- Acquiring Bank
A Bank that purchases some or all of the assets and/or assumes some or all of the liabilities of a failed Bank in a Purchase-and-Assumption transaction.
- Adverse Selection
The tendency for higher-risk Banks to opt for Deposit Insurance and lower-risk ones to opt out when membership in a Deposit Insurance System is voluntary.
The act of consolidating several individual accounts of a depositor into one (usually for the purpose of reimbursement).
The act of combining all or part of the assets and liabilities of two or more business units under a single entity.
- Assessment Base
The basis (i.e. insured Deposits, total liabilities, assets) on which the Deposit Insurer charges Premiums to a Member Bank or calculates the levy needed to compensate the Insured Depositors.
- Bail-in within Resolution**
A mechanism to recapitalise a Bank in Resolution or effectively capitalise a Bridge Bank, under specified conditions, through the write-down, conversion or exchange of debt instruments and other senior or subordinated unsecured liabilities of the Bank in Resolution into/for, equity or other instruments in that bank, the parent company of that Bank or a newly formed Bridge Bank, as appropriate to legal frameworks and market capacity.
Any transfer of funds from public sources to a failing or failed Bank, or a commitment by a public authority to provide funds with a view to sustaining the institution (e.g. by way of guarantees), which results in benefit to the shareholders or uninsured creditors of that Bank, or the assumption of risks by the public authority that would otherwise be borne by the Bank and its shareholders, where the funds transferred are not recouped from the institution, its unsecured creditors or, if necessary, the financial system more widely, or the national authority is not reimbursed, whether partially or wholly, for the risks assumed.
- Bank Run
A rapid and significant withdrawal of Deposits from a bank by depositors following a loss of confidence, precipitated by the fear that the Bank may fail and that depositors may therefore suffer losses or lose access to funds.
Any entity which accepts Deposits or repayable funds from the public and is classified under the jurisdiction’s legal framework as a Deposit-taking Institution.
- Blanket Guarantee*
A declaration by authorities that, in addition to the protection provided by limited coverage deposit insurance or other arrangements, certain Deposits and perhaps other financial instruments will be protected.
- Bridge Bank*
An entity that is established to temporarily take over and maintain certain assets, liabilities and operations of a failed Bank as part of the Resolution process.
- CAMELS Rating
A system used to rate Banks according to six factors represented by the acronym “CAMELS” (Capital adequacy, Asset quality, Management capability, Earnings, Liquidity and Sensitivity to market risk).
- Capital Adequacy Ratios
A measure of the amount of a Bank’s capital, typically expressed as a percentage of its risk-weighted assets.
An assertion of the indebtedness of a failed Bank, to a depositor, general creditor, Subordinated Debt holder, or shareholder.
A “loss-sharing” arrangement whereby depositors are covered for a pre-specified portion of Deposits that is less than 100% of their Insured Deposits.
The act or process by which a creditor takes Claim on any assets of a debtor (mortgage, pledge, charge or other form of security) as recourse in the event that the debtor defaults on the original loan/obligation.
- Compulsory Membership
A system wherein all designated Banks are required to be members of a Deposit Insurance System, according to law or agreement.
A person or entity, appointed by a regulatory authority to operate a Troubled Bank in an effort to conserve, manage, and protect the bank’s assets until the Bank has been restored to viability or has been closed by the chartering authority.
The legal procedure provided by law or agreement for the interim management of Troubled Banks.
The spread of the financial problems of one Bank to other Banks or Financial Institutions, usually within the same jurisdiction, or the spread of economic and financial disturbances within a jurisdiction or across jurisdictions.
- Corporate Governance
The systems (strategies, policies, processes and controls) by which an organisation is directed, administered or controlled, including the relationships among stakeholders and the goals for which the organisation is governed.
- Coverage Limit
The maximum amount which a depositor can Claim from or be reimbursed by a Deposit Insurer in the event of a Bank failure.
- Coverage Ratio (by account and/or depositor)
The number of fully covered accounts or depositors divided by the total number of eligible accounts or depositors.
