fractional reservenoun phrase
FRAK-shun-ul reh-ZURV
A banking system in which banks hold only a fraction of deposits as cash reserves and lend the rest, creating new money in the process.
"Under fractional reserve banking, your bank holds perhaps 10 cents of every dollar you deposit."
money supplynoun
MUN-ee suh-PLY
The total amount of money in circulation in an economy at a given time, including cash and bank deposits.
"When the money supply expands faster than economic output, inflation tends to rise."
depositnoun
deh-POZ-it
Money placed in a bank account by a customer. In banking, deposits are a bank's primary liability.
"Her $5,000 deposit allowed the bank to lend up to $4,500 to another customer."
reserve rationoun phrase
reh-ZURV RAY-shee-oh
The percentage of deposits that a bank must keep as cash reserves rather than lending out.
"A 10% reserve ratio means a bank can lend $900 for every $1,000 deposited."
money multipliernoun phrase
MUN-ee MUL-tih-ply-er
The factor by which the banking system multiplies an initial deposit into a larger total money supply through repeated lending.
"With a 10% reserve ratio, the money multiplier is 10 — a $1,000 deposit can ultimately create $10,000 in the money supply."
credit creationnoun phrase
KRED-it kree-AY-shun
The process by which banks create new money by issuing loans. 97% of all money in circulation today comes from credit creation.
"Credit creation by commercial banks, not government printing presses, is how most money comes into existence."
commercial banknoun
kuh-MUR-shul bank
A bank that offers services to the public and businesses — deposits, loans, and transfers. Distinct from a central bank.
"HSBC, JPMorgan, and Deutsche Bank are examples of commercial banks."
liquiditynoun (uncountable)
lih-KWID-ih-tee
The ease with which an asset can be converted to cash; also a bank's ability to meet short-term payment obligations.
"The bank's liquidity came under pressure when large withdrawals exceeded its cash reserves."
solventadjective
SOL-vent
Having sufficient assets to cover all debts and liabilities. A solvent bank or company can pay what it owes.
"The bank remained solvent despite the crisis — its assets exceeded its liabilities."
insolventadjective
in-SOL-vent
Unable to pay debts; having more liabilities than assets. Insolvency typically leads to bankruptcy or bailout.
"Lehman Brothers was declared insolvent in September 2008, triggering a global financial panic."
bank runnoun
bank run
A situation where many customers simultaneously withdraw their deposits, fearing the bank will fail. Self-fulfilllling: the fear causes the collapse.
"Social media accelerated the run on Silicon Valley Bank — $42 billion was withdrawn in hours."
capitalnoun (uncountable)
KAP-ih-tul
Money invested in a business; also the financial cushion a bank holds to absorb losses and protect depositors.
"Regulators require banks to hold a minimum level of capital to protect against losses."
leveragenoun / verb
LEV-er-ij
The use of borrowed money to amplify potential returns — and potential losses. High leverage means high risk.
"A bank with $10 in equity and $90 in borrowed funds is leveraged 10 to 1."
assetnoun
AS-et
Anything of financial value owned by an individual or company. For a bank, loans and securities are assets.
"The bank's assets include loans, government bonds, and cash reserves."
liabilitynoun
ly-uh-BIL-ih-tee
A financial obligation or debt owed to another party. For a bank, customer deposits are liabilities — money it owes back.
"Customer deposits are a bank's largest liability — it owes this money back on demand."
balance sheetnoun
BAL-uns sheet
A financial statement showing a company's assets, liabilities, and equity at a specific point in time.
"The bank's balance sheet showed $2.3 trillion in assets against $2.1 trillion in liabilities."
interbank lendingnoun phrase
IN-ter-bank LEN-ding
Loans made between banks, typically overnight, to meet short-term liquidity needs. When this freezes, the financial system seizes.
"Interbank lending froze in 2008 as banks stopped trusting each other's solvency."
write-downnoun
RYT-down
A reduction in the book value of an asset to reflect its reduced market value.
"The bank announced a $3 billion write-down on its portfolio of subprime mortgages."
exposurenoun
ek-SPOH-zhur
The amount of money at risk in a financial transaction, market position, or relationship with a borrower.
"The bank had significant exposure to European sovereign debt."
systemic risknoun phrase
sis-TEM-ik risk
The risk that the failure of one institution could trigger a cascade of failures across the entire financial system.
"Systemic risk is why governments feel compelled to bail out large banks — letting them fail could destroy the whole system."
too big to failidiom
too big too fayl
A bank or institution so large and interconnected that its collapse would cause catastrophic damage to the wider economy.
"'Too big to fail' means the bank can take extreme risks knowing taxpayers will rescue it."
overnight ratenoun phrase
OH-ver-nyt rayt
The interest rate at which banks lend money to each other for one night. The central bank's main policy tool.
"The Federal Reserve's target for the overnight rate affects all other interest rates in the economy."
write-offnoun
RYT-awf
A debt officially declared unrecoverable and removed from financial records. A total loss.
"The bank took a write-off on $500 million in uncollectable loans."
moral hazardnoun phrase
MOR-ul HAZ-erd
The tendency to take greater risks when shielded from the consequences of those risks — because someone else will pay.
"Guaranteeing bank deposits creates moral hazard — banks may take excessive risks knowing depositors are protected."