Financial Risk Glossary

Allowance for loan and lease losses (ALLL): A valuation reserve that banks set aside to cover potential losses from bad debts or loans that may not be repaid.

AML (Anti-money-laundering): Policies and procedures aimed at preventing money laundering activities.

Asset: Anything of value to which the firm has a legal claim.

Asset Turnover: Measures how profitably and efficiently assets are used to produce sales. Calculated as Net sales/Average assets.

Automated Clearing House (ACH): A US payment network that facilitates electronic transfers of funds between bank accounts.

Available for Sale (AFS): Financial assets not held for trading, held to maturity, or for strategic reasons, and have a readily available market price.

Book Value: Carrying value of assets or liabilities as shown on the balance sheet.

Brokered Deposit: Deposit obtained directly or indirectly through a deposit broker.

Capital: Any asset used to produce profits for an investor.

Credit Default Swap (CDS): A financial derivative used to manage risk of default on credit instruments.

Collateral: Asset provided to a creditor as security for a loan.

Cost of Funds: Interest Expense/Average Assets.

Counterparty: Any natural or legal person to whom a bank has financial exposure.

Crypto:  A speculative intangible "asset." Digital tokens have no intrinsic value and are dependent on the ability to sell to a greater fool.

Custody Account: An account where securities/other assets are held by a bank on behalf of a customer, not reported on the bank's balance sheet.

Default: Failure to pay interest or principal when due.

Derivative Contracts: Instruments banks use to manage risk exposures, such as interest rate, FX, or cash flow risk.

Double Leverage: Total investment in subsidiaries divided by equity capital.  Specifically applicable to banks and insurance companies.

Efficiency Ratio: Overhead expenses / Net Interest Income + non-interest income.

Expected Loss (EL): Estimated potential losses across a lending portfolio.

Exposure at Default (EAD): Maximum potential loss, often calculated as Unused Credit Lines/Existing Credit Lines.

Forbearance: Suspension of loan payments.

Liability: Any money or service owed to another party.

Liquidity Coverage Ratio (LCR): HQLA Amount / Total Net Cash Outflow Amount over 30 days under stress.

Loss Given Default (LGD): Net loss as a percentage of loan amount.

Mortgage Servicing Right (MSR): A payment intangible with defined cash flows.

Net Interest Margin (NIM): Difference between interest/dividends earned and interest paid, as a percentage of average earning assets.

Net Loss: Net credit losses on loans and leases divided by average loans and leases.

Noncurrent Loans and Leases: Loans and leases 90+ days past due, or in nonaccrual status.

Non-performing Loans (NPLs): Loans in default for a period, usually 90+ days.

Probability of Default (PD): Chance of a borrower defaulting on a previously contracted debt.

Return on Assets (ROA): Net Income divided by Average Assets.

Return on Earning Assets (ROEA): Net Interest Income/Earning Assets.

Return on Equity (ROE): Net Income/Total Capital.

Risk Weighted Assets (RWA): Assets/off-balance-sheet exposures weighted according to risk.

Short-Term Liquid Assets: Cash, due from accounts, federal funds sold, securities under resale agreements, and securities maturing in under a year.

Surplus Note: A debt-like financial instrument issued by U.S. insurance companies to raise equity capital but which is subordinated to insurance claims. 

Unexpected Loss (UL): Difference between expected and actual loss, used in risk management.

Value at Risk (VaR): Statistical measure of the potential loss of an investment over a specific period, at a certain probability level.