A person, company or country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another person, company or country. 

Corporation chartered by a state to engage in international banking: so named because the corporation enters into an “agreement” with the Fed's Board of Governors that it will limit its activities to those permitted and Edge Act Corporation.

The process of fully paying off indebtedness by installments of principal and earned interest over a definite time.

The cost of credit on a yearly basis expressed as a percentage.

The charge for estimating the value of property offered as security.

See currency appreciation.

Electronic clearing and settlement system for exchanging electronic transactions among participating depository institutions; such electronic transactions are substitutes for paper checks and are typically used to make recurring payments such as payroll or loan payments. The Federal Reserve Banks operate an automated clearinghouse, as do some private sector firms.

automated teller machine (ATM)

Computer-controlled terminal located on the premises of financial institutions or elsewhere, through which customers may make deposits, withdrawals or other transactions as they would through a bank teller. Other terms sometimes used to describe such terminals are customer-bank communications terminal (CBCT) and remote service unit (RSU). Groups of banks sometimes share ATM networks located throughout a region of the country that may include portions of several states.

A depositor's savings account from which funds may be transferred automatically to the same depositor's checking account to cover a check written or to maintain a minimum balance.

B

An accounting statement of the money value of international transactions between one nation and the rest of the world over a specific time period. The statement shows the sum of transactions of individuals, businesses and government agencies located in one nation, against those of all other nations.

That part of a nation's balance of payments dealing with imports and exports, that is trade in goods and services, over a given period. If exports of goods exceed imports, the trade balance is said to be favorable; if imports exceed exports, the trade balance if said to be unfavorable.

A large extra payment that may be charged at the end of a loan or lease.

International organization established in 1930 and based in Basle, Switzerland, that serves as a forum for central banks collecting information, developing analyses and cooperating on a wide range of policy-related matters.

Company that owns, or has controlling interest in, one or more banks. A company that owns more than one bank is known as a multibank holding company. The Board of Governors is responsible for regulating and supervising bank holding companies, even if the bank owned by the holding company is under the primary supervision of a different federal agency (the Comptroller of the Currency or the Federal Deposit Insurance Corporation).

A term used synonymously with paper money or currency issued by a bank. Notes are, in effect, a promise to pay the bearer on demand the amount stated on the face of the note. Today, only the Federal Reserve Banks are authorized to issue bank notes, i.e. Federal Reserve notes, in the United States.

The formulation and issuance by authorized agencies of specific rules or regulations, under governing law, for the conduct and structure of banking.

A series of unexpected cash withdrawals caused by a sudden decline in depositor confidence or fear that the bank will be closed by the chartering agency, i.e. many depositors withdraw cash almost simultaneously. Since the cash reserve a bank keeps on hand is only a small fraction of its deposits, a large number of withdrawals in a short period of time can deplete available cash and force the bank to close and possibly go out of business.

Oversight of individual banks to ensure that they are operated prudently and in accordance with applicable statutes and regulations.

Banker's acceptances are negotiable time drafts, or bills of exchange, that have been accepted by a bank which, by accepting, assumes the obligation to pay the holder of the draft the face amount of the instrument on the maturity date specified. They are used primarily to finance the export, import, shipment or storage of goods.

Eight times a year, prior to FOMC meetings, each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key businessmen, economists, market experts and other sources. The Beige Book summarizes this information by District and sector.

Central, governmental agency of the Federal Reserve System, located in Washington, D.C., and composed of seven members who are appointed by the President and confirmed by the Senate. The Board of Governors is responsible for domestic and international economic analysis; with other components of the System, for the conduct of monetary policy; for supervision and regulation of certain banking organizations; for operation of much of the nation's payments system; and for administration of most of the nation's laws that protect consumers in credit transactions.

Securities that are recorded in electronic records, called book entries, rather than as paper certificates. Ownership of U.S. government book-entry securities is transferred over Fedwire.

The name commonly given to the United Nations Monetary and Financial Conference, held (July 1-22, 1944) at Bretton Woods, N.H. The conference resulted in the creation of the International Monetary Fund, to promote international monetary cooperation, and of the International Bank for Reconstruction and Development. By December 1945, the required number of governments had ratified the treaties creating the two organizations, and by the summer of 1946 they had begun operation.

Any person, other than a bank, engaged in the business of buying or selling securities on its own behalf or for others.

