Banker's Glossary
L/C or LC
See letter of credit and line of credit.
Laddered maturities
A maturity pattern within a portfolio in which maturities of the assets in the portfolio are equally spaced. Over time, the shortening of the remaining lives of the assets provides a steady source of liquidity or cash flow.
Land contract
Contractual arrangement used in some states under which a buyer purchases real estate from a seller over a period of time, usually by making periodic installment payments. Title is not conveyed to the buyer until the final payment is made. Also called an article of agreement.
Land flip
A colloquial expression used by some lenders and real estate developers to describe an abuse intended to overstate the purchase price of real estate collateral. Typically a land flip involves a sale of real estate at an inflated price that is not an arm’s length transaction. An example of this kind of abuse might be a property purchased by X for $50,000 and one year later sold to a partnership involving X for $100,000.
Landlord’s waiver
A loan document used in a number of different situations. Most often used when inventory or equipment lenders are secured by collateral located in premises leased by the borrower. In those cases, the secured lender may request a landlord’s waiver to establish the lender’s right to enter the premises and to control or remove the collateral. May also be used to obtain a landlord’s permission and waiver of rights when a lender takes a security interest in leasehold improvements made by a borrower/tenant.
LAR
See loan application register.
Last in, first out (LIFO)
One of the methods for accounting for business inventory permitted by generally accepted accounting principals (GAAP).
Late charges
Charges that are assessed for late payments of principal or interest on a loan. Late charges may be determined as a percentage applied to the unremitted payment or as a fixed dollar amount. Some states limit late charges. Federal Regulation AA prohibits a practice called cascading late charges for consumer loans.
LBO
See leveraged buyout.
Lease
A contract providing for the use of property in which one party (the owner, landlord, or lessor) allows another party (the tenant or lessee) to use the property in exchange for value given to the lessor. May cover either real or personal property. Long-term, noncancelable leases, called capital leases, must be carried on the lessee’s balance sheet as liabilities under GAAP. When they are recorded on the lessee’s balance sheet, they are said to be capitalized. Short-term, cancelable leases, sometimes called operating leases, do not have to be capitalized.
Leasehold improvements
Things such as walls, air conditioners, and shelves that are added to leased space.
Leasehold mortgages
Collateral interests in real property leased by the borrower. For example, a borrower may own a building located on leased land. In those cases, a lender will take a leasehold mortgage covering the borrower’s interest in both the leased land and the building.
Lease purchase agreement
A lease that includes an option for the lessee to purchase the leased property at a time and under terms specified in the lease.
Ledgering
A type of secured, working capital lending. See dominion of funds.
Legal risk
The risk to earnings or capital arising from unenforceable contracts, lawsuits, adverse judgments, or nonconformance with laws, rules, and regulations. One of six risks defined by the Federal Reserve. The Office of the Comptroller of the Currency (OCC) uses a slightly narrower definition for what it calls compliance risk.
Lender’s loss payable clause
A provision in a hazard insurance contract stipulating that in the event of a loss, proceeds will be paid to a secured party. Usually used when the insured property is personal property. This is the personal property version of the standard mortgagee clause. Unlike a more common loss payable clause, the lender’s loss payable clause is actually a stronger, much broader type of insurance policy stipulation. Under the lender’s loss payable clause, the secured party is protected against any act or neglect of the insured that may otherwise invalidate the policy for the owner. (Some states use a different form that also provides broader coverage than the simple loss payable clause.)
Lender liability
An informal term referring to various manifestations of actual or potential legal liability arising from the conduct of a financial institution lender. Generally, lender liability arises from allegations that a lender has violated a duty (whether implied or contractual) of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders.
Letter of credit
An obligation issued by a bank on behalf of a bank customer to a third party. There are many different kinds of letters of credit. The two most common are commercial letters and standby letters. A commercial or trade letter of credit is a bank promise to pay the third party for the purchase of goods by the bank’s customer. A standby letter of credit is a bank promise to pay the third party in the event of some defined failure by the bank’s customer, usually, but not always, a failure to pay. Standby letters of credit are often used as credit enhancements for securities.
Letter of credit right
A right to payment or performance under a letter of credit whether or not the beneficiary has demanded or is at the time entitled to demand payment or performance. The term does not include the right of a beneficiary to demand payment or performance under a letter of credit. A category of personal property collateral defined by the 2000 revisions to Article 9 of the Uniform Commercial Code.
Letter stock
Stock that bears a restrictive legend on the certificate that limits the owner's ability to sell. All letter stock is restricted stock.
