RBS 2011 Annual Report Download - page 483

RBS Group 2011 481
Liquidity coverage ratio (LCR) -the ratio of the stock of high quality liquid
assets to expected net cash outflows over the following 30 days. High-
quality liquid assets should be unencumbered, liquid in markets during a
time of stress and, ideally, be central bank eligible. These include, for
example, cash and claims on central governments and central banks.
The Basel III rules require this ratio to be at least 100% and it is expected
to apply from 2015.
Liquidity enhancements - make funds available to ensure that the issuer
of securities, usually a commercial paper conduit, can redeem the
securities at maturity. They typically take the form of a committed facility
from a third-party bank.
Loan impairment provisions -loan impairment provisions are established
to recognise incurred impairment losses on a portfolio of loans classified
as loans and receivables and carried at amortised cost. It has three
components: individually assessed loan impairment provisions,
collectively assessed loan impairment provisions and latent loss
provisions.
Loan-to-deposit ratio -the ratio of loans and advances to customers net
of provision for impairment losses and excluding reverse repurchase
agreements to customer deposits excluding repurchase agreements.
Loan-to-value ratio - the amount of a secured loan as a percentage of the
appraised value of the security e.g. the outstanding amount of a
mortgage loan as a percentage of the property's value.
Loss given default (LGD) - the economic loss that may occur in the event
of default i.e. the actual loss - that part of the exposure that is not
expected to be recovered - plus any costs of recovery.
Market risk -the risk that the value of an asset or liability may change as
aresult of a change in market factors such as foreign exchange rates and
commodity prices, interest rates, credit spreads and equity prices.
Master netting agreement - an agreement between two counterparties
that have multiple derivative contracts with each other that provides for
the net settlement of all contracts through a single payment, in a single
currency, in the event of default on, or termination of, any one contract.
Medium term notes (MTNs) - debt securities usually with a maturity of five
to ten years, but the term may be less than one year or as long as 50
years. They can be issued on a fixed or floating coupon basis or with an
exotic coupon; with a fixed maturity date (non-callable) or with embedded
call or put options or early repayment triggers. MTNs are generally issued
as senior unsecured debt.
Monoline insurers - entities that specialise in providing credit protection
against the notional and interest cash flows due to the holders of debt
instruments in the event of default. This protection is typically in the form
of derivatives such as credit default swaps.
Mortgage-backed securities - asset-backed securities for which the
underlying asset portfolios are loans secured on property. See
Residential mortgage backed securities and Commercial mortgage
backed securities.
Mortgage servicing rights - the rights of a mortgage servicer to collect
mortgage payments and forward them, after deducting a fee, to the
mortgage lender.
Mortgage vintage - the year in which a mortgage loan was made to the
customer.
Negative equity mortgages - mortgages where the value of the property
mortgaged is less than the outstanding balance on the loan.
Net interest income - the difference between interest receivable on
financial assets classified as loans and receivables or available-for-sale
and interest payable on financial liabilities carried at amortised cost.
Net interest margin - net interest income as a percentage of average
interest-earning assets.
Net stable funding ratio (NSFR) -introduced by Basel III, the NSFR is the
ratio of available stable funding to required stable funding over a one year
time horizon, assuming a stressed scenario. The ratio is required to be
over 100% with effect from 2015. Available stable funding would include
such items as equity capital, preferred stock with a maturity of over one
year and liabilities with a maturity of over one year. The required amount
of stable funding is calculated as the sum of the value of the assets held
and funded by the institution, multiplied by a specific required stable
funding factor assigned to each particular asset type, added to the
amount of potential liquidity exposure multiplied by the associated
required stable funding factor. The NSFR is subject to an observation
period and to review to address any unintended consequences.
Non-conforming mortgages - mortgage loans that do not meet the
requirements for sale to US Government agencies or US Government
sponsored enterprises. These requirements include limits on loan-to-
value ratios, loan terms, loan amounts, borrower creditworthiness and
other requirements.
Operational risk -the risk of loss resulting from inadequate or failed
processes, people, systems or from external events.
Option - an option is a contract that gives the holder the right but not the
obligation to buy (or sell) a specified amount of the underlying physical or
financial commodity, at a specific price, at an agreed date or over an
agreed period. Options can be exchange-traded or traded over-the-
counter.