Business Glossary

account at a bank, savings and loan association, credit union, or brokerage firm that belongs to a federal or private insurance organization. Bank accounts are insured by the Deposit Insurance Fund (DIF) administered by the Federal Deposit Insurance Corporation (FDIC). In 2005, Congress raised the federal deposit insurance level from $100,000 to $250,000 on retirement accounts and gave the FDIC the option to increase insurance ceilings on regular bank accounts from $100,000 by $10,000 a year, based on inflation, every five years thereafter starting April 1, 2010. Credit union accounts are insured by the National Credit Union Administration.. Brokerage accounts are insured by the securities investor protection corporation Such insurance protects depositors against loss in the event that the institution becomes insolvent. Federal insurance systems were set up in the 1930s, after bank failures threatened the banking system with collapse. Some money market funds are covered by private insurance companies.

banking expansion across state lines, as authorized by state laws permitting bank holding companies to merge with out-of-state banks. Regional interstate agreements, originating in the mid-1980s, were the initial step toward nationwide bank networks and nationwide branching. For example, the six New England states adopted reciprocal interstate banking laws in the mid-1980s, as did states in the Southeast, the Midwest, and Western regions.

Under the Riegle-Neal Interstate Banking and Branch Efficiency Act of 1994, well-capitalized banks were able to merge with banks outside their home state after October 1, 1995, and accept deposits through branches in any state after June 1, 1997.

bank holding company operating subsidiary banks in two or more states. The American Banker, a daily newspaper, defines a super-regional bank as a non-money center bank ranking in the top 100 banking companies in the United States that has merged across state lines to establish a full commercial bankingpresence in another state. Super regional banks operate multistatebanking networks in all major geographic regions of the United States.

bank organized under a charter granted by a regulatory authority in one of the 50 U.S. states, as distinguished from a national bank, which is federally chartered. The powers of a state-chartered commercial bank are generally consistent with those of national banks, since state laws tend to conform to federal initiatives and vice versa. State banks deposits are insured by the Federal Deposit Insurance Corporation. State banks have the option of joining the federal reserve system, and even if they reject membership, they may purchase support services from the Fed, including check-processing and coin and currency services.

federal official, appointed by the President and confirmed by the Senate, who is responsible for chartering, examining, supervising, and liquidating all national banks. In response to the comptroller's call, national banks are required to submit call reports of their financial activities at least four times a year and to publish them in local newspapers. National banks can be declared insolvent only by the Comptroller of the Currency.

member-owned organization, similar to a mutualsavings and loan association, that makes loans and pays interest on pooled deposits. Cooperatives in the United States arecredit unionsFederal Intermediate Credit Banks, and Banks for Cooperatives in theFarm Credit System (FCS), and state chartered savings associations in several New England states.

1. bank named by members of a multibank lending syndicate to protect the interests of the participating banks in administering a loan to a foreign or domestic borrower. Its role is similar to a bond trustee. The agent bank is responsible for notifying other banks of advances or drawdowns by the borrower and changes in interest rate. Often synonymous with lead bank or lead manager.
2. bank that participates in the credit card program of another bank, by issuing credit cards and acting as a merchant depository, but does not finance the card receivables. Most financial institutions participating in bank card programs are agents rather than principal issuers.
3. foreign bank doing business in the United States on behalf of its parent. Such banks negotiate terms for international letters of credit and act as collection agents for the parent bank, but do not accept deposits or make loans in their own name. Also called agency bank.

banking expansion across state lines through bank holding company acquisitions. Interstate expansion of commercial banking companies began in the mid-1980s when state legislatures enacted laws permitting holding company acquisitions on a reciprocal basis with other states.

Interstate banking has evolved in three distinct phases, starting in the 1980s with regional interstate banking, where banking companies within a region-the Northeast or Southeast-merged to create larger banks; regional expansion under state laws containing a national trigger permitting mergers with banks in any other state after a certain date; and nationwide interstate banking. The Riegle-Neal Interstate Banking and Branching Efficiency Act permitted well-capitalized banks to acquire banks anywhere in the United States after Oct. 1, 1995.

bank that is a member of a corporation or joint venture providing common benefits. Examples include banks that are members in a clearing house association and those affiliated with a bank card system such as Visa or MasterCard International. Typically, associations have different classes of membership, depending on equity ownership, and other factors.

