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Market discipline
Pillar 3 of the new Accord. Encouragement made to financial institutions to improve effective risk management by allowing for comparison, through disclosure requirements, of the performance across the sectors (credit institutions and investment firms).
Market disclosure
Market risk
The risk of losses of on and off balance sheet positions arising from changes in market price. For instance if any individual buys shares at the current market price, the risk that they may fall in price.
Material drivers
Maturity
The remaining time in years that a borrower is permitted to take to fully discharge their contractual obligation (principal, interest and fees) under the terms of a loan agreement.
Minimum capital requirements
The minimum amount of regulatory capital that a financial institution must hold to meet the Pillar 1 requirements for credit, market and operational risk.
Minimum standards
The minimum requirements that a regime must meet in order to meet the requirements of the legislation.
Model outliers
Statistical term to describe observation points that deviate from trend line, which are excluded from model build.
Mortgage backed bonds
A form of capital raising instrument issued by a financial institution that is secured on a given portfolio of mortgages on its balance sheet. Should the bank be wound up the bondholders would have claim on these assets in preference to other creditors.
MRCR
Market Risk Capital Requirement. The capital charge (or capital resources requirement) for market risk.
N2
1st December 2001. The date that the Financial Services and Markets Act 2000 (FSMA 2000) came into force that conferred the responsibility for supervising all financial business in the UK on the Financial Services Authority (FSA).
National discretion
An area of the requirements where national supervisors may choose alternative treatments.
Net Stable Funding Ratio
The ratio of the amount of Available Stable Funding to the required amount of stable funding, which must be greater than 100% to meet the minimum regulatory standard.
Netting of transactions
The ability of a bank to reduce its credit risk exposures, by offsetting the value of any deposits against loans to the same counterparty. For instance if an individual has deposits of £100 and borrowings of £300, then a bank could calculate its capital requirement by assuming the individual had only borrowed £200 (£300-£100).
No compulsion, no prohibition
FSA's implementation principle that it is for senior management in banks to decide which approaches to credit and operational risk they wish to adopt.
NSFR
Obligor
Borrower or borrowing group to whom a loan is extended.
OECD
Organisation for Economic Co-operation and Development group of 30 member countries. Capital adequacy requirements distinguish between exposures in OECD and non-OECD sovereigns and banks.
Off balance sheet
Assets/liabilities that have been committed but not yet transacted. In terms of credit risk, off balance sheet items are obligations to make loans or other payments in the future.
On balance sheet
Items that appear within the bank's balance sheet e.g. loans which have actually been made (see off balance sheet, above).
Operational risk
The risks associated with the internal failure of systems or people, or the risk arising from external events. These are risk events such as internal fraud, the failure of internal IT infrastructure (e.g. for payment and settlement) or external factors such as terrorism, which have the potential to impact on the institutions ability to carry out its business.
Operational Risk Requirement
The Capital Charge for Operational Risk i.e. the amount of regulatory capital that must be assigned for operational risk.
ORR
OTD
The Originate-to-distribute model of lending, where the originator of a loan sells it to various third parties.
Own Funds Directive
Directive (1989/229/EC). The Directive introduced harmonised rules for the definition of tier 1 and tier 2 capital within the EU, implementing the requirements laid out in the 1988 Basel Accord.
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