Glossary of Financial Terms

Basel II.Description of the Basel Committee's forthcoming standards for new capital-adequacy rules expected to come into force at end-2006.

BIS stands for Bank for International Settlements, which serves as banker to the central banks.

Bonus. Generic term covering the amounts allocated by pension companies to policyholders in addition to what is originally guaranteed (see Guaranteed interest rate).

Bonus potential related to benefits on premium-free policies is the commitment to allocate Bonus on premiums already paid into pension companies, and is a sub-item under Life-insurance provisions. Bonus potential related to benefits on premium-free policies is linked to the individual policy and may be used to cover losses on assets in policies within the same portfolio, i.e. with the same Guaranteed interest rate.

Bonus potential related to future premiums is the commitment to allocate Bonus on premiums that are agreed but not yet due, in pension companies, and is a sub-item under Life-insurance provisions.

Callable bond. A bond which can be prematurely redeemed by the debtor on terms agreed in advance. Danish mortgage-credit bonds are callable bonds.

Capital adequacy. See Solvency ratio.

Capital base.The capital that a pension company may use to cover its Solvency margin. The capital base comprises the pension company's equity capital less certain deductions, e.g. subsidiary insurance companies' solvency margin, and certain additional items, e.g. special bonus provisions.

Capital requirement. See Solvency requirement for credit institutions and Solvency margin for pension companies.

Category A, B or C. Danmarks Nationalbank's categorisation of Nordic financial groups and Danish banking institutions. Category A comprises Nordic financial groups including Danske Bank and Nordea. Category B comprises major Danish banking institutions, i.e. banking institutions in the Danish Financial Supervisory Authority's categories 1 and 2 that are not included in category A. Category C comprises small Danish banking institutions and is identical to the Danish Financial Supervisory Authority's category 3.

Category 1, 2, 3 or 4 banking institution. The Danish Financial Supervisory Authority's categorisation of Danish banking institutions based on volume of Working capital Banking institutions in category 1 have a working capital of kr. 25 billion and above. Banking institutions in category 2 have a working capital from kr. 3 billion up to kr. 25 billion, banking institutions in category 3 have a working capital from kr. 250 million up to kr. 3 billion, and banking institutions in category 4 have a working capital of less than kr. 250 million.

CD. See Certificate of Deposit.

Certificate of Deposit is a short-term negotiable certificate which is mainly traded between banking institutions. Abbreviated to CD.

Clearing. Compilation of each participant's purchases and sales, resulting in the net position of each participant. See also Settlement and VP.

CLS is the abbreviation for Continuous Linked Settlement, which is an international currency-settlement system.

Collective bonus potential in pension companies is the undistributed reserves that can be used to allocate bonus in addition to the bonus amounts accrued to the Life-insurance provisions. May be used to cover losses on assets. See also Bonus potential related to benefits on premium-free policies.

Commercial Paper is a short-term debt instrument (zero-coupon paper) with a maturity of up to one year. Abbreviated to CP.

Conglomerate (financial). A group comprising both an insurance company and a credit institution or investment company, and in which the financial activities account for a significant share of the balance sheet.

Contribution principle.Determines the framework for the distribution of the pension companies' profits and losses among the owners and policyholders so that owners and policyholders are allocated a reasonable proportion of the realised profits in relation to their contribution to generating the profits.

Core capital in credit institutions comprises paid-up share or guarantee capital, premium on Issue and general reserves, adjusted for e.g. own shares and current deficit for the year. Furthermore, Hybrid core capital may be included.

Corrective account.An account to which the banking institutions' ongoing losses and Provisions are booked.

CP. See Commercial Paper.

Credit risk. The risk of suffering a loss should the counterparty or debtor default on its payment obligations. See also Market risk.

Credit-risk-transfer instrument is an instrument that enables credit institutions to reduce the credit risk in relation to e.g. specific sectors.

Credit standing. Assessment of a debtor's willingness and ability to honour its commitments. See also Rating.

