Financial Stability

Additional capital. Subordinate loan capital in credit institutions, offered as part of the base 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.

Adjustable-rate loan. See variable interest rate.

Amortised cost. A principle for valuation of lending by banking institutions. On determination of the value of the loan, the original cost price is calculated less redemptions and any write-downs and with the addition/deduction of the accrued transaction costs, fees and commission to be received during the term of the loan. See also fair value.

Bancassurance. Describes the distribution of both banking and insurance products within the same financial company or group.

Base capital.Financial companies' capital required for compliance with the statutory capital requirement. The base capital comprises core capital and additional capital, and the latter may not exceed half of the base capital. The base capital is adjusted for e.g. capital investments in other financial companies.

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

Basel Committee on Banking Supervision, whose secretariat is at BIS, was set up in 1975 with the purpose of promoting cooperation between national banking supervision authorities and strengthening the stability of the international financial system.

BIS.The Bank for International Settlements serves as banker to the central banks.

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 need. A credit institution must assess its capital need, i.e. capital adequacy in relation to its risks. See also solvency requirement.

Capital requirement. See solvency requirement.

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

Category A, B or C. Danmarks Nationalbank's categorisation of Nordic financial groups and Danish banking institutions. Category A comprises 6 Nordic financial groups including Danske Bank and Nordea. Category B comprises 18 selected major Danish banking institutions, i.e. selected banking institutions in the Danish Financial Supervisory Authority's categories 1 and 2 that are not included in category A. Category C comprises 28 selected small Danish banking institutions and is part of the Danish Financial Supervisory Authority's category 3.

CEBS.The Committee of European Banking Supervisors.CEBS is a level-3 committee for the banking sector, comprising both central banks and supervisory authorities. See the Lamfalussy procedure.

CEIOPS.The Committee of European Insurance and Occupational Pension Supervisors.CEIOPS is a level-3 committee for the insurance sector, comprising supervisory authorities. See the Lamfalussy procedure.

CESR.The Committee of European Securities Regulators.CESR is a level-3 committee for the securities sector, comprising supervisory authorities. See the Lamfalussy procedure.

CIBOR. The Copenhagen Inter-Bank Offered Rate is a reference interest rate for liquidity offered on an uncollateralised basis in the inter-bank market to banking institutions with a high credit standing.

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

CLS. Continuous Linked Settlement is an international currency-settlement system.

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.

Core capital. In credit institutions, this comprises paid-up share, cooperative or guarantee capital, additional paid-in capital and reserves, adjusted for e.g. own shares and deficit for the year. Furthermore, hybrid core capital may be included.

Cost ratio. A banking institution's ordinary costs, excluding losses and provisions, as a ratio of its ordinary profit.

Credit derivative. A term used for a number of financial derivatives that can be used for trading in credit risk.

Credit risk. The risk of suffering a loss should the counterparty default on its payment obligations.

Credit spread. The difference between the yield on a lower rated bond and a higher rated bond.

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

Depositor Guarantee Fund. The Guarantee Fund for Depositors and Investors is a private, independent institution established by act of parliament. 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 depositor guarantee scheme.

Derivative. See Financial derivative.

Distance to default. The risk measure "distance to default" illustrates the probability that the estimated market value of a company's assets becomes lower than the value of its debt (i.e. insolvency). The distance is measured by the number of standard deviations for the estimated market value of the company's assets. 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 decrease in the assets' estimated market value does not cause the banking institution to fall below the statutory solvency requirement.The distance is measured by the number of standard deviations for the estimated market value of the assets. See also distance to default.

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

Equity capital. The owners' share of the company's capital, including share capital, accumulated profits, etc.

ESCB. The European System of Central Banks consists of the European Central Bank (ECB) and the central banks of all EU member states.

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

European passport. The option to operate across borders within the EU on the basis of approval in one member state.

Exchange-rate risk. The risk of losses due to exchange-rate fluctuations.See also market risk.

Fair value.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 value of the liability on market terms. See also amortised cost.

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

Financial derivative. 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.

Floor risk. The risk arising from the fact that the deposit rate cannot be negative. This situation may arise when the market interest rate is so low that if it declines further the deposit rate cannot be lowered correspondingly, whereby the interest margin narrows.

Forward rate. An implicit short-term interest rate at a future point in time. It is derived on the basis of bonds with different, long maturities. The forward rate reflects expectations of the future interest rate, including, inter alia, a risk premium to take account of the uncertainty of the future interest rate.

FSAP. The EU's Financial Services Action Plan.FSAP was initiated in 2000 to put into effect the EU's single market for financial services.

Gearing (financial). Debt (loan capital) as a ratio of equity.