Money borrowed by brokers from banks for uses such as financing specialists' inventories of stock, financing the underwriting of new issues of corporate and municipal securities, and financing customer margin accounts.

A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables.

A lump sum payment made to the creditor by the borrower or by a third party to reduce the amount of some or all of the consumer's periodic payments to repay the indebtedness.

C

The percentage of the economy's total plant and equipment that is currently in production. Usually, a decrease in this percentage signals an economic slowdown, while an increase signals economic expansion.

The market in which corporate equity and longer-term debt securities (those maturing in more than one year) are issued and traded.

An order issued after notice and opportunity for hearing, requiring a depository institution, a holding company or a depository institution official to terminate unlawful, unsafe or unsound banking practices. Cease-and-desist orders are issued by the appropriate federal regulatory agencies under the Financial Institutions Supervisory Act and can be enforced directly by the courts.

The principal monetary authority of a nation, which performs several key functions, including issuing currency and regulating the supply of credit in the economy. The Federal Reserve is the central bank of the United States.

The buying or selling of currency, foreign or domestic, by central banks in order to influence market conditions or exchange rate movements.

A form of time deposit at a bank or savings institution; a time deposit cannot be withdrawn before a specified maturity date without being subject to an interest penalty for early withdrawal. Small-denomination CDs are often purchased by individuals. Large CDs of $100,000 or more are often in negotiable form, meaning they can be sold or transferred among holders before maturity.

The movement of a check from the depository institution at which it was deposited back to the institution on which it was written; the movement of funds in the opposite direction and the corresponding credit and debit to the involved accounts. The Federal Reserve operates a nationwide check-clearing system.

An institution where mutual claims are settled between accounts of member depository institutions. Clearinghouses among banks have traditionally been organized for check-clearing purposes, but more recently have cleared other types of settlements, including electronic fund transfers.

An automated clearing system used primarily for international payments. This system is owned and operated by the New York Clearinghouse banks and engages Fedwire for settlement.

An agreement in which advanced credit plus any finance charges are expected to be repaid in full over a definite time. Most real estate and automobile loans are closed-end agreements.

Property that is offered to secure a loan or other credit and that becomes subject to seizure on default. (Also called security.)

Bank that offers a broad range of deposit accounts, including checking, savings and time deposits and extends loans to individuals and businesses. Commercial banks can be contrasted with investment banking firms, such as brokerage firms, which generally are involved in arranging for the sale of corporate or municipal securities.

Enacted by Congress in 1977, the CRA encourages banks to help meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate incomes, while maintaining safe and sound operations.

Describes the ability of a person, company or country to produce a good or service at a lower cost relative to other goods and services. Even though a country may have an absolute advantage over another country, it still will be better off specializing in the good or service in which it has a comparative advantage and trading for goods and services it doesn't produce as efficiently.

One of two categories of bidders on Treasury securities: competitive and noncompetitive. Competitive bidders are usually financial institutions.

The Comptroller of the Currency is an officer of the Treasury Department responsible for chartering national banks and has primary supervisory authority over them. All national banks are required to be members of the Federal Reserve System and are insured by the Federal Deposit Insurance Corporation.

A statutory body established by Congress in 1976. The Council, with 30 members who represent a broad range of consumer and creditor interests, advises the Federal Reserve Board on the exercise of its responsibilities under the Consumer Credit Protection Act and on other matters on which the Board seeks its advice.

A measurement of the cost of living determined by the Bureau of Labor Statistics.

Bank that accepts deposits of, and performs services for, another bank (called a respondent bank); in most cases, the two banks are in different cities.

A term referring to a person, other than the principal borrower, who signs for a loan. The cosigner(s) assumes equal liability for the loan.

The promise to pay in the future in order to buy or borrow in the present. The right to defer payment of debt.

Any card, plate or coupon book that may be used repeatedly to borrow money or buy goods and services on credit.

A record of how a person has borrowed and repaid debt.

A statistical system used to determine whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness.

Financial cooperative organization of individuals who have a common bond, such as place of employment or residence or membership in a labor union. Credit unions accept deposits from members, pay interest (in the form of dividends) on the deposits out of earnings and use their funs to provide consumer installment loans to members.

A creditor's measure of a consumer's past and future ability and willingness to repay debts.

An increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates, a unit of one currency buys more units of another currency.

A decline in the value of one currency relative to another currency. Depreciation occurs when, because of a change in exchange rates, a unit of one currency buys fewer units of another currency.