Level factor amortization
Perhaps the best method of accounting for MBS premiums and discounts is the change in factor or level factor amortization method. Under the change in factor method, the amount of monthly premium amortization or discount accretion is calculated to be proportionate to the amount of the monthly principal payments. The alternative amortization method is called the effective interest method.
Leverage
The amount of the owners’ or stockholders’ money relative to the money that lenders, suppliers and others have contributed to the firm. The ratio of owners' money to other peoples' money.
Leveraged buyout
Corporate acquisitions in which the acquiring company borrows most or all of the funds needed to finance the purchase. In a typical leveraged buyout, the buyer intends to repay the finance debt from funds gained from either the sale of assets owned by the acquired company or from profits earned by the acquired company. The high level of debt associated with almost all leveraged buyouts makes them relatively high-risk transactions. Thus, while some bank financing is often involved, some form of junior debt is needed. The junior debt in leveraged buyout may come from a lender willing to take a subordinate position. This type of financing is often called mezzanine financing. The funds needed for a leveraged buyout may also be raised by issuing junk bonds.
Leveraged leases
A form of lease financing in which the lessor/owner supplies only a portion of the cost of acquiring the leased property as equity. The remaining portion of the purchase price of the leased equipment is borrowed from long-term lenders.
LGIPs
See local government investment pools.
Liability insurance
Insurance that protects a party from various types of claims. Typically liability insurance protects the insured from losses resulting from property damage claims or from bodily injury claims. Construction lenders usually require contractors to obtain and carry liability insurance to protect against claims resulting from the contractor’s operations.
Liability management
A term used to describe the general banking strategy of focusing on the management of the amount, maturity, and cost of core deposits and purchased funds, with an emphasis on the latter. Under liability management, bankers make loans and loan commitments to meet market conditions without concern for funding. Liability managers increase or decrease the amount of funds obtained by the bank as necessary to provide whatever funding is needed at any given time.
Liability sensitive
Describes an entity's position when an increase in interest rates will hurt the entity and a decrease in interest rates will help the entity. An entity is liability sensitive when the impact of the change in its assets is smaller than the impact of the change in its liabilities after a change in prevailing interest rates. This occurs when either the timing or the amount of the rate changes for assets cause interest income to change by more than the change in interest expense. The impact of a change in prevailing interest rates may be measured in terms of the change in the value of assets and liabilities. In that case, a liability sensitive entity’s economic value of equity decreases when prevailing rates rise or increase when prevailing rates fall. Alternatively, the impact of a change in prevailing rates may be measured in terms of the change in the interest income and expense for assets and liabilities. In that case, a liability sensitive entity’s earnings or net income decreases when prevailing rates rise and increases when prevailing rates fall.
LIBID
See London Interbank Bid Rate.
LIBOR
See London Interbank Offered Rate.
Lien
An interest or encumbrance held by a creditor in a debtor's real or personal property for the satisfaction of a debt. The lien may arise as a result of a consensual contract between the debtor and the creditor such as a security agreement or a mortgage. Alternatively, liens may be established by courts or by statutes. See consensual lien, judicial lien and statutory lien.
Lien search
The process or the result of investigations into the outstanding liens in a pledgor’s or potential pledgor’s property. The lien search not only investigates the existence of all liens but also the relative priority of those liens. For personal property, a lien search may be obtained in most states by submitting a standard form, called a UCC-4, to the appropriate filing office. Secured lenders often conduct preclosing lien searches prior to loan closings and postclosing lien searches shortly after loan closings.
Life estate deed
A document used to convey title in real estate from one party to another but only upon the death of the grantor. A life estate allows the grantor the right to own or possess real estate until his or her death. Upon the life estate holder’s death, the property is automatically conveyed to another person or persons who hold a remainder interest. The holder of a remainder interest is often called a remainderman because he or she gets the remaining interest in the property.
Lifetime cap
The upper limit for increases in the interest rate on a floating-rate or adjustable-rate instrument.
LIFO
See last in, first out.
LIFO reserve
The amount by which the book value of inventory is lower than it would be if first in, first out (FIFO) rather than LIFO accounting was applied to value the inventory. Only relevant to firms reporting inventory on a LIFO basis.
Limited appraisal
One of two types of appraisals defined by the Uniform Standards of Professional Appraisal Practice (USPAP). Under USPAP, a limited appraisal may be performed when the appraiser invokes a USPAP provision that it calls the departure provision. Limited appraisals may only deviate from the requirements set forth for complete appraisals in specifically identified areas. See appraisal, complete appraisal and evaluation.