- Coverage Ratio (by value)
The value of Insured Deposits divided by the total value of Eligible Deposits.
- Cross-border Cooperation Arrangements**
Specific cooperation agreements, which enable Resolution Authorities or Deposit Insurers to share information and act collectively, to resolve banks located in multiple jurisdictions in a more orderly and less costly manner.
- De Minimis Clause in Reimbursement
A Deposit level threshold below which a Deposit Insurer is not obligated to pay (i.e. low value Deposits that would not be reimbursed because the administrative costs would exceed the amount of reimbursement).
Any credit balance which derives from normal banking transactions and which a Bank must repay at par under the legal and contractual conditions applicable; any debt evidenced by a certificate issued by a Bank; and any other funds or obligations defined or recognised as Deposits by the law establishing the Deposit Insurance System.
- Deposit Insurance System*
Refers to the Deposit Insurer and its relationships with the Financial Safety-Net participants that support Deposit Insurance functions and Resolution processes.
- Deposit Insurance*
A system established to protect depositors against the loss of their Insured Deposits in the event that a Bank is unable to meet its obligations to the Depositors.
- Deposit Insurer*
A specific legal entity responsible for providing Deposit Insurance, Deposit guarantees or similar Deposit protection arrangements.
- Deposit Reimbursement
A Resolution method that involves the reimbursement of Deposits to Insured Depositors.
- Depositor Preference*
Granting deposit liabilities a higher Claim class than other general creditors against the proceeds of Liquidation of an insolvent Bank’s assets, so that depositors must be paid in full before remaining creditors can collect on their Claims. Depositor Preference can take a number of different forms. For example:
- eligible Depositor Preference gives preference to all deposits meeting the eligibility requirements for deposit insurance coverage;
- insured Depositor Preference gives preference to insured depositors (and the deposit insurer under Subrogation);
- a two-tiered Depositor Preference concept, in which eligible, but Uninsured Deposits have a higher ranking than Claims of ordinary unsecured, non-preferred creditors, and insured depositors have a higher ranking than eligible depositors; and
- general Depositor Preference, in which all deposits have a higher ranking than Claims of ordinary unsecured, non-preferred creditors, regardless of their status (insured/uninsured or eligible/not eligible).
- Differential Premium System*
A Premium assessment system which seeks to differentiate Premiums on the basis of criteria such as individual Bank risk profiles.
- Due Diligence
An On-site Inspection of the books and records of a failing/failed Bank by a potential purchaser, a supervisor, a Resolution Authority, a Deposit Insurer or their agents for a valuation/estimation of assets and liabilities.
- Early Intervention**
Any actions, including formal corrective action, taken by supervisors, Resolution Authorities or Deposit Insurers in response to weaknesses in a Bank prior to entry into Resolution.
- Early Warning System
A model that attempts to predict the likelihood of failure or financial distress of Banks over a fixed time horizon, based on a bank’s current risk profile.
- Eligible Deposits**
Deposits that fall within the Scope of Coverage of a Deposit Insurance System (i.e. they meet the requirements for coverage under a Deposit Insurance System, and are based typically on the type(s) of depositor and/or Deposit).
An electronic store of monetary value on a technical device that may be widely used for making payments to entities other than the E-money issuer. The device acts as a prepaid bearer instrument which does not necessarily involve bank accounts in transactions.
- Enterprise Risk Management (ERM)
The processes and activities used to identify, assess, measure, monitor, control and mitigate risks in respect of the Deposit Insurer’s enterprise as a whole.
- Entry into Resolution**
The formal determination by the relevant authority or authorities that a Bank meets the conditions for Resolution and will consequently be subject to Resolution measures.
- Ex ante Funding*
The regular collection of Premiums, with the aim of accumulating a fund to meet future obligations (e.g. reimbursing depositors) and cover the operational and related costs of the Deposit Insurer.
- Ex post Funding*
A system in which funds to cover deposit insurance obligations are only collected from surviving Banks after a Bank failure.