A deliberate downward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold.

A deliberate upward adjustment in the official exchange rate established, or pegged, by a government against a specified standard, such as another currency or gold.

The difference between the nation's total exports of goods, services and transfers and its total imports of them. Current account balance calculations exclude transactions in financial assets and liabilities.

Unemployment caused by a low level of aggregate demand associated with recession in the business cycle.

D

Also known as a “daylight trade.” The purchase and sale or the short sale and cover of the same security in a margin account on the same day.

A card that resembles a credit card but which debits a transaction account (checking account) with the transfers occurring contemporaneously with the customer's purchases. A debit card may be machine readable, allowing for the activation of an automated teller machine or other automated payments equipment.

Failure to meet the terms of a credit agreement.

The amount each year by which government spending is greater than government income.

A deposit that may be withdrawn at any time without prior written notice to the depository institution. A checking account is the most common form of demand deposit.

A financial institution that obtains its funds mainly through deposits from the public. This includes commercial banks, savings and loan associations, savings banks and credit unions. Although historically they have specialized in certain types of credit, nonbank depository institutions have broadened their powers in recent years. For example, NOW accounts, credit union share drafts and other services similar to checking accounts may be offered by thrift institutions.

See currency depreciation.

A method of payment which electronically credits your checking or savings account.

A type of floating exchange rate that is not completely freely floating because central banks intervene from time to time to alter the rate from its free-market level. It is still a floating rate because it has not been pegged at a predetermined par value.

The difference between the face value and the price paid for a security.

The interest rate at which eligible depository institutions may borrow funds, usually for short periods, directly from a Federal Reserve Bank. The law requires the board of directors of each Reserve Bank to establish the discount rate every 14 days subject to the approval of the Board of Governors.

Figurative expression for Federal Reserve facility for extending credit directly to eligible depository institutions (those with transaction accounts or nonpersonal time deposits).

Goods that have a relatively lengthy life (television sets, radios, etc.).

E

An increase in the nation's capacity to produce goods and services.

Events that impact the economy, come from outside it, and are unexpected and unpredictable (e.g., Hurricane Andrew in 1991, the rise in oil prices by OPEC).

Corporation chartered by the Federal Reserve to engage in international banking. The Board of Governors acts on applications to establish Edge Act corporations and also examines the corporations and their subsidiaries. Named after Senator Walter Edge of New Jersey, who sponsored the original legislation to permit formation of such organizations. See also agreement corporation.

Transfer of funds electronically rather than by check or cash. The Federal Reserve's Fedwire and automated clearinghouse services are EFT systems.

A variety of systems and technologies for transferring funds (money) electronically rather than by check. Includes Fedwire, automated clearinghouses (ACHs) and other automated systems.

The percentage of the labor force that is employed. The employment rate is one of the economic indicators that economists examine to help understand the state of the economy. See also unemployment rate.

Deposits denominated in U.S. dollars at banks and other financial institutions outside the United States. Although this name originated because of the large amounts of such deposits held at banks in Western Europe, similar deposits in other parts of the world are also called Eurodollars.

Amount of reserves held by an institution in excess of its reserve requirement and required clearing balance. Also see reserves.

The price of a country's currency in terms of another country's currency.

A security that is exempted from most provisions of the securities laws, including the margin rules. Such securities include U.S. government and agency securities, and municipal securities designated by the SEC.

The public's expectations for inflation. These expectations determine how large an effect a given policy action by the Fed will have on economic activity.

F

Advisory group made up of one representative (in most cases a banker) from each of the 12 Federal Reserve districts. Established by the Federal Reserve Act, the council meets periodically with the Board of Governors to discuss business and financial conditions and make recommendations.

An independent deposit insurance agency created by Congress in 1933 to maintain stability and public confidence in the nation's banking system. The FDIC promotes safety and soundness of insured depository institutions and the U.S. financial system by identifying, monitoring and addressing risks to the deposit insurance funds; minimizes disruptive effects from the failure of banks and savings associations; and ensures fairness in the sale of financial products and the provision of financial services.

Short-term transactions in immediately available funds between depository institutions and certain other institutions that maintain accounts with the Federal Reserve; usually not collateralized.

The federal funds rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. The rate may vary from depository institution to depository institution and from day to day.

A broker's demand upon a customer for cash, or securities needed to satisfy the required Regulation T down payment for a purchase or short sale of securities.