Limited guaranty
A guaranty agreement that includes a statement that limits the guarantor's liability to the bank to a defined amount.
Limited liability company
Legal entity that is a special kind of corporation. A limited liability company offers shareholders the limitations on personal liability that are available to stockholders in C or S corporations. At the same time, limited liability companies are taxed very much like partnerships; that is, the income is allocated to the stockholders for tax purposes. Generally, limited liability companies offer owners the same advantages of the more familiar S corporations but have fewer restrictions.
Limited partnership
A partnership with at least one general partner and at least one, often more, limited partner(s). The general partner has unlimited liability for the debts of the partnership, but the limited partners are only liable to the extent of their investment in the partnership.
Linear yield curve smoothing
The simple process of "drawing" straight lines to connect the knot points. The simplest but least accurate technique for yield curve smoothing. See smoothing.
Line of credit
A type of credit facility. The specific meaning of the term varies from bank to bank. Since the various uses often cause confusion, two definitions are presented here. In this book, the second definition is used.
(1) A type of loan that permits a borrower to draw funds, up to a specified maximum, for a defined period of time. Sometimes called a nonrevolving line of credit.
(2) Any loan that permits the borrower to borrow funds up to a specified maximum, make repayments in any amount at any time, and obtain any number of readvances so long as the maximum is not exceeded. Sometimes called a revolving line of credit. The distinguishing feature of a line of credit is that it rebounds, which means that the amount borrowed can be paid down and reborrowed, or readvanced, as the borrower's needs change.
Liquidity
Both the capacity and the perceived capacity to meet all obligations whenever due and to take advantage of business opportunities important to the future of the enterprise. The capacity and the perceived ability to meet known near-term and projected long-term funding commitments while supporting selective business expansion.
Liquidity contingency risk
The risk that future events may require a materially larger amount of liquidity than the financial institution currently requires. One of the three primary components of liquidity risk along with mismatch liquidity risk and market liquidity risk. Also called prudential liquidity risk, funding risk or stand-by liquidity risk. Contingency risk arises from two closely related elements. See liquidity franchise risk and liquidity option risk.
Liquidity franchise risk
The risk arising from the implied obligation of a bank to continue making new loans or other new business related cash flows in order to preserve its business franchise even though it may be having funding difficulties. One of two types of liquidity contingency risk. Also called liquidity-implied option risk. See liquidity contingency risk and liquidity option risk.
Liquidity gap or liquidity gap risk
See liquidity mismatch.
Liquidity in the ordinary course of business
One of the three main types of liquidity-need environments. An institution's "going concern" need for liquidity. Funding required for the normal ebb and flow of cash in the course of conducting bank business. Includes seasonal funding fluctuations. See bank-specific liquidity risk and systemic liquidity risk.
Liquidity mismatch or liquidity mismatch risk
The expected amount of liquidity risk based on the mismatch between contractual amounts and dates for inflows and outflows. Also called funding gap, liquidity gap, or term liquidity risk. One of the three primary components of liquidity risk along with contingency risk and market liquidity risk.
Liquidity option risk
The risk that actual cash flows will occur on dates or in amounts different from the contractual maturity dates and amounts. Put option risk includes the rights of saving, checking, and money market depositors to withdraw funds. It also includes the right of certificate of deposit (CD) holders to make early withdrawals. Call option risk includes the rights of line of credit borrowers to draw down on their committed lines of credit. One of the two types of liquidity contingency risk. See liquidity contingency risk and liquidity franchise risk.
Liquidity preference
(1) A desire among some holders of financial instruments to keep some or all of their funds in liquid instruments, that is, instruments that either mature in a short period of time or that can be readily sold with small risk of loss.
(2) A theory that attempts to explain the shape of yield curves. Under the liquidity preference hypothesis, the shape of yield curves is determined by the collective expectations of investors (the expectations hypothesis and implied forward rates) but with an upward bias at least for short- term rates caused by investors' preferences for liquidity.
Liquidity premium
(1) The portion of a security's yield that is attributable to investors' desire to hold liquidity.
(2) The difference or spread paid for liquidity.
Liquidity reserves
The amount of unused capacity to meet unexpected reductions in funding or unexpected new funding requirements in the future. For much of the twentieth century, liquidity reserves were defined as primary reserves (cash and deposits due from banks) and secondary reserves (short-term, marketable investment securities). However, the term is used more broadly today.