Going concern. A description of a company that is expected to continue its activities. Used e.g. as a basis for valuation of assets and liabilities.

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

Guaranteed interest rate, also called technical interest rate. 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.

Hedge association. The Danish equivalent of a hedge fund. Unlike e.g. investment associations, hedge associations will not be subject to limitations to their gearing and short-selling options.

Hybrid core capital. Capital that may, under certain conditions, be included in the banking institutions' core capital. Hybrid core capital has characteristics resembling a debt instrument, but is subject to stricter rules. For instance, the maturity must not be fixed, and interest on debt lapses if the banking institution has no free reserves. Hybrid core capital must not exceed 15 per cent of the core capital.

IAS/IFRS. 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. See also standard deviation.

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.

Inter-bank market. In Denmark, the market for krone-denominated loan agreements and interest-rate derivatives with a maturity of up to a year transacted between banking institutions and mortgage-credit institutes. Often referred to as the money market.

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

Interest-rate guarantee. See guaranteed interest rate.

Interest-rate risk. The risk that interest-rate fluctuations generate losses. The key ratio "interest-rate risk" is an expression of the part of the core capital after deductions that is lost on a parallel shift of the yield curve by 1 percentage point.

Internal interest rate. See yield to maturity.

IOSCO. The International Organization of Securities Commissions, established in 1983, is an international forum for securities supervisors.

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

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

Lamfalussy procedure. A procedure determining the framework conditions for a new, faster legislative process within the EU, respecting the competences of the various EU institutions. The Lamfalussy procedure consists of 4 levels: at level 1, the European Parliament and the Council jointly adopt the framework regulation. More technical provisions are laid down in legislative acts issued by the European Commission following consultation of a special committee of member state representatives, i.e. level 2. Level 3 comprises close cooperation between the member states' supervisory authorities, etc., while level 4 is enforcement of the provisions by the European Commission.

Liable capital.A term previously used for base capital in credit institutions.

Liquidity. 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. 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 equity prices) will result in losses. See also Value-at-Risk.

Median. The numerical value dividing data into two equal sets, one half being below and the other above the median. Corresponds to the 50th percentile.

OMX AB. A Swedish company that owns, inter alia, the stock exchanges in Stockholm, Helsinki, Tallinn, Riga and Vilnius. In December 2004, an agreement was concluded to combine OMX AB and the Copenhagen Stock Exchange A/S.

Operational risk. The risk of losses due to IT system failure, legal risk, human errors, fraud, etc.

Option. A financial derivative granting the owner (buyer) the right, but not the obligation, to buy or sell an underlying asset (e.g. a product, a security, a currency or another derivative) at an agreed price (the strike price) at/before an agreed future point in time. The seller of an option is obliged to fulfil the owner's right. An option can also be an inherent element of securities in the form of the right of premature redemption.

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

Ordinary profits of banking institutions include e.g. net interest income, net fee and commission income, value adjustments, and the result of capital investments in associated and affiliated companies.

Percentile. The numerical value representing 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.

Prime broker. An investment bank that services hedge funds in connection with their activities in the financial markets. Prime brokers offer the following services, among others: trading transactions, clearing and settlement, securities lending, help to set up hedge funds. See hedge associations.

Profitability. See return on equity.

Provisions for loans.See write-downs.

Rating. An assessment of credit standing given by rating agencies such as Fitch, Moody's and Standard & Poor's. Rating is used e.g. in connection with the issue of securities and takes the probability of default and the size of the loss into account.

Red and yellow lights.The Danish Financial Supervisory Authority's risk scenarios for pension companies aimed to illustrate whether the company's chosen relationship between investment risk, capital base and commitments is appropriate. Each risk scenario is used to test the pension companies' ability to sustain losses due to changes in interest rates, falling equity and real estate prices, etc.

Return on assets. Describes a non-financial company's ability to achieve a return on invested capital. It is calculated as the company's profit before interest (primary operating result) as a ratio of its assets.

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

Risk-weighted items. The risk-weighted assets and off-balance-sheet items, i.e. items subject to credit risk and market risk. Under Basel II, the risk-weighted items will also include operational risk. See also solvency requirement.

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

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

Short-selling. Sale of securities or currency not yet possessed in the expectation that the position can subsequently be hedged by purchasing at a lower price. See also hedge association.

Solvency. Indicators for a company's ability to sustain losses. More specifically the part of its assets that can be lost before the losses affect its loan capital. Calculated as the ratio of equity capital to assets.

Solvency ratio. A key indicator for credit institutions, defined as base capital as a ratio of risk-weighted items. See also solvency requirement.