Twelve-member committee made up of the seven members of the Fed's Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. The FOMC meets eight times a year to set Federal Reserve guidelines regarding the purchase and sale of government securities in the open market as a means of influencing the volume of bank credit and money in the economy. It also establishes policy relating to System operations in the foreign exchange markets.

Federal legislation that established the Federal Reserve System.

One of the 12 operating arms of the Federal Reserve System, located throughout the nation, that together with their 25 branches carry out various System functions, including operating a nationwide payments system, distributing the nation's currency and coin, supervising and regulating member banks and bank holding companies and serving as banker for the U.S. Treasury.

One of the twelve geographic regions served by a Federal Reserve Bank.

Float is checkbook money that appears on the books of both the check writer (the payor) and the check receiver (the payee) while a check is being processed. Federal Reserve float is float present during the Federal Reserve's check collection process. To promote efficiency in the payments system and provide certainty about the date that deposited funds will become available to the receiving depository institutions (and the payee), the Federal Reserve credits the reserve accounts of banks that deposit checks according to a fixed schedule. However, processing certain checks and collecting funds from the banks on which these checks are written may take more time than the schedule allows. Therefore, the accounts of some banks may be credited before the Federal Reserve is able to collect payment from other banks, resulting in Federal Reserve float.

Currency issued by the Federal Reserve. Nearly all of the nation's circulating paper currency consists of Federal Reserve notes printed by the Bureau of Engraving and Printing and issued to the Federal Reserve Banks which put them into circulation through commercial banks and other depository institutions. Federal Reserve notes are obligations of the U.S. government.

The central bank of the United States, created by Congress and made up of a seven-member Board of Governors in Washington, D.C., 12 regional Federal Reserve Banks, and their 25 branches.

Electronic funds transfer network operated by the Federal Reserve. Fedwire is usually used to transfer large amounts of funds and U.S. government securities from one institution's account at the Federal Reserve to another institution's account. It is also used by the U.S. Department of the Treasury and other federal agencies to collect and disburse funds.

Money that has little or no intrinsic value as a commodity; it is costless to produce, usually taking the form of tokens or pieces of paper; and is not redeemable for any commodity.

The total dollar amount paid to get credit.

An institution that uses its funds chiefly to purchase financial assets (loans, securities) as opposed to tangible property. Financial institutions can be classified according to the nature of the principal claims they issue. See also depository institution.

Services performed by the Federal Reserve Banks for the U.S. government. These include maintaining deposit accounts for the Treasury Department, paying U.S. government checks drawn on the Treasury, and issuing and redeeming savings bonds and other government securities.

The federal government's decisions about the amount of money it spends and collects in taxes to achieve a full employment and noninflationary economy.

Exchange rates between currencies that are set at predetermined levels and don't move in response to changes in supply and demand.

A traditional approach to determining the finance charge payable on an extension of credit. A predetermined and certain rate of interest is applied to the principal.

The flexible exchange rate system in which the exchange rate is determined by the market forces of supply and demand without intervention.

Purchase or sale of the currencies of other nations by a central bank for the purpose of influencing foreign exchange rates or maintaining orderly foreign exchange markets. Also called foreign-exchange market intervention.

The foreign exchange trading desk at the New York Federal Reserve Bank. The desk undertakes operations in the exchange markets for the account of the Federal Open Market Committee, and as agent for the U.S. Treasury and for foreign central banks.

A type of foreign exchange transaction whereby a contract is made to exchange one currency for another at a fixed date in the future at a specified exchange rate. By buying or selling forward exchange, businesses protect themselves against a decrease in the value of a currency they plan to sell at a future date.

Federal legislation that, among other things, specifies the primary objectives of U.S. economic policy—maximum employment, stable prices, and moderate long-term interest rates.

Contracts that require delivery of a commodity of specified quality and quantity, at a specified price, on a specified future date. Commodity futures are traded on a commodity exchange and are used for both speculation and hedging.

G

A variant form of the gold standard under which a country pegged the value of its currency to the value of the currency of a “major” country, e.g. sterling or dollars, which was itself on a gold standard. The international monetary regime in force between 1958 and 1970 is frequently described as a “gold exchange standard” system because of the wide use of the dollar, itself pegged to gold, as a reserve currency and as an accepted medium of exchange internationally.

A monetary system in which currencies are defined in terms of a given weight of gold.