Liquidity risk
(1) For a financial institution, the risk that not enough cash will be generated from either assets or liabilities to meet cash requirements. For a bank, cash requirements are primarily made up of deposit withdrawals or contractual loan fundings. One of six risks defined by the Federal Reserve and one of nine risks defined by the Office of the Comptroller of the Currency (OCC). The OCC defines liquidity risk as the risk to earnings and capital arising from a bank’s inability to meet its obligations when they become due, without incurring unacceptable losses. The Federal Reserve uses a broad definition of liquidity risk as the potential that an institution (a) will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding (referred to as "funding liquidity risk") or (b) cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions ("market liquidity risk").
(2) For a security, the risk that not enough interested buyers will be available to permit a sale at or near the currently prevailing market price.
Liquidity stock
See liquidity reserves.
Load
A sales charge paid by an investor in some mutual fund shares or annuities. The sales charge may be a front-end charge, a back-end charge, or a 12b-1 charge. Also, an expression used to describe a mutual fund that imposes sales charges on investors. The opposite of a no load mutual fund. See 12b-1 fee, back-end load and front-end load.
Loan application register (LAR)
A document required by the Home Mortgage Discolure Act (HMDA) to gather information indicative of possible discrimiantion. Lending institituions are required to collect information on the sex, race and ethnicity of loan applicants. At the end of each calendar year, the lender must provide the loan application register to its primary regulator no later than March 1 of the following year. Once the information is analyzed and returned in the form of a disclosure statement, the lender must make the information available to the public at its home office and, if requested, at any branch location.
Loan participation
An arrangement in which two or more lenders share in a loan to one borrower.
Loan-to-value (LTV) ratio
The name used to refer to a credit analysis ratio that measures collateral coverage. To calculate the LTV ratio, the total amount of the borrower's obligations to the bank is divided by the total calculated value for the collateral. For example, if the total collateral value is estimated to be $1,000,000 and the total amount of the borrower's obligations to the bank is $800,000, then the LTV ratio is 0.80 or 80percent.
LOC
See letter of credit and line of credit.
Local clearing house
An organization established by the banks in a local area to facilitate the presentment and exchange of checks between those banks.
Local government investment pools (LGIPs)
Commingled investment pools. The public sector equivalent of money market mutual funds. LGIPs are usually but not always created by states for the benefit of their local governments. Sometimes these pools are managed by the states.
Lockbox
(1) A cash management arrangement designed to reduce delays in depositing funds into the payee’s bank accounts. A post office box that is established by a bank to receive checks for its cash management customers. Lockboxes are utilized to accelerate deposits to the bank by eliminating internal processing by the payee organization. The bank need not maintain a separate post office box for each lockbox customer. Instead, it can sort mail received in a common box.
(2) A secured lending control arrangement. Under this arrangement, the borrower's account debtors mail their payments into a post office box that is controlled by the bank. The funds are then applied by the bank to reduce a loan to the borrower that is secured by those accounts receivable. The bank need not maintain a separate post office box for each lockbox customer. Instead, it can sort mail received in a common box.
Lock-in period
See call protection.
Lockout
(1) A prohibition, usually, but not always, for a specified period of time. For example, a prohibition against prepayment of a loan.
(2) The period of time before a REMIC investor will begin receiving principal payments.
LOCOM
See lower of cost or market.
London Interbank Bid Rate (LIBID)
The rate that a bank is willing to pay to acquire funds in the international interbank market.
London Interbank Offered Rate (LIBOR)
The rate the highest quality banks pay for Eurodollar deposits. There is a different LIBOR for each deposit maturity. LIBOR is commonly used as an index that represents short-term rates.
Long
The position of an investor who owns, or commits to buy, a security in either the cash or futures markets. For example, the purchase of an interest rate future is a commitment to take delivery of securities at an agreed-on price on some future date. This is called a long futures position. Owning an investment security is a long cash position.
Long bond
The term used to describe the most recent 30-year bond issue. Once the Treasury sells a new 30-year bond issue, that issue remains the long bond until the Treasury sells a subsequent issue.
Long coupon
Sometimes bonds are issued with a bond date of greater than six months from the issue date. Coupons after the initial, long coupon are every six months. A long coupon reduces the effective yield-to-maturity by reducing the income that can be earned from reinvestment of the coupon.
Lookback
The interval of time, or lag, between the date when an index value is established and the date when the payment rate and/or accrual rate is changed.
Loss payee
A secured party to whom insurance proceeds are paid as stipulated in a loss payee clause of an insurance policy obtained by a debtor and covering property owned by a debtor and pledged to the secured party. Generally applies to personal property.
Lower of cost or market (LOCOM)
The accounting practice of reflecting the value of an asset at the lower of its historical cost or market value.