome will vary from the expected outcome (uncertainty).
Access to cash and other sources of funds to meet day-to-day expenses and commitments.
Time-pattern of Cash Flows
The frequency of periodic cash flows (interest and principle) associated with a financial instrument.
A combination of assets, each comprising attributes of return, risk, liquidity and timing of cash flows.
The buying and selling of assets and liabilities to best meet current savings, investment and funding needs.
Actions of a central bank that influence the level of interest rates in order to achieve economic outcomes.
Primary target is inflation.
An increase in prices of goods and services over time.
Measure by the Consumer Price Index (CPI).
Depository Financial Institutions
Accept deposits and provide loans to customers (commercial banks, credit unions).
Specialist providers of financial and advisory services to corporations, high-net-worth individuals and government.
Contractional Savings Institutions
Offer financial contracts such as insurance and superannuation (large investors).
Finance Companies and General Financiers
Borrow funds direct from markets to provide loans and lease finance to customers.
Investors buy units issued by the trust.
Pooled funds invested (equity trust, property trust).
- - Non-liquid assets are sold into a trust.
- - The trustee issues new securities.
- - Cash flows from the original securities are used to repay the new securities.
The sum of the financial interest an investor has in an asset (an ownership position).
Ordinary Share (Common Stock)
The principle form of equity issued by a corporation.
Bestows certain rights to the shareholder.
That part of a corporation's profit that is distributed to shareholders.
A financial instrument that incorporates the characteristics of both debt and equity (preference shares).
The legal process of winding up the affairs of a company in financial distress.
Specify conditions of a loan agreement.
Issuer/borrower, amount, return, timing of cash flows, maturity date.
Debt must be repaid.
A debt instrument that provides the lender with a claim over specified assets if the borrower defaults.
Negotiable Debt Instrument
A debt instrument that can be sold by the original lender through a financial market.
A synthetic security that derives its price from a physical market commodity or security.
Mainly used to manage risk exposures.
An over-the-counter agreement that locks in a price (interest or exchange rate) that will apply at a future date.
An agreement between two parties to swap future cash flows (interest rate swap, currency swap).
Short-term assists should be funded with short-term liabilities.
Long-term assets should be funded with long-term liabilities and equity.
A fluctuating credit facility provided by a bank.
Allows a business operating account to go into debit up to an agreed limit.
An agent who carries out the instructions of a client.
Makes a market in a security by quoting both buy (bid) and sell (offer) prices.
The assessment by a credit rating agency of the creditworthiness of an obligator to a financial obligation.
The risk that a borrower may not meet financial commitments (loan repayments). when they are due.
Financial transaction conducted with a financial intermediary (bank deposit, bank loans).
Seperate contractual agreements.
The ability of financial intermediaries to provide a range of products that meet customers' portfolio preferences.
Financial intermediaries offer products with a range of terms to maturity.
Banks actively manage their sources of funds (liabilities) in order to meet future loan demands (assets).
Credit Risk Transformation
A saver's credit risk exposure is limited to the intermediary.
The intermediary is exposed to the credit risk of the ultimate borrower.
Measured by the ability of a saver to convert a financial instrument into cash.
Economies of Scale
Financial and operational benefits gained from organisational size, expertise and volume of business.
Direct financial flow transactions between institutional investors and borrowers.
Financial transactions conducted with financial intermediaries mainly by individuals and small to medium sized businesses.
Wholesale markets in which short-term securities are issued and traded.
Participants in the wholesale markets (funds managers, insurance offices, banks).
The lending and borrowing of very short-term funds by banks operating in the payments system.
Short-term securities issued with a face value payable at maturity.
Do not pay interest.
Sold today at a discount to the face value.
An active money market for the issue and trading of bills of exchange (discount securities).
Promissory notes (discount securities) issued into the money market by corporations with a good credit rating.
Negotiable Certificate of Deposit
A discount security issued by a bank.
Markets for longer-term funding.
Includes equity, corporate debt and government debt.
Is supported by the foreign exchange and derivatives.
Facilitate the issue of financial securities that represent an ownership interest in an asset (stock market).
Corporate Debt Market
Facilitate the issue and trading of debt securities issued by corporations (discount securities, bonds).
Financial transactions conducted in a foreign country in a currency other than the currency of that country.
Government borrowing for short-term liquidity needs, or longer-term budget capital expenditure (T-notes, treasury bonds).
Government borrowing that reduces the net amount of funds available for other lending in the financial system.
Foreign Exchange Markets
Facilitate the buying and selling of foreign currencies.
Markets in synthetic risk management products (futures, forwards, options, swaps).
Borrowers or users of funds.
Sectorial Flow of Funds
The flow of funds between surplus and deficit sectors in an economy.
- Rest-of-the-world Sectors
The management of annual revenues and expenditures of a government.
Employers must contribute minimum specified amounts into retirement savings for employees (Australia)