Deposit Guarantee Fund. The guarantee fund for depositors and investors is a private, self-governing fund established by law. It grants compensation to depositors and investors in Danish banking institutions, mortgage-credit institutes and investment companies for losses in connection with suspension of payments or compulsory liquidation. Under certain conditions, branches of foreign credit institutions and investment companies may also be included in the Danish Deposit Guarantee Fund.

Deposit margin (implied). The difference between the banking institutions' deposit interest rate and a reference interest rate, e.g. a 3-month uncollateralised interbank interest rate. The deposit interest rate is calculated implicitly by measuring the interest costs for the period as a ratio of average outstanding deposits.

Derivative. See Financial derivative.

Distance to default. The distance-to-default risk measure illustrates the probability of a company failure, i.e. that the market value of its assets becomes lower than the value of its debt. The distance is measured by the number of Standard deviations. See also Distance to insolvency.

Distance to insolvency. The risk measure distance to insolvency shows the probability that a banking institution keeps within the statutory solvency requirement, i.e. that a fall in the assets' market value does not imply that the banking institution does not meet the statutory Solvency requirement.The distance is measured by the number of Standard deviations. See also Distance to default.

Duration. The price sensitivity of an outstanding amount or Portfolio to (small) interest-rate fluctuations. The higher the duration, the greater the price sensitivity.

Economic capital is the credit institution's assessment of the adequate capital at the chosen risk profile. The calculation takes account of unexpected losses in relation to various risk types, e.g. market and credit risks and operational risks. See also Solvency requirement.

Equity capital is the owners' share of the company's capital, including share capital and accumulated profits.

Equity reserves is a key indicator expressing the extent to which the pension companies' adjusted equity capital (equity capital plus subordinate loan capital) exceeds the statutory minimum requirement measured as a ratio of Life-insurance provisions in a pension company. Equity reserves and Bonus reserves together contribute to evaluation of a company's ability to pay a bonus and its financial strength, i.e. the company's resilience to fluctuating returns and unforeseen insurance and financial risks.

Estimated failure rate for companies in this publication is estimated in a failure-rate model based on key accounting ratios. The estimated failure rate indicates the probability that a company is compulsorily liquidated within the next few years.

Exchange-rate risk is the risk of losses due to exchange-rate fluctuations.See also Market risk.

Fair value states an estimate of the proceeds from transfer of an asset to a buyer on market terms. The fair value of a liability is an estimate of the set-off of the liability on market terms.

Fee and commission income comprises inter alia brokerage and custody commission, guarantee commission, fees for use of payment systems and remortgaging fees, as well as ordinary loan fees.

Financial derivative is an instrument whose value is derived from the price of an underlying asset such as a security, a product or a currency. Options and Swaps are examples of financial derivatives.

Floating interest rate. An interest rate which is floating during the maturity of the loan, e.g. that is agreed to float in step with another interest rate.

Gearing (financial). External financing as a ratio of equity.

Going concern is a description of a company that is expected to continue its activities.

Guaranteed benefits are payment obligations guaranteed to the policyholders in a pension company. See also Guaranteed interest rate and Life-insurance provisions.

Guaranteed interest rate, also called the maximum technical interest rate, is the lowest return on the savings guaranteed to the policyholders in a pension company. The guaranteed interest rate is used to calculate the relationship between paid-in premiums and the Guaranteed benefits to policyholders in a pension company under the insurance contract. The interest rate is based on a number of assumptions regarding risk of disability, mortality, and interest rates and costs.

Hybrid core capital may be included in the banking institutions' Liable capital. Hybrid core capital has characteristics resembling a debt instrument, but is subject to stricter rules, inter alia no fixed maturity and no interest on debt if the banking institution has no free reserves. Hybrid core capital can amount to maximum 15 per cent of the Core capital.

IAS. The international accounting standards prepared by the independent International Accounting Standards Board (IASB) to make accounts comparable across countries.

Implied volatility. The theoretically derived Volatility in the Black and Scholes option-price model for an underlying financial asset, calculated on the basis of the observed option prices. It follows that this type of volatility can not be directly observed.

Insolvency. A company's situation if the value of its equity is negative.

Insurance provisions. The total provisions made by a pension company for settlement of commitments relating to the insurance policies issued by the company. Insurance provisions are divided into various categories, of which the most important in pension companies is Life-insurance provisions.