- Expected Losses (EL)
The average losses that a Deposit Insurance Fund may incur as part of normal Deposit insurer business. Mathematically defined as the mean of the Deposit Insurance fund’s loss distribution.
- Explicit Protection
A system, expressly laid down by statutes or other legal instruments, that stipulates the amount of reimbursement which depositors can expect in the event of a Bank failure, with rules concerning Coverage Limits, the types of instruments covered, the methods for calculating depositor Claims, Funding arrangements and other related matters.
- Extraordinary Contribution
Additional Premiums which can be collected Ex post from members of a Deposit Insurance System if existing system funds prove insufficient to meet its obligations.
- Financial Assistance
Assistance provided to a Troubled Bank by third parties, such as government agencies, Resolution Authorities or Deposit Insurers. This may take various forms, including deposits, loans, guarantees, subsidies, tax allowances, contributions, purchase of assets, subscription of debts, capital injections, or cost-sharing arrangements.
- Financial Inclusion*
The extent to which individuals and entities have access to and utilise formal financial services.
- Financial Institution
Any entity whose principal business involves the provision of financial services or the conduct of financial activities, including deposit-taking, credit intermediation, insurance, investment or securities business, or operating a Financial Market Infrastructure.
- Financial Market Infrastructure**
A multilateral system among participating Financial Institutions, including the operator of the system, used for the purposes of clearing, settling or recording payments, securities, derivatives or other financial transactions. It includes payment systems, central securities depositories, securities settlement systems, central counterparties, and trade repositories.
- Financial Safety-Net*
A framework that includes the functions of prudential regulation, supervision, Resolution, lender of last resort and Deposit Insurance. In many jurisdictions, a department of government (generally a Ministry of Finance or Treasury responsible for financial sector policy) is included in the financial safety-net.
- Fit and Proper*
Fitness tests that usually seek to assess the competence of managers and directors and their capacity to fulfil the responsibilities of their positions, while propriety tests seek to assess their integrity and suitability. Formal qualifications, previous experience and track record are some of the elements focused on by authorities when determining competence.
- Flat-rate Premium
A Premium payable to a Deposit Insurer and assessed at a uniform rate across all Member Banks.
The granting of exemptions or delaying intervention action in relation to Banks as regards compliance with minimum regulatory requirements or intervention criteria.
- Foreign Bank Branch
An establishment of a foreign Bank that is not a separate legal entity in a Host Jurisdiction.
- Foreign Bank Subsidiary
A separate legal entity of a Bank incorporated outside the Home Jurisdiction.
Financing mechanisms necessary to cover the operating expenses and obligations of a Deposit Insurer.
- Global Systemically Important Bank (G-SIB)
A Bank designated by the Financial Stability Board as global systemically important.
- Governing Body
A group of people or an entity, such as a board of directors, that directs the business and affairs of an organisation.
- Home Jurisdiction**
The jurisdiction in which the operations of a financial group are supervised on a consolidated basis.
- Host Jurisdiction
Any jurisdiction, other than the Home Jurisdiction, in which a Bank conducts business activities.
- Implicit Protection
An expectation that some form of government protection would be provided in the event of a Financial Institution failure. Implicit Protection is, by definition, never formally specified. There are no statutory rules regarding the eligibility of Financial Institution liabilities, the level of protection provided or the form which reimbursement will take.
A collateral contract or assurance under which one entity agrees to secure another entity against either anticipated financial losses or potential adverse legal consequences (e.g. damages and costs).
- Indexed Coverage
Limited Coverage Level which is determined or adjusted by the inflation rate or the change in another relevant price index of a jurisdiction.
A situation in which a Bank can no longer meet its financial obligations when due, and/or the value of its assets is less than the total of its liabilities.
- Insured Depositors
Holders of Eligible Deposits that do not exceed the Maximum Coverage Level provided by a Deposit Insurance System.
- Insured Deposits
Eligible Deposits that do not exceed the Maximum Coverage Level provided by a Deposit Insurance System.