bank located in a city with a Federal Reserve Bank or branch office. These banks generally maintain higher reserve account balances than banks located outside reserve bank cities, which are called country banks.

country's bank that (1) issues currency; (2) administers monetary policy, including open-market operations; (3) holds deposits representing the reserves of other banks; and (4) engages in transactions designed to facilitate the conduct of business and protect the public interest. In the United States, central banking is a function of the federal reserve system.

state chartered nonstock savings institution that accepts deposits from individuals and makes residential mortgage loans. Management is by a board of trustees. These savings institutions offer checking and other transaction account services, and may also originate consumer loans, commercial loans, and commercial mortgages, and invest in limited amounts of corporate bonds and corporate stock. State banking departments are the primary regulators of mutual savings institutions.

1. ability of a bank to lend, specifically its power to "create money" by depositing a portion of a new loan in a bank account. The borrower doesn't take out the loan in cash; instead, the loan proceeds are deposited in a new or existing checking account. The lender agrees to honor checks drawn against the account, and can use part of that balance to make new loans.
   Unlike most other corporations, which are free to engage in almost anything not prohibited by law, U.S. banks may undertake only those activities specifically approved by law or regulation. Banking powers generally fall into two categories: express powers, including the ability to lend money granted by state legislatures or Congress; and implied powers given by the courts through judicial rulings. See also money multiplier.
2. financial services regarded as closely related to banking and approved by Congress or banking supervisory agencies as permissible nonbank activities. In the 1990s, many barriers limiting bank activities in securities dealing, insurance, mutual funds, and investment advisory services were lifted, allowing banks to compete more freely with non-bank financial institutions. See also Financial Holding Company (FHC); gramm-leach-bliley act of 1999, securities act of 1933.

bank in one of the major financial centers of the world, among them New York, Chicago, San Francisco, Los Angeles, London, Paris, and Tokyo. These banks play a major national and international economic role because they are large lenders, depositories, and buyers of money market instruments and securities as well as large lenders to international governments and corporations. In the stock market, bank analysts usually categorize the money center banks as separate from regional banks-those that focus on one area of the country. Also known as money market bank.

financial organization that regularly performs services for another in a market inaccessible to the other. In banking there is usually a depository relationship that compensates for expenses and facilitates transactions.

type of limited service bank popular in the 1980s. Enactment of the Riegle-Neal Interstate Branching Act of 1994, authorizing nationwide branching and bank acquisitions, eliminated any reason for chartering nonbank banks to gain access to out-of-state markets.

federal law enacted by Congress in 1982 authorizing banks and savings institutions to offer a new account, the Money Market Deposit Account-a transaction account with no interest rate ceiling to compete more effectively with money market mutual funds; gave savings and loan associations the authority to make commercial loans; and gave federal regulatory agencies the authority to approve, for the first time, interstate acquisitions of failed banks and savings institutions.

The following are highlights of the numerous provisions of the act:

(1) savings and loan associations were authorized to make commercial, corporate, business, or agricultural loans up to 10% of assets after January 1, 1984.

(2) the deposit interest rate differential, allowing savings and loans and savings banks to offer rates on interest-bearing deposit accounts l/4 of 1% higher than commercial banks was lifted, as of January 1984.

(3) the act authorized a new capital assistance program, the Net Worth Certificate Program, under which the Federal Savings and Loan Insurance Corp. and the Federal Deposit Insurance Corp. would purchase capital instruments called Net Worth Certificates from savings institutions with net worth to assets ratios under 3%, and would later redeem the certificates as they regained financial health.

(4) the act permitted savings associations to offer checking accounts (demand deposit accounts) to individuals and business checking accounts to customers who had other accounts.

(5) savings and loans were authorized to increase their consumer lending, from 20% to 30% of assets, and to expand their dealer lending and floor-plan loan financing.

(6) the act raised the ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets, and also allowed investment of 10% of assets in education loans for any educational purpose, and up to 100% of assets in state and municipal bonds.

(7) the act preempted state restrictions on enforcement by lenders of due-on-sale clauses in most mortgages for a three year period ending October 15, 1985, and authorized state chartered lenders to offer the same kinds of alternative mortgages permitted nationally chartered financial institutions.

(8) authorized the Comptroller of the Currency to charter Bankers' Banks, or depository institutions owned by other banks.

(9) made state chartered industrial banks eligible for federal depository insurance.

