Confused about the bank meltdown? Here's how to speak Wall Street
This text defines some of the most common terms used on Wall Street.
CNN New York --
Wall Street can be confusing due to its sheer volume of banking terminology and acronyms.
However, headlines this week have highlighted the importance of finance, from the financial collapse at Silicon Valley Bank to Credit Suisse's need to provide a lifeline for First Republic's instability, to the collapse of Credit Suisse.
What does it mean to hear that the FDIC is taking control, that a Treasury portfolio is in decline, or that a bank was backed up and bailed-out?
This guide will help you understand the most common terms that you have heard.
It stands for the Federal Deposit Insurance Corporation. This independent agency protects bank depositors. Because it can intervene and ensure that institutions operate properly, it is one of the most important names in banking failures.
The standard insurance amount for bank failure is $250,000 per insured bank and per depositor for each account category.
Financial support for an institution that is at risk of collapse. Bailouts can be associated with government intervention as it did during 2008's financial crisis.
It is important to remember that even though the government sent a rescue team for SVB/First Republic, they weren't rescued by it.
It is amazing how quickly a bank or company can convert an asset into cash without losing any of its value. You can use liquidity to assess your ability to pay short-term loans and other bills. Because it is generally quick and easy to sell and buy in liquid markets, people feel at ease.
Cash is the most liquid asset.
Bank runs, withdrawals, deposits
You can deposit money into your bank account and withdraw it. Bank runs are when clients withdraw large amounts of money at once. This is often caused by panic or rumor.
Ratio of loan-to-deposit
A bank with a ratio higher than 100% (like First Republic) will loan more money than it deposits. This is a bad situation.
The US government backs investments - which are known to be among the most secure. These include Treasury Bills (Treasury Bonds), Treasury Notes (Treasury Notes), and Treasury Bills (Treasury Bills). Treasuries can be affected by changes in interest rates and inflation, but are more sensitive to general economic conditions.
As interest rates rose, the value of SVB’s Treasuries portfolio fell.
Anything that can be used to generate cashflow. This could include tangible assets such as stocks or buildings, as well intangible assets such brand.
Inflows and Outflows
Inflow refers to the money that goes into a company. Think about product sales or smart investments. Cash that is left the business is called outflow.
It's the alternative steps that a company takes to achieve its goals. This could include strategies such as diversifying or product development.
What does this really mean? It could be that the company is considering selling itself.
Rapid and mass selling of stock due to fear, such as rumors of bank collapse.
Companies can gift cash or other rewards to shareholders.
A company can survive by taking an action. Credit Suisse, for example, received a $54billion lifeline from Switzerland's central bank. However, it hasn’t completely quell investor fears. First Republic was another bank to benefit from a lifeline, with 11 banks depositing $30 billion.
The term "last-resort" is used in the financial industry to refer to financial protection. It's almost like an insurance policy. It can be used to provide secondary funds, such as credit support or guaranteed payments for unsubscribed shares.
Systemic risk exception
The FDIC uses this system to take action in the event of a bank crisis that could affect the entire sector. Although it is rare to use this system, the FDIC made an exception last week to take over Signature Bank and SVB.