Securities issued by the U.S. Treasury or federal agencies.

Repayment terms calling for gradual increases in the payments on a closed-end obligation. A graduated payment loan usually involves negative amortization.

Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United States, but which were acquired or engaged in before a particular date. Such activities may be continued under the “grandfather” clauses of the Bank Holding Company Act and the International Banking Act.

Total value of goods and services produced by labor and property located in the United States during a specific period. In 1991, GDP became the U.S. government's primary measure of economic activity in the nation, replacing gross national product (GNP), which is the total value of goods and services produced by labor and property supplied by U.S. residents (but not necessarily located within the country).

H

Informal name for the Full Employment and Balanced Growth Act of 1978, from the names of the act's original sponsors.

I

A rise, over time, in the average level of prices.

The return expressed in percentage earned on an investment each year. These payments are issued every six months based on an annual rate.

An intermediate target is a variable (such as the money supply) that is not directly under the control of the central bank, but that does respond fairly quickly to policy actions, is observable frequently and bears a predictable relationship to the ultimate goals of policy.

Facilities which, in general, can accept time deposits from foreign customers free of reserve requirements and interest rate limitations, and can lend to foreigners if the funds are for the conduct of foreign business outside of the United States Net borrowing from these facilities by domestic banking offices is subject to reserve requirements.

An international organization with 146 members, including the United States. The main functions of the IMF are to lend funds to member nations to finance temporary balance of payments problems, to facilitate the expansion and balanced growth of international trade and to promote international monetary cooperation among nations. The IMF also creates special drawing rights (SDRs), which provide member nations with a source of additional reserves. Member nations are required to subscribe to a Fund quota, paid mainly in their own currency. The IMF grew out of the Bretton Woods Conference of 1944.

J

An arrangement by which a group of currencies maintain a fixed relationship relative to each other, but move jointly relative to another currency in response to supply and demand conditions in the exchange market.

K

An economic theory originated by the British economist John Maynard Keynes and his followers. Keynes maintained that governments should use the power of the budget to maintain economic growth and stability and overcome the recessionary cycles common in most western economies.

L

As the nation's central bank, the Federal Reserve has the authority and financial resources to act as “lender of last resort” by extending credit to depository institutions or to other entities in unusual circumstances involving a national or regional emergency, where failure to obtain credit would have a severe adverse impact on the economy.

Quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process. Sometimes used more broadly to encompass credit in hand and promises of credit to meet needs for cash.

In banking, risk that a depository institution will not have sufficient cash or liquid assets to meet borrower and depositor demand.

M

Measure of the U.S. money stock that consists of currency held by the public, travelers checks, demand deposits and other checkable deposits including NOW (negotiable order of withdrawal) and ATS (automatic transfer service) account balances and share draft account balances at credit unions.

Measure of the U.S. money stock that consists of M1, certain overnight repurchase agreements and certain overnight Eurodollars, savings deposits (including money market deposit accounts), time deposits in amounts of less than $100,000 and balances in money market mutual funds (other than those restricted to institutional investors).

Measure of the U.S. money stock that consists of M2, time deposits of $100,000 or more at all depository institutions, term repurchase agreements in amounts of $100,000 or more, certain term Eurodollars and balances in money market mutual funds restricted to institutional investors.

The study of economics in terms of whole systems with reference to general levels of output and income and to the interrelations among sectors of the economy. See also microeconomics.

With regard to securities, this term refers to a fractional amount of full value, or the equity outlay (down payment) required for an investment in securities purchased on credit.

Any stock listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or appearing on the Board's list of over-the-counter margin stock and most mutual funds.

Rates of interest paid on deposits and other investments, determined by the interaction of the supply of and demand for funds in the money market.

Transaction in which the Federal Reserve sells a government security to a dealer or a foreign central bank and agrees to buy back the security on a specified date (usually within seven days) at the same price (the reverse of a repurchase agreement). Such transactions allow the Federal Reserve to temporarily absorb excess reserves from the banking system, limiting the ability of banks to make new loans and investments.

Depository institution that is a member of the Federal Reserve System. All federally chartered banks are automatically members of the System. State-chartered banks are divided into those that are members of the System (state member banks) and those that are not (nonmember banks).

microeconomics

The study of economics in terms of individual areas of activity (as a firm, household or prices). See also macroeconomics.