(10) raised the legal lending limit for national banks from 10% to 15% of capital and surplus.

system supplying credit reserves for savings and loans, cooperative banks, and other mortgage lenders in a manner similar to the Federal Reserve's role with commercial banks. The Federal Home Loan Bank System is made up of 12 regional Federal Home Loan Banks. It raises money by issuing notes and bonds and lends money to savings and loans and other mortgage lenders based on the amount of collateral the institution can provide. The system was established in 1932 after a massive wave of bank failures. In 1989, Congress passed savings and loan bailout legislation revamping the regulatory structure of the industry. The Federal Home Loan Bank Board was dismantled and replaced with the Federal Housing Finance Board, which now oversees the home loan bank system. The financial services modernization act of 1999 expanded the collateral that member banks could use to obtain an advance. In addition to traditional mortgage loans, banks can now put up rural, agricultural, and small business loans.

banking services offered to the general public. Retail banking services are a group of financial services that includes installment loans, residential mortgages, equity credit loans, deposit services, and individual retirement accounts. In contrast with wholesale banking or corporate banking, retail banking is a high volume business with many service providers competing for market share. Some retail banking services, for example, credit cards, are among the most profitable services offered by financial institutions.

federal law enacted by Congress in 1933 forcing a separation between commercial banking and investment banking. This act, which required commercial banks to dispose of their securities affiliates, bears the same name as the banking act of 1933, and is part of the landmark 1933 act. Since then, the name Glass-Steagall has been more commonly used when referring to the four sections of the banking act (Sections 16, 20, 21, and 32) pertaining to underwriting and sale of securities.

The late 1980s saw legislative barriers between banking and investment banking significantly eroded, as banks were granted more powers by banking regulators to deal in securities as both principal and agent for bank customers. Commercial banks own securities, brokerdealer and investment management firms, and mutual fund companies, and they act as investment advisors for municipal governments and corporations. Banks won Federal Reserve Board approval to underwrite commercial paper in 1987, and corporate equity securities and bonds in 1990 (through subsidiaries of bank holding companies). The gramm-leach-bliley act repealed the affiliation (Section 20) and management interlock (section 32) prohibitions of Glass-Steagall.

Other key provisions of the Glass-Steagall Act still remaining in effect are Section 16, prohibiting Federal Reserve member banks from directly underwriting securities, except for those of the U.S. Treasury and federal agencies, and the general obligations of state and municipal governments; and Section 21, prohibiting securities underwriters from accepting federally insured deposits.

internationally, synonymous with central bank. In the United States, a nationally chartered bank.

company that owns or controls two or more banks or other bank holding companies. As defined in the Bank Holding Company Act of 1956, such companies must register with the board of governors of the federal reserve system and hence are called registered bank holding companies. Amendments to the 1956 act set standards for acquisitions (1966) and ended the exemption enjoyed by one-bank holding companies (1970), thus restricting bank holding companies to activities related to banking. The financial services modernization act of 1999 liberated Bank Holding Companies that qualify as financial holding companies to acquire or create as subsidiaries securities firms and insurance companies.

banking services offered to corporations with sound financial statements, and institutional customers, such as pension funds and government agencies. Services include lending, cash management, commercial mortgages, working capital loans, leasing, trust services, and so on. Most banks divide wholesale banking into several different businesses: the Fortune 500 and Fortune 1000 market, composed of the 500 and 1,000 largest U.S. corporations, respectively; the Middle Market; and the small business market.

Commercial banks, responding to increased market competition from alternative financing sources, such as commercial paper and junk bonds, have begun to place more emphasis on fee-based corporate services, including foreign exchange and securities trading, advisory services in corporate mergers, and acquisitions, merchant banking, and corporate cash management, and securities underwriting.

depository institution, usually a commercial bank, organized and chartered to do business with other banks and owned by the banks it services. These banks do not take deposits or make loans to the public. They may be chartered as national bank, invest in an Export Trading Company (ETC), and may be exempted from reverse mortgage.

banking system in several European countries where commercial banks make loans, underwrite corporate debt, and also take equity positions in corporate securities. For example, in Germany commercial banks accept time deposits, lend money, underwrite corporate stocks, and act as investment advisors to large corporations. In Germany, there has never been any separation between commercial banks and investment banks, as there is in the United States.