Interest-rate guarantee. See Guaranteed interest rate.

Interest-rate margin. The difference between the rate of interest for lending and deposits.

Interest-rate risk.The risk that interest-rate fluctuations generate losses.See also Market risk.

Internal interest rate. See Yield to maturity.

Investment banking. Activities related to analysis of and trading in securities and financial consulting services in connection with e.g. stock Issues, public offerings and mergers and acquisitions.

Issue.The issue of e.g. securities on a stock exchange.

KFX. Stock index consisting of the 20 most traded and liquid Danish shares listed on the Copenhagen Stock Exchange. The composition of the index is revised twice a year.

Lending margin (implied). The difference between the banking institutions' lending interest rate and a reference interest rate, e.g. a 3-month uncollateralised money-market interest rate. The lending interest rate is calculated implicitly as the interest income of the period as a ratio of average outstanding loans.

Liable capital.Credit institutions' capital base required for compliance with the statutory Solvency requirement. Liable capital comprises Core capital and Supplementary capital, and the latter may not exceed half of the liable capital. Liable capital is adjusted for e.g. capital elements in other credit institutions.

Life-insurance provisions are measured by the actuaries appointed by the pension companies. Life-insurance provisions are divided into three sub-categories: Guaranteed benefits, Bonus potential related to future premiums, and Bonus potential related to benefits on premium-free policies. See also Insurance provisions and Collective bonus potential.

Liquidity is a measure of negotiability. Liquid securities are often characterised by a large circulating volume, high turnover and a narrow spread between bid and ask prices. See also Liquidity premium.

Liquidity premium. The premium which the buyer is willing to pay for a more Liquid asset.

Liquidity risk is the risk that the required financing is not available at a given price (interest rate) as the commitments fall due (e.g. if refinancing of securities or a loan is required).

Market risk. The risk that fluctuations in market prices (interest or exchange rates, or stock prices) will impose losses. See also Value-at-Risk.

Maximum technical interest rate. See Guaranteed interest rate.

Median. The numerical value dividing data into two equal shares of which one half is below and the other is above the median. Corresponds to the 50th Percentile.

Operating income over operating expenses is a key performance indicator to express banking institutions' earnings capability. The measure is calculated as ordinary profit over Ordinary costs.

Operational risk. The risk of losses due to insufficient or unsuccessful internal procedures, human or system errors, or external events.

Option. A Financial derivative granting the owner (buyer) the right, but not the obligation, to buy or sell an underlying instrument (e.g. a product, a security or a currency) at an agreed price (strike price) at an agreed future time. The seller of an option is obliged to recognise the owner's right.

Ordinary costs of banks include personnel and administrative costs, depreciation and amortisation, and losses and provisions.

Ordinary profit of banks comprises e.g. net interest income, net fee and commission income, value adjustments, and the result of capital investments in associated and affiliated companies.

Par. A price of 100 per cent of a paper's nominal value.

Percentile is the numerical value indicating the share of the observations below that value. For example the 10th percentile for the Return on assets is the point below which exactly 10 per cent of the companies with the lowest returns on assets lie.

Portfolio. A holding of assets.

Profitability. See Return on equity.

Provisions.For loans on which a loss is expected, the banking institution must write down the loan and book the amount under losses and provisions. There are two types of provision: A provisions are for losses with a probable risk, and B provisions for losses that are deemed inevitable, but the size of the loss cannot be fully estimated. Provisions are gathered in the Correction account.

Rating. An assessment of Credit standing given by rating agencies such as Fitch, Standard & Poor's, and Moody's. Rating is typically used in connection with securities issue, and accounts for the probability of default and the size of the loss.

Red and yellow light.The Danish Financial Supervisory Authority's description of risk scenarios for pension companies aimed to illustrate whether the company's chosen relationship between investment risk, capital and commitments is appropriate. Each risk scenario is used to test the pension companies' ability to sustain losses due to interest-rate change, fall in share and property prices, etc. The pension companies must publish their sensitivity to the red risk scenario.

