Glossary of Terms for Deposit Insurance Print

The following are terms often used by Deposit Insurers in describing aspects of their business: 

Adverse selection - The tendency for higher-risk banks to opt for deposit insurance and lower-risk banks to opt-out of deposit insurance when membership in a deposit insurance system is voluntary.

Bank run - A rapid loss of deposits precipitated by fear on the part of the public that a bank may fail and depositors may suffer losses.

Benchmark - A standard or guideline to which other items or processes can be compared.

Blanket guarantee - A declaration by the government that all deposits and perhaps other financial instruments will be protected.

Bridge bank - A temporary bank established and operated to acquire the assets and assume the liabilities of a failed institution until final resolution can be accomplished.

Coinsurance - An arrangement whereby depositors are insured for a pre-specified portion, less than 100 percent of their deposits.

Collateralisation - The taking of a mortgage, pledge, charge or other form of security by a creditor over one or more assets of a debtor.

Contagion - The spread of an individual bank run to several other financial institutions.

Corporate governance - The processes, structures, and information used for directing and overseeing the management of an organisation.

Depositor priority - The granting of preferential treatment to depositors such that their claims must be paid in full before remaining creditors can collect on their claims.

Differential premium/risk-adjusted differential premium - A levy on a bank assessed on the basis of that bank’s risk profile.

Disclosure - A fact, condition, or description that is revealed clearly and publicly.

Ex-ante funding - The accumulation of a fund to cover deposit insurance claims in anticipation of the failure of a member bank.

Ex-post funding - An assessment levied after the failure of a member bank to provide funds to cover deposit insurance claims.

Financial safety net - Usually comprises the deposit insurance function, prudential regulation and supervision, and the lender-of-last-resort function.

Forbearance - To grant an extension of time to certain distressed banks from minimum regulatory requirements.

Foreign bank – A foreign-bank subsidiary is incorporated as a separate entity in the host country. A foreign-bank branch, on the other hand, is an extension of the foreign bank itself into a host country. Foreign-bank branches and subsidiaries may be subject to different rules and supervised differently by a host country.

Individual Account - An account owned and controlled by one person rather than corporation or other legal entity.

Joint Account – An account owned/controlled by two or more persons for their mutual benefit.

Least-cost resolution - A procedure that requires the deposit insurer or other designated entity to implement the resolution alternative that is determined to be less costly to the system than all other resolution alternatives, including the liquidation of the failed bank.

Lender-of-last-resort function - The provision of liquidity to the financial system by a central bank.

Limited-coverage deposit insurance - A guarantee that the principal and the interest accrued on protected deposit accounts will be paid up to a specified limit.

Mandate - A mandate is a set of official instructions or statement of purpose of a firm.

Market discipline - A situation where depositors or creditors assess the risk characteristics of a bank and act upon such assessments to deposit or withdraw funds from a bank.

Moral hazard - The incentive for additional risk taking that is often present in insurance contracts and arises from the fact that parties to the contract are protected against loss.

Netting/netting arrangements – This refers to the reduction of an accountholder's insured deposits by the amount of outstanding loans in a failed institution or the reduction of an accountholder's outstanding loans by the amount of deposits above the coverage limit.

Open-bank assistance - A resolution method in which an insured bank in danger of failing receives assistance in the form of a direct loan, an assisted merger, or a purchase of assets.

Paybox - A deposit insurer with powers limited to paying off the claims of depositors.

Purchase-and-assumption transaction (sales) - A resolution method in which a healthy bank or group of investors assume some or all of the obligations, and purchase some or all of the assets of the failed bank.

Receiver - The legal entity that undertakes the winding down of the affairs of an insolvent bank.

Recovery - The amount of net collections of a bank’s assets.

Regulatory discipline - Governs the establishment of new banks; qualifications of directors and managers; business activities; change of control; and standards for risk-management, internal controls, and external audits.

Risk minimiser – A deposit insurer with the powers to reduce the risks it faces. These powers may include the ability to control entry and exit from the deposit insurance system, assess and manage its own risks and may conduct examinations of banks, or request such examinations.

Set-off - Rrefers to situations where the claim of a creditor in an insolvent bank (for example, a deposit) is deducted from a claim of the bank against the creditor (for example, a loan).

Situational analysis - An examination that policymakers undertake to assess factors such as: the state of the economy; current monetary and fiscal policies; the state and structure of the banking system; public attitudes and expectations; the state of the legal, prudential regulatory and supervisory; accounting and disclosure regimes.

Supervisory discipline - Requires that banks are monitored for safety and soundness as well as compliance issues and that corrective actions are taken promptly, including the closure of a bank when necessary.

Suspense account – A suspense account is used when not enough information is available to post a transaction with the right offset. For example, dividends and interest are “paid” to a trust account on their payable date even if all of the money from depositors and paying agents is not received on time.

Systemic risk – A risk that has implications for the general health of the financial system and can have serious adverse implications for financial stability and overall economic conditions.

Trust Account – An account held on behalf of another person and administered/maintained by a trustee.  It is usually established under a trust agreement.

Trustee - An individual or organization which holds or manages and invests assets for the benefit of another such as a parent that manages a deposit account for his/her child. The trustee is legally obliged to make all trust-related decisions with the trustee's interests in mind, and may be liable for damages in the event of not doing so. Trustees may be entitled to a payment for their services, if specified in the trust deed. In the specific case of the bond market, a trustee administers a bond issue for a borrower, and ensures that the issuer meets all the terms and conditions associated with the borrowing.