Act which requires that all banks and all institutions that accept deposits from the public make periodic reports to the Federal Reserve System. Starting in September 1981, the Fed charged banks for a range of services that it had provided free in the past, including check clearing, wire transfer of funds and the use of automated clearinghouse facilities.

A central bank's actions to influence the availability and cost of money and credit, as a means of helping to promote national economic goals. Tools of monetary policy include open market operations, discount policy and reserve requirements.

Anything that serves as a generally accepted medium of exchange, a standard of value and a means to save or store purchasing power. In the United States, currency (the bulk of which is Federal Reserve notes), coin and funds in checking and similar accounts at depository institutions are examples of money.

Total quantity of money available for transactions and investment; measure of the U.S. stock include M1, M2 and M3. (Also referred to as the money stock or simply money.)

The risk that a party to a transaction has not entered into a contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

N

A self-regulatory organization with jurisdiction over certain broker-dealers. The NASD requires member brokers to register and conducts examinations for compliance with net capital requirements and other regulations. It also conducts market surveillance of the over-the-counter (OTC) securities market. National Association of Securities Dealers Automated Quotations (NASDAQ) is a subsidiary of the NASD which facilitates the trading of approximately 5,000 most active OTC issues through an electronically connected network.

A computerized system established by the NASD to facilitate trading by providing broker/dealers with current bid and ask price quotes on over-the-counter stocks and some listed stocks.

The federal government agency that supervises, charters and insures federal credit unions. NCUA also insures state-chartered credit unions that apply and qualify for insurance. The NCUA also operates a credit facility for member credit unions.

The rate of unemployment attainable without stimulating an increase in the inflation rate.

An increase in the principal of a loan, when the loan payments are insufficient to pay the interest due. The unpaid interest is added to the outstanding loan balance causing the principal to increase rather than decrease as payments are made. This situation typically occurs in an adjustable mortgage with an annual cap limiting any increases in the interest rate, and also in a graduated payment mortgage, which has low initial payments so moderate-income borrowers can afford to make the loan payments.

An interest-earning account on which checks may be drawn. Withdrawals from NOW accounts may be offered by commercial banks, mutual savings banks, and savings and loan associations and may be owned only by individuals and certain nonprofit organizations and governmental units.

Depository institution that is not a member of the Federal Reserve System.
Specifically, a state-chartered commercial bank that has elected not to join the System.

Current stated rates of interest paid or earned.

O

An independent bureau of the Treasury Department and the oldest federal financial regulatory body. The OCC oversees the nation's federally chartered banks and through a system of bank supervision and regulation promotes safety and soundness by requiring that national banks adhere to sound management principles and comply with the law, and encourages banks to satisfy customer and community needs while remaining efficient competitors in the financial services market.

A bureau of the Treasury Department, established in August 1989, which has the authority to charter federal thrift institutions and serve as the primary regulator of approximately 2,000 federal and state-chartered thrifts.

open-end credit

A line of credit that may be used repeatedly up to a certain limit, also called a charge account or revolving credit.

A lease that may involve a balloon payment based on the value of the property when it is returned. Also called finance lease.

Purchases and sales of government securities and certain other securities in the open market, through the Domestic Trading Desk at the Federal Reserve Bank of New York as directed by the Federal Open Market Committee (FOMC), to influence the volume of money and credit in the economy. Purchases inject reserves into the banking system and stimulate growth of money and credit; sales do the opposite.

A debt security not traded on the national securities exchange, which meets certain Regulation T requirements as to size of original offering, available information and status of interest payments.

A checking account associated with a line of credit that allows a person to write checks for more than the actual balance in the account, with a finance charge on the overdraft.

Figurative term for the means of trading securities that are not listed on an organized stock exchange such as the New York Stock Exchange, as in OTC margin bonds. Over-the-counter trading is done by broker-dealers who communicate by telephone and computer networks.

P

The full face value of a security.

payments system

Collective term for mechanisms (both paper-backed and electronic) for moving funds, payments and money among financial institutions throughout the nation. The Federal Reserve plays a major role in the nation's payments system through distribution of currency and coin, processing of checks, electronic transfer of funds and the operation of automated clearinghouses that transfer funds electronically among depository institutions; various private organizations also perform payments system functions.

Financial activities closely related to banking that may be engaged in by bank holding companies (BHCs), either directly or through nonbank subsidiaries. For example, a BHC might own finance companies or engage in mortgage banking. The Federal Reserve Board determines which activities are closely related to banking. Before making such activities permissible, the Board must determine that performance of the activities by bank holding companies is in the public interest.

