Glossary of Banking terms A-Z

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The words, expressions, institutions and definitions of the Banking and Finance industry can often seem dense and confusing to an undergraduate, even to one aspiring to the financial world themselves. So, we've brought together a glossary for the most common terms to help you get up to speed.

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Annuity

A fixed sum of money paid to someone every year, often as a pension.

Asset

An item of property owned by a person or company regarded as having a value, and which can meet a debt.

Back of House

Support personnel in a financial services company.

BACS

"Bankers' Automated Clearing Services" - electronic financial transaction service, often used to pay employees.

Bail out

The giving of financial assistance to a failing business to save it from collapse.

Bank of England

The central bank for the UK. It acts as the government's bank, issues currency, oversees monetary policy and sets interest rates.

BIC

Bank Identifier Code - a number used to identify each bank and branch.

Blue chip

Adjective used to describe high quality and specifically in the banking world to describe stocks which are a reliable investment, but less so than gilt-edged stock. Originates either from a high value poker chip, or from a sliver of diamond.

Bond

A loan to a corporate or government for a defined period at a fixed interest rate.

Boom and bust

A process of economic expansion and contraction, often in repeated cycles.

Boutique

An investment bank which offers some but not all banking services, generally in corporate finance.

Broker

A person who buys and sells stocks for others in return for a commission.

Budget, the 

Government's plans for the fiscal year.

Bulge bracket

The largest multinational investment banks.

Capital

Assets which are available for a purpose such as investment or starting a company. It is different to money because money is used only to purchase things, capital is used to generate wealth, e.g. through investment.

Capital market

The financial system which raises capital by dealing in shares, bonds and long term investments.

Cash flow

The amount of money being transferred in and out of a business, affecting liquidity.

Chancellor of the Exchequer

The chief finance minister of the UK who prepares the Budget.

Collateral

Assets that are offered to secure a loan or type of credit

Commodity

A raw material that can be bought or sold such as coffee or coal.

Credit

A payment received. Alternatively, an agreement to repay something of value in the future. Thirdly, the borrowing capacity of a person or company.

Credit rating

An assessment of a particular issuer's credit worthiness which results in a rating being assigned. Ratings range from AAA (very high) to D (in default). Several companies study issuers and make ratings decisions, including Moody's and Standard & Poor's. 

Debit

A payment made. 

Default

Failure to repay a loan.

Diversification

The strategy of investing broadly across a number of different investments to reduce risk; a hallmark of mutual fund investing.

Domiciled

Reside or be based.

Duty

A tax levied on goods not humans

Emerging market

A country which is developing the characteristics of a developed market, but is not yet fully developed. Normally a country experiencing rapid growth and industrialisation.

Exposure

Being placed at risk of financial losses.

Financial Instrument

A document involving monetary value which can be equity based, represent ownership of an asset or represent a loan made to an owner of an asset. They are tradeable packages of capital. Essentially, it is an equity, asset or loan.

Fiscal

Government revenue, e.g. taxes.

Freddie Mac and Fannie Mae

Two American institutions involved with mortgages. They were heavily involved in the causes of the credit crunch of 2008 as they were over exposed to risk.

Front Office

The sales personnel and finance employees - normally where revenues are generated.

FTSE 100

"Financial Times Stock Exchange", pronounced "futsie" - a share index of 100 companies on the London Stock Exchange with the highest market capitalisation. Its rises and falls are used as a gauge of business prosperity.

GDP

"Gross Domestic Product" - the monetary value of all the finished goods and services produced within a country's borders in a specific time period, usually annually.

Gold Standard

A now obsolete exchange whereby the value of a currency is defined by gold.

Golden Rule of Banking

Short term transactions should be financed with short term money, and long term transactions with long term funds.

Gordon Gekko

Fictional stockbroker from the 1987 film Wall Street who has become a byline for greed thanks to his (mis)quote "greed is good".

Government bond

A bond issued by a national government to finance spending. While this means the bond is free of credit risk because the government can always pay the debt by raising taxes or printing money, it does depend on a stable political system.

Gross

The full amount of income, profit or interest without any deductions from tax or costs.

Hedge

An attempt to protect against loss on a bet or investment by making a compensating transaction.

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Hedge fund

Investments of a few (normally wealthy) people pooled together and managed professionally. Their goal is to aggressively maximise return on the investment but the term actually originates from their previous strategy of "hedging risk".

HMRC

"Her Majesty's Revenue and Customs" - the UK Government department tasked with collecting taxes, paying some forms of state support and administering some regulatory regimes such as the national minimum wage.

Holding company

A parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management. This means the holding company is protected against the other company's losses or liabilities, but reaps the rewards of its profits. It can also be based in jurisdictions with lower tax rates while allowing the other company to continue to operate wherever.

IMF- International Monetary Fund

Created to promote monetary and exchange stability in the global economy. This means it monitors financial developments around the world and lends funds to needy countries.

Inflation

An increase in prices which means that the purchasing power of money falls - in other words you get less for your money than you used to.