- Integrated Protection Scheme (IPS)
A system in which a single agency, usually a pre-existing Deposit Insurer, provides a guarantee or protection to investors in securities firms, and/or policyholders of insurance companies, in addition to depositors in Banks, for the loss of insured funds or unsatisfied Claims in the event of a Member Institution’s failure.
- Interim Payment**
A partial payment made to depositors by a Deposit Insurer before the start of actual full reimbursement. This could be particularly useful in situations when there may be extended delays in reimbursement or when the Deposit Insurer is of the opinion that Insured Depositors urgently require access to their funds.
Any actions, including formal corrective action, taken by supervisors, Resolution Authorities or Deposit Insurers to address concerns that may arise with a Bank.
- Joint Account
An account opened in the names of two or more individuals who have rights of access to the account.
- Least-cost Resolution
A procedure that requires the Resolution Authority to implement the Resolution option, including Liquidation of the failed Bank, that is least costly to the Resolution Authority, the financial system or the Deposit Insurance System.
- Legal Framework**
The comprehensive legal system for a jurisdiction, established by any combination of the following: a constitution; primary legislation enacted by a legislative body that has authority in respect of that jurisdiction; subsidiary legislation (including legally binding regulations or rules) adopted under the primary legislation of that jurisdiction; or legal precedent and legal procedures of that jurisdiction.
- Legal Protection
The set of legal mechanisms by means of which the deposit insurer and persons participating in the Resolution of a failed Bank, including current and former employees, directors, officers and lawfully delegated agents of an organisation, are covered from the effects of Claims and procedures initiated against them for alleged acts and omissions executed in good faith, which occur within the scope of such persons’ mandate.
- Limited-Coverage Deposit Insurance System
A system which guarantees that the principal and/or the interest accrued on Insured Deposit accounts will be paid, up to a specified limit, in the event of Bank Insolvency.
The Winding-Down (or Winding-Up, as used in some jurisdictions) of the business affairs and operations of a failed Bank through the orderly disposition of its assets after its licence has been revoked and it has been placed in Receivership. In most jurisdictions, it is synonymous with “Receivership”.
The legal entity that undertakes the Winding-Down of the failed Bank and the disposition of its assets.
- Liquidity Funding
Additional Funding arrangements to supplement the Deposit insurance funds in situations where the cumulated funds are insufficient to meet the needs of intervention and failure Resolution, including depositor reimbursement.
- Loss Given Default (LGD)
The non-recoverable share of resource exposure (non-returnable to the Deposit insurance fund) from the bankruptcy estate of a liquidated Member Institution. Typically expressed as a percentage of the total exposure.
- Loss Minimiser*
A Mandate in which the Deposit Insurer actively engages in a selection from a range of least-cost Resolution strategies.
- Loss-sharing Agreement
An agreement in a financial transaction, in which the Resolution Authority or the Liquidator agrees to share with the acquirer losses on certain types of loans. Loss-sharing may be offered in connection with the sale of classified or non-performing loans that otherwise might not be sold to an acquirer at the time of Resolution.
A set of official instructions describing the Deposit Insurer’s roles and responsibilities. There is no single Mandate or set of Mandates suitable for all Deposit Insurers. When assigning a Mandate to a Deposit insurer, jurisdiction-specific circumstances must be taken into account. Mandates can range from narrow “paybox” systems to those with extensive responsibilities, such as preventive action and loss or risk minimisation/management, with a variety of combinations in between. These can be broadly classified into four categories: Paybox, Paybox plus, Loss Minimiser and Risk Minimiser.
- Market Discipline
A situation in which depositors, creditors or investors assess the risk characteristics of a Bank and can influence Bank risk-taking behaviour by threatening to withdraw funds from the institution.
- Member Bank
A Bank that is a member of a Deposit Insurance System.
- Moral Hazard*
Arises when parties have incentives to accept more risk because the costs that arise from such risk are borne, in whole or in part, by others.