In reference to a loan, points consist of a lump sum payment made by the borrower at the outset of the loan period. Generally, each point equals one percent of the loan amount. See also seller's points.

The amount by which the auction price of a bill, note, or bond is higher than its face value.

The amount of physical output for each unit of productive input.

The exchange rate between any two currencies adjusts to reflect changes in the price levels within the two countries.

Credit used for the purpose of buying, carrying or trading in securities.

R

GDP (gross domestic product) adjusted for inflation. Real GDP provides the value of GDP in constant dollars, which is used as an indicator of the volume of the nation's output.

Interest rates adjusted for the expected erosion of purchasing power resulting from inflation. Technically defined as nominal interest rates minus the expected rate of inflation.

A significant decline in general economic activity extending over a period of time.

A Federal Reserve check processing operation that clears checks drawn on depository institutions located within a specified area. RCPCs expedite collection and settlement of checks within the area on an overnight basis.

A type of variable rate involving a renewable short- term “balloon” note. The interest rate on the loan is generally fixed during the term of the note, but when the balloon comes due, the lender may refinance it at a higher rate. In order for the loan to be fully amortized, periodic refinancing may be necessary.

Financial report that all banks, bank holding companies, savings and loan associations, Edge Act and agreement corporations, and certain other types of organizations must file with a federal regulatory agency. Informally termed a call report.

An agreement by which, for example, the Federal Reserve purchases a security for immediate delivery and receives interest at a specific rate from a government securities dealer, with an agreement to sell the security back at the same price by a specific date (usually within 15 days). This arrangement allows the Federal Reserve to inject reserves into the banking system on a temporary basis to meet a temporary need and to withdraw these reserves as soon as that need has passed.

Requirements set by the Fed Board of Governors for the amounts that certain financial institutions must set aside in the form of reserves. Reserve requirements act as a control on the expansion of money and credit and may be raised or lowered within limits specified by law (lowering reserve requirements allows more bank lending and money growth; raising requirements, less lending and money growth).

A depository institution's vault cash (up to the level of its required reserves) plus balances in its reserve account (not including funds applied to its required clearing balance).

• required reserves
  Funds that a depository institution is required to maintain as vault cash or on deposit with a Federal Reserve Bank; required amount varies according to required reserve ratios set by the Board of Governors and the volume of reservable liabilities held by the institutions.
• required reserve balance
  Portion of its required reserves that a depository institution must hold in an account at a Federal Reserve Bank.
• excess reserves
  Amount of reserves held by an institution in excess of its reserve requirement and required clearing balance.

S

Depository institution historically engaged primarily in accepting consumer savings deposits and in originating and investing in securities and residential mortgage loans; now may offer checking-type deposits and make a wider range of loans.

Paper certificates (definitive securities) or electronic records (book-entry securities) evidencing ownership of equity (stocks) or debt obligations (bonds).

An independent, nonpartisan, quasi-judicial regulatory agency with responsibility for administering the federal securities laws. The purpose of these laws is to protect investors and to ensure that investors have access to disclosure of all material information concerning publicly traded securities. The Commission also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies.

The creditor's right to take property or a portion of property offered as security.

The profit which results from the difference between the cost of making coins and currency and the exchange value of coin and currency in the market.

Nongovernment organizations that have statutory responsibility to regulate their own members such as the New York Stock Exchange (NYSE) and National Association Of Securities Dealers (NASD).

In reference to a loan, seller's points consist of a lump sum paid by the seller to the buyer's creditor to reduce the cost of the loan to the buyer. This payment is either required by the creditor or volunteered by the seller, usually in a loan to buy real estate. Generally, one point equals one percent of the loan amount. See also points.

A component of some finance charges, such as the fee for triggering an overdraft checking account into use.

Interest rates on loan contracts—or debt instruments such as Treasury bills, bank certificates of deposit or commercial paper—having maturities of less than one year. Often called money market rates.

A message writing system that connects worldwide participating banks, primarily for the purpose of communicating payment information. Frequently, the SWIFT message is only part of an international payment.

A type of international money created by the International Monetary Fund (IMF) and allocated to its member nations. SDRs are an international reserve asset, although they are only accounting entries (not actual coin or paper, and not backed by precious metal). Subject to certain conditions of the IMF, a nation that has a balance of payments deficit can use SDRs to settle debts to another nation or to the IMF.

