Glossary

Arrears: A loan is in arrears when one or more payments due have not been paid.

Capital ratio: Key financial ratio of capital to assets (or risk-weighted assets) measuring an institution’s capital adequacy or financial strength. The Reserve Bank requires that institutions maintain a minimum capital ratio to ensure that there is enough capital (mostly shareholders’ equity and retained earnings) to protect the institution from unexpected losses. As a general rule, an institution with a higher capital ratio is more resilient than one with a lower capital ratio.

Capitalising interest: Where the interest owed on a loan is added to the total debt, rather than paid regularly.

Collective investment scheme: An investment product where a professional manager invests money on behalf of many individual investors (for example, a unit trust).

Contingent liability: A liability that might arise if a certain event occurs (for example, if a financial institution fails while under the Scheme).

Credit rating: Rating provided by an independent agency that estimates the creditworthiness of an organisation (that is, the ability of the organisation to meet its financial commitments). Credit ratings are publicly available and used by investors and analysts as a guide for investment decisions because they indicate relative credit standing or strength.

Credit worthiness: A measure of a borrower’s ability to meet debt obligations. Debentures: A fixed-interest debt security issued to raise funds, often medium- to longer-term funds but sometimes short-term. The security is often secured but can also be unsecured.

Debentures: A fixed-interest debt security issued to raise funds, often medium- to longer-term funds but sometimes short-term. The security is often secured but can also be unsecured.

Debt security: A debt instrument that can be bought or sold, where the issuing company agrees to repay the amount borrowed (principal) at a specified date with specified interest. Examples of debt securities include deposits, bonds, debentures, and certificates of deposit.

Delinquent loan: A loan with repayments that are overdue (that is, the borrower is behind or late in making payments).

Impaired loans: Loans for which the institution does not expect to receive part or all of the principal and interest back in a timely manner.

Liquidity: The ability to turn an asset into cash at short notice with minimum loss of value. Liquidity also refers to an institution’s ability to pay its obligations when they become due (for example, to fund withdrawals by depositors).

Market discipline: Incentives imposed by the market on institutions to conduct their business in a safe, sound, and efficient manner. For example, with comprehensive disclosure, the concern of depositors for the safety of their deposits will cause institutions to control and limit the riskiness of lending activities, because depositors will choose to lend to the less risky institutions.

Moral hazard: Occurs when a party insulated from risk behaves differently than it would if it were fully exposed to the risk. For example, people with insurance may take greater risks than they do without it because they know they are protected (and the insurer may receive more claims as a result).

Provision: An estimate of how much needs to be allocated in financial statements to cover expected losses (funds set aside to meet future liabilities).

Related-party exposure: Lending to related parties (also known as connected lending). Parties are considered related if one party has the ability to control the other party or to exercise significant influence over the other party’s financial and operating decisions. In terms of a deposit-taker, a related party would include directors, senior managers, and their relatives; subsidiaries; members of the borrowing group; people with a substantial interest in the deposit-taker or a group member; entities in which the deposit-taker or group member has a substantial interest; and entities with interlocking boards.

Retail deposits: Money held by financial institutions on behalf of individual investors and small businesses.

Trustee: An individual or organisation that holds or looks after assets on behalf of someone else (beneficiary) and ensures that the terms of the trust deed are met.

Wholesale deposits: Money held by financial institutions on behalf of large companies, other financial institutions, and governments