I

Idiosyncratic stress

A firm-specific stress scenario where the market and/or customers perceive that the particular firm is in difficulties, leading to a loss of confidence in the firm’s ability to continue business as usual.

ILSA

Individual Liquidity Systems Assessment. Now replaced by the ILAAP.

Individual Capital Assessment

A firm's own assessment of its capital requirements resulting from its ICAAP.

Individual Capital Guidance

Guidance (formerly) given by the supervisor (FCA/PRA) on the amount and quality of capital resources which the FCA/PRA considers that a firm needs to hold at all times.  Now replaced the supervisor's Pillar 2A assessment.

Individual Liquidity Guidance

Guidance given by the PRA on (i) the amount and makeup of liquidity resources that a firm needs to hold and (ii) what the PRA considers to be an appropriate funding profile for the firm.

Inherent Risk

The level of risk that exists before mitigation. This is to distinguish it from residual risk.

Instrument

A financial contract that can be traded, either a cash instrument whose value is determined directly by markets or a derivative contract.

Interbank lending

Lending by one bank to another.

Interest rate risk

Interest rate risk is the exposure of a bank's financial condition to adverse movements in interest rates. Accepting this risk is a normal part of banking and can be an important source of profitability and shareholder value.

Interest Rate Swap

An agreement between two counterparties where one stream of future interest payments is exchanged for another based on a notional principal amount. Interest rate swaps often exchange a fixed payment for a floating payment that is linked to an interest rate (e.g. LIBOR). Most swaps are traded over-the-counter.

Internal Capital Adequacy Assessment Process

Assessment process (or report of assessment) under which a bank considers whether it has adequate capital to meet both its business requirements and regulatory obligations.

Internal Controls

These include audits or other appropriate oversight mechanisms to ensure the integrity of the information used by senior officials in overseeing compliance with policies and limits.

Internal Estimates

Internal estimates are those parameters for use in models that have been generated by using the banks own loss experiences. These estimates are normally subject to some qualitative criteria.

Internal Limits

Self-imposed parameters designed to set boundaries for the levels of risks or exposure permitted. For instance a bank may limit the value of the amount of exposure it is allowed to have to some business lines.

Internal Liquidity Adequacy Assessment Process

Assessment process (or report of assessment) under which a bank considers the type and quality of liquidity resources it thinks it should hold against the sources of liquidity risk.

Internal Model Method

Under (Basel II) IMM banks that meet qualifying supervisory standards are permitted to use their 'own estimates' developed through internal models for calculating counterparty credit risk exposure. IMM is applicable to both OTC derivatives and SFTs.

Internal models or processes

The firm's process for generating estimates of risk components for use in the calculation of regulatory or economic capital requirements. These models are usually computer simulations that use past data or equivalent cohorts as a guide to estimating the characteristics of a type of risk. For instance, past data on mortgage defaults may be used to generate the probability of default of a new mortgage borrower.

Internal Rating Based Approach

Approach to credit risk under which a bank may use internal estimates to generate risk components for use in their Basel II credit risk capital assessment. There are two approaches: Foundation (FIRB) and Advanced (AIRB).

Internal risk management

A financial institution's internal process/strategy for handling the risk inherent in their operations. This will also include how management are involved in the monitoring of these risks and what systems the organisation has to reduce the probability or severity of risk events.

Investment firm

A firm responsible for dealing, arranging and managing qualifying investment items as defined within the scope of the Investment Services Directive.

ISDA

International Swaps and Derivatives Association.

L

Large Exposure

The total exposure of a bank to a counterparty, or group of connected counterparties, that represents a significant concentration risk. In regulatory terms, any aggregate exposure that exceeds 10% of a bank’s eligible capital is considered to be a large exposure.

Level 1 Assets

The highest quality and most liquid assets that may be held to meet LCR regulatory requirements; generally, cash, central bank reserves and zero-weighted assets backed by sovereigns and central banks.

Level 2 Assets

Assets that are highly liquid and qualify as HQLA (but not Level 1). These are categorised as Level 2A assets, such as sovereign debt weighted 20% and high quality (non-FI) corporate debt and covered bonds; and Level 2B assets, such as certain asset-backed securities, certain shares, qualifying (non-FI) corporate debt and covered bonds.

Leverage Ratio

Commonly used to mean the ratio of assets to the firm’s capital base. Under the Basel III definition, the bank’s capital is restricted to Tier 1 Capital; the 'exposure measure' goes beyond on-balance sheet assets to include securities funding transactions and derivative exposures together with off-balance sheet items (reduced to 10% where unconditionally cancellable).

LIBA

London Investment Banking Association.

LIBOR

London Interbank Offered Rate. A daily published rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (interbank market).

Liquidity Contingency Plan

A plan of contingency measures for managing and preserving liquidity in various adverse situations.

Liquidity Coverage Ratio

The ratio of a bank’s stock of unencumbered, high quality liquid assets (HQLA) to net cumulative cash outflows over a 30 calendar day period. To meet the Basel III definition, the ratio must be greater than 100% for a combined firm-specific (idiosyncratic) and market-wide shock scenario. Net cash outflows must be calculated according to the scenario parameters set by the regulator.

Liquidity Metric Monitor

Liquidity monitoring tool provided by the PRA, originally designed for banks to monitor their ILG as well as a range of other liquidity metrics.

Liquidity Supervisory Review and Evaluation Process

The process under which the adequacy of a firm’s liquidity resources and ILAAP is assessed by the PRA.

Loan to Value

The ratio (percentage) of the value of a loan to the value of the security taken against it; usually used in relation to mortgages.

Long-term Repo

Many repos are overnight transactions, with the sale taking place one day and being reversed the next day. Long-term repos can extend for a month or more.

Loss Given Default

Reflects the amount that would be lost should a counterparty default. (Usually expressed as a percentage).

Low-point Risk

The risk that a firm has insufficient HQLA to cover peak outflows for each and every day within the LCR 30-day window.

LRM

Liquidity risk management.

LRP

Liquidity risk profile.