Confused about the bank meltdown? Here’s how to speak Wall Street
New York (CNN) Wall Street can seem confusing given its sheer volume of jargon, banking terms, and acronyms.
But this week’s headlines, from the collapse of Silicon Valley Bank to the need for a lifeline from Credit Suisse to instability at First Republic, have made finance a national concern.
So when you hear about the FDIC taking over, a treasury portfolio going down, or a bank being bailed out and bailed out, what exactly does that mean?
Here’s a guide to all the key terms you’ve heard.
It is an acronym for the Federal Deposit Insurance Corporation, an independent government agency that protects depositors in banks. It’s one of the most important names when bank failures are unfolding because it can step in and ensure institutions are functioning properly.
If a bank fails, the standard amount of insurance is $250,000 per depositor, per insured bank, and for each category of account holder.
Financial support for an institution that would otherwise collapse. Bailouts are associated with government intervention, as was so well known during the 2008 financial crisis.
It is important to note that although a government has sent out a rescue mission for SVB and First Republic, they have not been rescued.
How easily a company or bank can convert an asset into cash without losing a ton of its value. Liquidity can be used to gauge the ability to repay short-term loans or other bills. People are comfortable in liquid markets because it’s generally quick and easy to buy and sell.
The most “liquid” asset, as you can probably imagine, is cash.
Deposits, withdrawals and bank runs
Deposits are cash you deposit into your bank account and withdrawals are money you withdraw. A bank run is when a rush of customers withdraw money at once, often due to rumor or panic.
When a bank has a ratio above 100% (like First Republic), it lends more money than it has deposits. This is not a good situation.
Investments backed by the US government – and known to be one of the safest. These include treasury bills, treasury bonds and treasury notes. However, Treasuries are sensitive to broader economic conditions such as inflation and changing interest rates.
As interest rates rose, the value of SVB’s treasury portfolio fell.
Anything that could be used to generate cash flow. These can be tangible assets, such as stocks and buildings, or intangible assets, such as brands
inflows and outflows
Inflow is the money that goes into a business – think product sales and smart investments. Outflow is cash leaving the company.
Technically, they are alternative steps a company takes to achieve its goals. This could include strategies such as diversification and product development.
But what does it really mean? The company may be considering putting itself up for sale.
A quick and en masse sale of a stock due to an imminent fear – like rumors of a bank failure.
Cash or other rewards that companies give to their shareholders.
An action that allows a company to survive. For example, Credit Suisse has just received a $54 billion lifeline from the Swiss central bank, although that hasn’t fully allayed investor fears. Another bank that benefited from a lifeline is First Republic, when 11 banks deposited $30 billion.
This term is often used in the financial sector to describe a financial protection of last resort, much like an insurance policy. It is a secondary source of funding, either through credit support or guaranteed payment for unsubscribed shares.
Exception systemic risk
A system used by the FDIC to allow it to take action against a banking crisis that could affect the entire sector. While it’s fairly rare to enact, the FDIC used that exemption to take over SVB and Signature Bank last week.
This is the Fed’s main way of lending money directly to banks, giving them more liquidity and stability. The loans have a term of up to 90 days. Many banks are currently using this tool because the Fed, in the wake of the SVB, has made it easier to borrow from the discount window to avoid further bank runs.