Refers to a situation before institutional Insolvency, and may also include circumstances in which: (i) regulatory capital or required liquidity falls below specified minimum levels; (ii) there is a serious impairment of the Bank’s access to Funding sources; (iii) the Bank depends on official sector financial assistance to sustain operations or would be dependent in the absence of Resolution; (iv) there is a significant deterioration in the value of the Bank’s assets; (v) the Bank is expected in the near future to be unable to pay liabilities as they fall due; (vi) the Bank’s business plan is non-viable; and/or (vii) the Bank is expected in the near future to be balance-sheet insolvent.
- On-site Inspection
An appraisal by the banking supervisor or the Deposit Insurer, on the premises of the Bank, which includes an examination of the Bank’s books, records and internal controls.
- Open-bank Assistance
A Resolution method taken by the Resolution Authority, in which a Bank in danger of failing receives assistance in the form of a direct loan, an assisted merger, a purchase of assets, or other means.
- Operational Independence
The ability of an organisation to fulfil its Mandate using the legislated powers and means assigned to it, without undue influence from external parties.
- Paybox Plus*
A Mandate in which the Deposit Insurer has additional responsibilities, such as certain Resolution functions (e.g. financial support).
A Mandate in which the Deposit Insurer is only responsible for the reimbursement of Insured Deposits.
- Payment Agent
Entities (e.g. Banks, postal banks) authorised by a Deposit Insurer to reimburse Insured Depositors on its behalf.
The amount that a Member Institution pays to the Deposit Insurer in the manner and time frames prescribed by legislation.
- Probability of Default
The probability that a Bank will not be able to meet its obligations over a particular time horizon.
- Prompt Corrective Action (PCA)
A set of progressive corrective actions taken by the supervisory authorities against Financial Institutions exhibiting progressively deteriorating financial performance or behaviours, with the goal of identifying and addressing financial or operational weaknesses that threaten the viability of a Financial Institution while the problems are still small enough to manage.
- Public Awareness Programme
A comprehensive programme designed to disseminate information to the public regarding the benefits and limitations of a Deposit Insurance System, including how and when depositors can gain access to their funds in the event of a Bank failure.
- Public policy Objectives*
Refers to the goals which the Deposit Insurance System is expected to achieve.
- Purchase and Assumption Transaction (P&A)
A Resolution method in which a healthy Bank or a group of investors assume some or all of the obligations, and purchase some or all of the assets of the failed Bank.
The return of part of a Deposit insurance Premium payment, representing some deduction from the full amount previously paid.
The amount of collections on the assets of a failed Bank.
- Recovery Plan**
A plan to guide the recovery of a distressed Bank. In the recovery phase, the Bank has not yet met the conditions for resolution or entered the resolution regime. There should be a reasonable prospect of recovery if appropriate recovery measures are taken. The recovery plan should include measures to reduce the risk profile of an entity and conserve capital, as well as strategic options such as the divestiture of business lines and restructuring of liabilities.
- Recovery Rate
The ratio of collections to the book value of a failed Bank’s assets.
- Resolution Authority*
A public authority that, either alone or together with other authorities, is responsible for the Resolution of Financial Institutions established in its jurisdiction (including resolution planning functions).
- Resolution Costs
The sum of the expenditures and obligations incurred by the Resolution Authority for a given resolution method, including any immediate or long-term obligations and any direct or contingent liabilities for future payment, less the recoveries on assets of a failed Bank.
- Resolution Plan**
A plan intended to facilitate the effective use of Resolution Powers by the Resolution Authority, with the aim of making feasible the resolution of any financial institution without severe systemic disruption and exposure of taxpayers to loss while protecting systemically important functions. It serves as a guide to the authorities for achieving an orderly Resolution, in the event that recovery measures are not feasible or have proven ineffective.
- Resolution Powers**
Powers available to Resolution Authorities under legal frameworks for the purposes of Resolution, and exercisable without the consent of shareholders, creditors, debtors or the entity in resolution.
- Resolution Regime**
The elements of the legal framework and the policies for planning, preparing for, carrying out and coordinating a Resolution, including the application of Resolution Powers.