Return on assets describes a company's ability to achieve a return on invested capital. It is calculated as the company's profit as a ratio of its assets.

Return on equity is a measure of a company's ability to achieve a return on the owners' investment. Return on equity is calculated as the company's profit as a ratio of equity capital.

Risk-weighted items. The risk-weighted assets and off-balance-sheet items, i.e. items subject to Credit risk, share risk, Interest-rate risk, Exchange-rate risk, commodity risk, etc. See also Solvency requirement.

RTGS system is a real-time gross settlement system in which payments are settled individually, immediately, and finally to the participants' accounts.

S&P 500. US abbreviation of Standard & Poor's 500 Stock Index. It consists of the 500 most traded US stocks and is e.g. used as an underlying index for stock futures and stock Options.

Settlement.Completion of trade by final settlement of agreed commitments. See also Clearing and VP.

Solvency is an expression of a company's ability to sustain losses, i.e. the part of the company's assets that can be lost before the losses affect its borrowed capital. Calculated as the ratio of equity capital to assets.

Solvency margin.The statutory capital requirement of pension companies. The solvency margin is calculated on the basis of the Life-insurance provisions subject to a number of minor additions. See also Capital base.

Solvency ratio is a key indicator for credit institutions, defined as Liable capital as a ratio of Risk-weighted items. See also Solvency requirement.

Solvency requirement. The statutory solvency requirement imposed on credit institutions. For a credit institution Liable capital must account for at least 8 per cent of the credit institution's Risk-weighted items. See also Solvency ratio.

Standard deviation measures the distance from the observations to the average in the data material.

Subordinate capital is external financing that in the event of the borrower's compulsory liquidation is not repaid until after other debt has been settled. Subordinate debt, subject to certain requirements, may be included in the credit institutions' Supplementary capital. See also Liable capital.

Supplementary capital.Capital deposits in credit institutions offered as Liable capital that meets certain requirements (no default sanctions for the creditor, an option to defer interest payments and to write down the principal) as well as revaluation reserves.

Swap. A Financial derivative that is an agreement between two parties to exchange payments over a fixed period. Currency swaps are used to restructure payment flows between various currencies. Interest-rate swaps are typically used to restructure payment flows between fixed and floating interest rates. The overall value of a swap is usually zero on conclusion, but may subsequently become positive or negative, depending on market developments in interest and exchange rates.

Swaption is an option on a swap. The buyer of a swaption has the right, but not the obligation, to conclude a swap at agreed conditions.

Systemic (financial) risk. The risk that an event may trigger financial losses and/or lack of confidence in a significant part of the financial system and thus potentially threaten financial stability. Events leading to systemic risk may occur suddenly and unexpectedly or the risk builds over time in case of insufficient regulation, etc.

Term structure of interest rates is the relationship between securities' yields and maturity. A rising term structure, i.e. where yields on short-term securities are lower than yields on long-term securities, is considered normal. A falling term structure is described as inverse.

Value-at-Risk (VaR). A model to measure Market risk. For a given Portfolio and within a fixed time horizon the model calculates the maximum loss that may arise with a given probability, based on experience.

VaR. See Value-at-Risk.

Volatility. A parameter indicating the size of the fluctuations in an asset's price, e.g. the fluctuations in a share price. See also Implied volatility.

VP is the abbreviation of Værdipapircentralen A/S (VP Securities Services). VP and the Copenhagen Stock Exchange are the two key market institutions in the Danish securities market. VP's most important tasks are electronic issue of securities, registration of ownership and rights concerning electronic securities, as well as Clearing and Settlement of securities deals. All stock-exchange-listed securities and a number of unlisted securities are held electronically at VP Securities Services.

Working capital comprises deposits, issued bonds, Subordinate capital and Equity capital. See also Category 1, 2, 3 or 4 banking institution.

Yield to maturity or internal interest rate. The fixed discount rate at which the present value of a payment flow equals the investment.

Zero-coupon yield. The Yield to maturity on a zero-coupon paper, i.e. a paper with no ongoing accrual of interest, and where the redemption payment falls due when the loan matures. The borrowing costs for a zero-coupon paper are solely the capital loss on issue.