Interest

Money paid regularly as a charge for borrowing money, typically an annual percentage rate.

IPO- Initial Public Offering

The first sale of a company's shares to the public, also known as a stock market listing or flotation. Often used as a means for a young company to raise capital to expand.

Junk bond

Risky investments which can offer higher yields than safer bonds. Often issued by companies with a low credit rating as investors demand higher rewards as compensation for the risk of investing in them.

Lehman Brothers

A bank whose bankruptcy and collapse signalled the beginning of the 2008 credit crunch.

Leverage

Borrowing capital to finance an investment much larger than that which the borrower can afford with their own cash, in order to increase the potential return of the investment. For example, instead of using £200,000 to buy one house to sell on for £220,000, the investor could split their money across 10 houses priced at £200,000 and pay £20,000 to each and borrow the money to pay the rest.

Then they could sell the houses for £220,000 x 10 and make £200,000 profit, not the £20,000 they make on buying a house entirely with their own money. The bigger the ratio of borrowed money to owned, the more leveraged they are. Likewise a company which has £10 million can borrow £20 million and have £30 million to spend on growth, without increasing its equity and diluting its shares.

Liability

A company's debts that arise during its business operations, e.g. loans.

LIBOR - London Interbank Offered Rate

A rate which some leading banks charge each other for short-term loans. It is used to calculate interest rates on loans throughout the world.

Liquidation

When a business is terminated or bankrupt, its assets are sold to pay creditors.

Liquidity

The measure of how quickly an investment can be turned into cash. A mutual fund generally is considered a very liquid investment, because shares can be redeemed at any time. In contrast, a house is a very illiquid investment.

LSE- London Stock Exchange

The primary stock exchange in the UK. It has 350 companies from 50 countries.

Maturity

The finite time period at the end of which the financial instrument stops and the principle is repaid with interest.

Merger

The combining of two or more companies.

Mezzanine

A type of financing which combines debt and equity financing. It is debt capital which gives the lender the right to ownership and equity if the loan is not paid. It is often quite high risk so it can also be high yield for the lender. The word is derived from the Latin for "middle" as the risk is medium.

Microfinance

A system to allow low-income individuals or groups who cannot access normal financial services to save, lend or insure themselves. Its goal is to make these low-income demographics become self-sufficient.

Net

Gross income which has had tax deducted.

Options

An agreement for the right to buy or sell a financial asset at an agreed price during a certain time period. If the price of the asset rises, the option buyer can buy it at the agreed lower price and sell for a profit. On the other hand, if the price drops, the option writer can sell at the agreed price which is now higher, making themselves a profit instead.

PAYE- Pay as you earn

Employers deduct income tax from employees' paycheques and remit it to the government.

Penny stock

Originally denoting stocks with less than a $1 a share, they now can refer to stocks with more worth but which still operate outside of the major exchanges. They are generally very illiquid.

Portfolio

The collective noun for financial assets held by investors or managed by financial professionals.

Public company

A company who has issued securities through an IPO and consequently the value of their company is determined by the markets.

Quarter

Three months of the financial calender, often used as a basis for reporting performance. Often expressed as Q1 Q2 Q3 and Q4.

Recession

When two consecutive quarters record negative economic growth.

Redeem

Repay a financial instrument at its maturity date.

Remittance

Sending money to pay a bill, invoice, tax or similar.

Retail banks

Banks which provide high street services such as savings accounts and mortgages.

Securities

A financial instrument which can be either a stock, a bond or an option.

Share index

A measure of change in an economy or securities market.

Shares

Either a financial asset or a unit of ownership interest in a company. 

SME

Small and Medium Sized Enterprises

Speculation

Essentially the same as an investment but with a much higher risk of losing the initial outlay, though with a potential for a very high return. It sometimes has negative connotations such as irresponsibility.

Stocks

The same as shares and equity.

SWIFT - Society for Worldwide Interbank Financial Telecommunications

A system for secure financial transactions such as transfers.

Takeover

When one company buys another company. Occasionally a publicly listed company will be acquired in a hostile take over against its will when the buying company suddenly buys all the shares.

Tax avoidance

A legal attempt to minimise the amount of tax owed.

Tax evasion

An illegal attempt to mimimise the mount of tax owed.

The Treasury

Government department responsible for formulating and implementing financial and economic policy.

Trader

Someone who  enagages in the transfer of financial assets in a market, but for a much shorter time than an investor.

Volatility

Volatility refers to the amount of fluctuation in price of a security. Generally speaking, the higher the volatility the riskier the investment.

Wall Street (NY Stock Exchange)

The original home of the New York Stock Exchange and historic headquarters of the largest US banks. A collective noun for the financial commnuity in NY.

Wolf of Wall Street

Jordan Belfort, the subject of a Leonardo diCaprio film, who was a stockbroker convicted of fraud.

World Bank

An international organisation dedicated to aiding developing nations by providing finance, advice and research.

Yield

The income return on an investment, usually expressed as a percentage based on the investment's cost.

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