A disposition plan and process for a non-viable Bank. Resolution may include: Liquidation and depositor reimbursement; transfer and/or sale of assets and liabilities; establishment of a temporary bridge institution; and write-down or conversion of debt to equity. Resolution may also include the application of procedures under Insolvency law to parts of an entity in Resolution, in conjunction with the exercise of Resolution Powers.
- Risk Minimiser*
A Mandate in which a Deposit Insurer has comprehensive risk minimisation functions, including risk assessment/ management, a full suite of Early Intervention and Resolution Powers, and in some cases, prudential oversight responsibilities.
- Scope of Coverage
The types of Deposits and depositors eligible for deposit insurance coverage.
- Set-off Arrangement
An arrangement in which the Claim of a creditor against an insolvent Bank is to be deducted from a Claim of that Bank against the same creditor.
- Situational Analysis
An examination that Deposit Insurers undertake to assess macroeconomic 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 legal, prudential regulatory and supervisory framework; and accounting and disclosure regimes.
- Start-up Funding
The Funding received by a newly established Deposit Insurance System as initial contributions to the deposit insurance fund, typically from Financial Institutions, the government, and/or the central bank. This Start-up Funding or Seed Funding does not include the following:
(1) Support from the government and/or other financial safety-net players in the form of an initial endowment or capital for administration costs, staffing, and operational expenses, separately recorded from the deposit insurance fund;
(2) Funding support from international organisations or technical assistance agencies with the explicit agreement that such funding will not be repaid.
- Statute of Limitations
The law that sets a date after which no Claims can be submitted by the claimant against the debtor or defendant.
- Stress Testing
A range of simulation techniques used to assess the vulnerability of a Bank’s financial position under different scenarios, such as major changes to the macroeconomic environment, or exceptional but plausible events.
- Subordinated Debt
A debt instrument that ranks lower than other ordinary Claims or instruments in the priority of its Claim on the issuer’s assets.
The substitution of one party (e.g. the Deposit Insurer) for another (e.g. the Insured Depositor) with reference to a lawful Claim, demand or right, so that the party which substitutes succeeds to the rights of the other in relation to the debt or Claim, and its rights and remedies.
- Systemic Risk
A risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy.
- Systemically Important Financial Institution (SIFI)**
A Financial Institution or a group that, because of its size, complexity and systemic interconnectedness would, in the view of the relevant authorities, cause significant disruption to the domestic or broader financial system and economic activity, if it were to fail in a disorderly manner.
- Target Fund Size*
The size of the Ex ante Deposit insurance fund, typically measured as a proportion of the assessment base (e.g. total or insured deposits), sufficient to meet the expected future obligations and cover the operational and related costs of the Deposit Insurer.
- Termination of Deposit Insurance Membership
The power of a Deposit Insurer to terminate the membership of a Member Institution if it does not meet some specific qualifications set by the Deposit Insurer.
- Too big to fail (TBTF)
The belief that an institution is so systemically important that it cannot be allowed to fail, as its failure would cause instability across the financial system as a whole and disruption to the economy at large.
- Troubled Bank
A Bank that has, or will have, impaired liquidity or solvency unless there is a major improvement in its financial resources, risk profile, strategic business direction, risk management capabilities and/or quality of management.
- Unexpected Losses
Extraordinary (unexpected) losses of the Deposit Insurance fund that can occur under unlikely, yet possible circumstances with unfavourable outcomes. Mathematically defined as the deviations from the average (Expected Losses) with a certain level of probability, i.e. within a certain level of confidence.
- Uninsured Deposits
The types or amounts of Deposits that are not covered by a Deposit Insurance System.
The final phase in the dissolution of a failed Bank, in which assets are liquidated and creditors’ claims are settled.
- Withheld Deposits
Deposits that are temporarily suspended from payment by the Deposit Insurer due, in part, to insufficient information during reimbursement.
- (*) denotes definition from the Revised Core Principles for Effective Deposit Insurance Systems (November 2014)
- (**) denotes FSB definition
- Terms in bold refer to those terms that are defined in this document
- The definitions from the Draft Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions are subject to change as the Methodology is updated.