Definitions of Financial Terms

- Agency securities are highly-secure debt obligations issued by US government-sponsored agencies, such as Fannie Mae and Freddie Mac. Agency securities are slightly more risky than US government securities, such as Treasury bills and loans.
- Call loan is a loan extended by banks and nonbank companies to brokerage firms, that in turn provide loans to investors for stock purchases. A call loan is demandable back at anytime and is secured by the stock securities.
- Collateral is an asset that a borrower provides to a lender to secure the loan transaction.
- Commercial paper is a highly-secure debt instrument with a maturity of less than one year that is issued (sold) by firms to raise funds to cover short-term expenses. Buyers of commercial paper obtain a return that is slightly higher than a return on Treasury bills.
- "Equally safe" instruments are financial products in which market participants invest their cash for a short period of time, and that, in the ordinary course of events, are deemed as safe and liquid as bank deposits and Treasury securities, yet in times of crisis, do not exhibit nearly the same safety and liquidity characteristics that are commonly associated with them.
- Macroprudential policies, both cyclical and structural, aim to contain imbalances in a financial system by limiting credit growth and excessive risk-taking.
- Maturity transformation is a process of financing long-term assets, such as structured products or corporate bonds, with short-term liabilities, such as repurchase agreements and commercial paper.
- Market-based financial system is a financial system, in which most financial transactions, including borrowing and lending, are conducted via financial markets, as opposed to a bank-based financial system, in which most financial intermediation is done by the means of commercial banks.
- Money market is a market for short-term borrowing and lending, ranging from overnight to one year in duration. Commercial paper and repurchase agreements are example of instruments traded on the money market.
- Money market mutual fund is a mutual fund that invests exclusively in low risk, short-term assets, such as Treasury securities, commercial paper, or repurchase agreements.
- Repurchase agreement (repo) is a highly-secure agreement, in which one party sells securities to another party with a commitment to buy the securities back in a predetermined period of time, typically ranging from overnight to several days. In a repo transaction, the sellers of securities – mostly broker-dealers, asset management firms, and insurance companies – receive cash that they can use to finance their own short-term expenses, while the buyers – such as money-market mutual funds, pension funds, and hedge funds – receive a return on their cash investment since the repurchase price of securities is always greater than the original sale price.
- Shadow banking is a group of entities that “perform bank-like functions” (Financial Stability Board, 2011), while being situated outside the commercial banking system, and hence bypassing the stringent controls imposed on traditional banks. The definition covers a wide range of non-bank market-based institutions to capture all intermediation outside commercial banking, including investment banks, broker dealers, hedge funds, asset management firms, insurance companies, government-sponsored enterprises, such as Fannie Mae, and the financial products these firms create and intermediate.
- Shadow run is an evaporation of short-term funding from the money market. For example, in the 2007-2008 crisis, cash-rich entities withdrew short-term funding from repo and commercial paper markets, which are part of the money market.
- Securities lenders lend financial securities, such as stocks and bonds, to investors. A typical example of a securities lending operation is short selling of a stock, in which a securities lender lends a certain number of stock shares to the investor looking to sell the stock short.
- Structured product is a financial instrument whose return is based on a pool of specific assets. For instance, some structured products derive their values based on the performance of a pool of mortgage payments.


Sources

Financial Stability Board. (2011). Shadow Banking: Scoping the Issues: A Background Note of the Financial Stability Board. Basel, Switzerland: Financial Stability Board.