A foreign exchange transaction in which each party promises to pay a certain amount of currency to the other on the same day or within one or two days.

A bank that is chartered by a state and has elected to join the Federal Reserve System.

Securities held in the name of brokers, banks or their nominees, instead of in the customer's name.

An extra charge imposed on those who purchase with a credit card instead of cash. (Currently, surcharges for credit card purchases are prohibited.)

An arrangement between the central banks of two countries for standby credit to facilitate the exchange of each other's currencies.

Short-term reciprocal lines of credit between the Federal Reserve and 14 foreign central banks as well as the Bank for International Settlements. Through a swap transaction, the Federal Reserve can, in effect, borrow foreign currency in order to purchase dollars in the foreign exchange market. In doing so, the demand for dollars and the dollar's foreign exchange value are increased. Similarly, the Federal Reserve can temporarily provide dollars to foreign central banks through swap arrangements.

T

An application or offer to purchase a U.S. Treasury bill, note or bond.

The trading desk at the Federal Reserve Bank of New York through which open market purchases and sales of government and federal agency securities are made. The desk maintains direct telephone communication with major government securities dealers. A “foreign desk” at the Federal Reserve Bank of New York conducts transactions in the foreign exchange market.

A general term encompassing savings banks, savings and loan associations, and credit unions.

A council, established following the passage of the Monetary Control Act of 1980, whose purpose is to provide information and views on the special needs and problems of thrifts. The group is comprised of representatives of savings banks, savings and loan associations, and credit unions.

Government practices that protect large banking organizations from the normal discipline of the marketplace because of concerns that such institutions are so important to markets and their positions so intertwined with those of other banks that their failure would be unacceptably disruptive, financially and economically.

The amount by which merchandise imports exceed merchandise exports.

The value of the dollar pegged to, or expressed relative to, a market basket of selected foreign currencies. The Federal Reserve calculates a trade-weighted value of the dollar based on the weighted-average exchange value of the dollar against the currencies of 10 industrial countries.

A checking or similar account from which transfers can be made to third parties. Demand-deposit accounts, negotiable order of withdrawal (NOW) accounts, automatic transfer service (ATS) accounts, and credit union share draft accounts are examples of transaction accounts at banks and other depository institutions.

Short-term U.S. Treasury security having a maturity of up to one year and issued in denominations of $10,000 to $1 million. T-bills are sold at a discount: Investors purchase a bill at a price lower than the face value (for example, the investor might buy a $10,000 bill for $9,700); the return is the difference between the price paid and the amount received when the bill is sold or it matures (if held to maturity, the return on the T-bill in the example would be $300). T-bills are the type of security most frequently used in Federal Reserve open market operations.

Long-term security having a maturity of 10 years or longer issued in denominations of $1,000 or more. A 30-year bond is sometimes referred to as a long bond. Bonds pay interest semiannually, and the principal is payable at maturity.

Intermediate-term security having a maturity of one to 10 years and issued in denominations of $1,000 or more. Notes pay interest semiannually, and the principal is payable at maturity.

The percentage of the labor force that is unemployed and actively seeking a job.

Interest-bearing obligations of the U.S. government issued by the U.S. Department of the Treasury as a means of borrowing money to meet government expenditures not covered by tax revenues. There are three types of marketable Treasury securities—bills, notes and bonds.

V

A variable-rate agreement, as distinguished from a fixed-rate agreement, calls for an interest rate that may fluctuate over the life of the loan. The rate is often tied to an index that reflects changes in market rates of interest. A fluctuation in the rate causes changes in either the payments or the length of the loan term. Limits are often placed on the degree to which the interest rate or the payments can vary.

Cash kept on hand in a depository institution's vault to meet day-to-day business needs, such as cashing checks for customers; can be counted as a portion of the institution's required reserves.

The rate at which money balances turn over in a period for expenditures on goods and services (often measured as the ratio of GNP—gross national product—to the money stock). A larger velocity means that a given quantity of money is associated with a greater dollar volume of transactions.

W

Electronic transfer of funds; usually involves large dollar payments.

A financing device that permits an existing loan to be refinanced and new money to be advanced at an interest rate between the rate charged on the old loan and the current market interest rate. The creditor combines or “wraps” the remainder of the old loan with the new loan at the intermediate rate.

Y

The return on a loan or investment, stated as a percentage of price.