The advantages of this type of banking system have been debated. Universal banking permits better use of customer information and allows banks to sell more services under one roof as a financial supermarket. The main disadvantage is that universal banking permits concentration of economic power in a handful of large banking institutions that hold equity positions in companies that are also borrowers of funds.

In general: two companies are affiliated when one owns less than a majority of the voting stock of the other, or when both are subsidiaries of a third company. A subsidiary is a company of which more than 50% of the voting shares are owned by another corporation, termed the parent company. A subsidiary is always, by definition, an affiliate, but subsidiary is the preferred term when majority control exists. In everyday use, affiliate is the correct word for intercompany relationships, however indirect, where the parent-subsidiary relationship does not apply.
Banking Act of 1933: any organization that a bank owns or controls by stock holdings, or which the bank's shareholders own, or whose officers are also directors of the bank.
Internal Revenue Service: for purposes of consolidated tax returns an affiliated group is composed of companies whose parent or other inclusive corporation owns at least 80% of voting stock.
Interstate Commerce Commission, Account 706:

1. Controlled by the accounting company alone or with others under a joint agreement.
2. Controlling the accounting company alone or with others under a joint agreement.

concept in financial services marketing whereby an account officer or Customer Service Representative tries to meet all of a consumer's needs, or to the extent permitted by regulation. Relationship banking is an attempt to advance the sales culture in bank marketing beyond order taking to a more pro-active form of direct selling. Instead of selling financial services one at a time, an account officer attempts to gain an understanding of the consumer's needs and offer services that fulfill those needs. Commercial banks and other financial institutions have attempted to apply the concept of relationship banking through personal banker and private banking programs.

bank offering the public most, if not all, of the services traditionally expected of banking institutions. Services typically found in full service banks include consumer credit, mortgage financing, commercial lending, trust services, and corporate agency services, such as funds transfer and securities registration.

bank whose main office is outside a city with a Federal Reserve Bank or branch. Country banks do not receive overnight credit on checks cleared through the Federal Reserve System, and generally have lower reserve requirements than reserve city bank which are located in major cities having a Federal Reserve Bank. The term country collections is often used in reference to all banks outside the region where the sending bank is located.

commercial bank, savings bank, or savings and loan association that is not a member of the Federal Reserve System. Nonmember banks must maintain a portion of their transaction accounts and time deposits at a Federal Reserve Bank to meet reserve requirements, but have access to the Federal Reserve discount window and other Fed services on the same terms as Federal Reserve member banks. Contrast with member bank.

locally owned and operated commercial bank. It derives its sources of funds from, and it lends money to, the community where it operates, and is not affiliated with a multibank holding company. Also called community bank.

state chartered finance company that makes consumer and commercial loans and accepts time deposits and interest-paying Negotiable Order Of Withdrawal Account accounts. Industrial banks, once found in sixteen states, are today chartered in just five states, mostly in the western United States. The term has its roots in the early-20th-century finance companies that originated loans to industrial workers; back then, most commercial banks did not offer consumer loans. Also called industrial loan bank or industrial loan company.

U.S. system whereby banks are chartered by the state or federal government. This makes for differences in banking regulations, in lending limits, and in services available to customers.

bank organized to assume the deposits and secured liabilities of an insolvent bank. TheFederal Deposit Insurance Corporation (FDIC) was given authority to charter these temporary banks by the Competitive Equality Banking Act of 1987. The FDIC has the authority, using a bridge bank, to operate a failed bank for up to three years until a buyer can be found.

system established by the Federal Reserve Act of 1913 to regulate the U.S. monetary and banking system. The Federal Reserve System (the Fed) is comprised of 12 regional Federal Reserve Banks, their 24 branches, and all national and state banks that are part of the system. National banks are stockholdersof the federal reserve bank in their region.

The Federal Reserve System's main functions are to regulate the national money supply, set reserve requirements for member banks, supervise the printing of currency at the mint, act as clearinghouse for the transfer of funds throughout the banking system, and examine member banks to make sure they meet various Federal Reserve regulations. Although the members of the system's governing board are appointed by the President of the United States and confirmed by the Senate, the Federal Reserve System is considered an independent entity, which is supposed to make its decisions free of political influence. Governors are appointed for terms of 14 years, which further assures their independence.

law enacted by Congress in 1927 giving states the power to regulate bank branching, including branching by national banks. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 modified the McFadden Act, allowing banks to open deposit-taking branches across state lines by merging with other banks.

newly chartered bank, as opposed to a bank acquired through a purchase acquisition or a newly opened branch banking office. Banking expansion can take place through chartering of new banks and approval of new branch offices by state banking departments, or through the acquisition of existing banks (and banking offices). In states where de novo branching is tightly regulated, for example, the unit banking states in the Midwest where branching is prohibited by state law, banking companies have frequently been able to expand geographically by forming a multibank holding company, which then acquired other banks. State interstate banking laws have permitted banking expansion only through holding company acquisitions, rather than de novo charters of new banks.

state chartered corporation engaged in international banking. These banking offices agree to limit their activities, under Federal Reserve Board regulations, to those permitted edge act corporations, but have more liberal capital guidelines. Agreement corporations are chartered to conduct international operations through domestic offices, thereby allowing local firms access to international markets through local banks.

banking system in several states that prohibits branching, or operation of more than one full-service banking office. Banks operating in these states, located principally in the Midwest, are sometimes referred to as unit banks. Restrictive branching laws, most prevalent in the Midwest and the Southwest, encouraged chartering of large numbers of small, independently owned state banks, and large multibank holding companies owning numerous unit banks. Branching laws in most states have been eased in the last several years, permitting geographic expansion and branch banking networks across the United States.

1. Federal Reserve Board rule pertaining to the amount of reserves banks must maintain relative to deposits.
2. Securities and Exchange Commission (SEC) rules concerning private placements and defining related concepts such as accredited investor.

bank that regularly buys check processing and other services from a correspondent bank. Also known as a downstream bank. Purchased services can include securities clearing and trading, check processing, and foreign exchange trading. A respondent bank, which usually is a community bank, may also maintain its reserve account in a pass-through account at a correspondent, or sell participations in loans exceeding its legal lending limit, or buy participations in loans originated by other banks.

1. Securities and Exchange Commission provision for simplified registration of small issues of securities. A Regulation A issue requires a shorter form of prospectus and carries lesser liability for officers and directors for false or misleading statements.
2. Federal Reserve Board statement of the means and conditions under which Federal Reserve banks make loans to member and other banks at what is called the discount window. See also rediscount.

periodic review of a bank's balance sheet assets and liabilities by chartering agency or bank supervisory agency. Bank examiners focus their attention on three main areas: the competence of bank management; the quality of bank assets, principally loans; and compliance with state or federal banking regulations. Today, examiners also look closely at off-balance sheet items liabilities such as loan commitments or guarantees, which are contingent claims on the bank's assets.

Supervisory examinations are carried out by federal, state, and independent agencies. National banks are examined by the Comptroller of the Currency, state chartered banks by the Federal Deposit Insurance Corporation or the state banking department, and bank holding companies by the Federal Reserve Board. Savings and loan associations are examined by the Office of Thrift Supervision, savings banks and credit unions by state banking departments.

bank that is a member of the federal reserve system, including all nationally chartered banks and any state-chartered banks that apply for membership and are accepted. Member banks are required to purchase stock in the federal reserve bank in their districts. Half of that investment is carried as an asset of the member bank. The other half is callable by the Fed at any time. Member banks are also required to maintain a percentage of their deposits as reserves in the form of currency in their vaults and balances on deposit at their Fed district banks. These reserve balances make possible a range of money transfer and other services using the fed wire system to connect banks in different parts of the country.

district bank of the Federal Reserve System.

state bank or national bank, owned by stockholders, that accepts demand deposits, makes commercial and industrial loans, and performs other banking services for the public. The term commercial bank is synonymous with full service bank, because many commercial banks supply trust services, foreign exchange, trade financing, and international banking. Most state chartered trust companies are also commercial banks. Commercial bank deposits are insured by the Bank Insurance Fund (BIF), a federal insurance fund managed by the Federal Deposit Insurance Corporation.

depository institutions that specialize in originating, servicing, and holding mortgage loans, primarily on owner-occupied residential property.

Example: Traditionally, savings and loan associations were distinguished from commercial banks by their emphasis on long-term home mortgage loans, separate regulations and deposit insurance mechanisms, and their affiliation with the federal home loan bank system. Passage of FIRREA in 1990 destroyed most of these divisions. Today all depository institutions are eligible for affiliation with the Home Loan Bank System if they are willing to specialize in home mortgages.