Solvency requirement. The statutory solvency requirement imposed on financial companies. In a credit institution, the base capital must constitute at least 8 per cent of its risk-weighted items. In a pension company, the solvency requirement is calculated on the basis of life-insurance provisions with a number of minor additions. See also solvency ratio.

Standard deviation. The average distance from the observations to e.g. the average in the data material. See also implied volatility.

Subordinate loan capital. Debt that is subordinate to other liabilities in the event of the borrower's compulsory liquidation. Subordinate loan capital meeting certain requirements can be included in the credit institutions' additional capital. See also base capital.

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 variable interest rates. Credit default swaps are used to exchange credit risk between two borrowers. The overall value of a swap is usually zero when the agreement is made, but may subsequently become positive or negative, depending on market developments in interest and exchange rates.

Swaption. An option on a swap. The buyer of a swaption has the right, but not the obligation, to conclude a swap on 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.

Technical interest rate. See guaranteed interest rate.

Term structure of interest rates. The relationship between securities' yields and maturities. 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 for measuring market risk based on volatility and correlations in historical market developments. For a given portfolio and within a fixed time horizon, the model calculates the maximum loss that may arise with a given probability (often 95 per cent).

VaR. See Value-at-Risk.

Variable interest rate. An interest rate that varies during the maturity of the loan, e.g. because it is agreed that it tracks another interest rate.

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. An 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, and clearing and settlement of securities transactions.All stock-exchange-listed securities and a number of unlisted securities are held electronically at VP.

Working capital. Comprises deposits, issued bonds, subordinate loan capital and equity capital. See also category 1, 2, 3 or 4 banking institution.

Write-down on loans. Under the new accounting rules, banking institutions' provisions are to be referred to as write-downs in future. For loans on which a loss is expected (i.e. there is an objective indication of a deterioration in value), the banking institutions must write down the loan to the present value of the expected future payments, including realisation of collateral.

Yellow light for pension companies. See red and yellow lights.

Yield curve. See term structure of interest rates.

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


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				Glossary of Financial Terms
					Additional capital. Subordinate loan capital in credit institutions, offered as part of the base 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. Adjustable-rate loan. See variable interest rate. Amortised cost. A principle for valuation of lending by banking institutions. On determination of the value of the loan, the original cost price is calculated less redemptions and any write-downs and with the addition/deduction of the accrued transaction costs, fees and commission to be received during the term of the loan. See also fair value. Bancassurance. Describes the distribution of both banking and insurance products within the same financial company or group. Base capital.Financial companies' capital required for compliance with the statutory capital requirement. The base capital comprises core capital and additional capital, and the latter may not exceed half of the base capital. The base capital is adjusted for e.g. capital investments in other financial companies. Basel II.Description of the Basel Committee's forthcoming standards for new capital-adequacy rules, entering into force at end-2006. Basel Committee on Banking Supervision, whose secretariat is at BIS, was set up in 1975 with the purpose of promoting cooperation between national banking supervision authorities and strengthening the stability of the international financial system. BIS.The Bank for International Settlements serves as banker to the central banks. 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 need. A credit institution must assess its capital need, i.e. capital adequacy in relation to its risks. See also solvency requirement. Capital requirement. See solvency requirement. Category 1, 2, 3 or 4 banking institution. The Danish Financial Supervisory Authority's categorisation of Danish banking institutions based on their volume of working capital. Banking institutions in category 1 have working capital of kr. 25 billion and above; category 2 from kr. 3 billion to kr. 25 billion; category 3 from kr. 250 million to kr. 3 billion; and category 4 less than kr. 250 million. Category A, B or C. Danmarks Nationalbank's categorisation of Nordic financial groups and Danish banking institutions. Category A comprises 6 Nordic financial groups including Danske Bank and Nordea. Category B comprises 18 selected major Danish banking institutions, i.e. selected banking institutions in the Danish Financial Supervisory Authority's categories 1 and 2 that are not included in category A. Category C comprises 28 selected small Danish banking institutions and is part of the Danish Financial Supervisory Authority's category 3. CEBS.The Committee of European Banking Supervisors.CEBS is a level-3 committee for the banking sector, comprising both central banks and supervisory authorities. See the Lamfalussy procedure. CEIOPS.The Committee of European Insurance and Occupational Pension Supervisors.CEIOPS is a level-3 committee for the insurance sector, comprising supervisory authorities. See the Lamfalussy procedure. CESR.The Committee of European Securities Regulators.CESR is a level-3 committee for the securities sector, comprising supervisory authorities. See the Lamfalussy procedure. CIBOR. The Copenhagen Inter-Bank Offered Rate is a reference interest rate for liquidity offered on an uncollateralised basis in the inter-bank market to banking institutions with a high credit standing. Clearing. Compilation of each participant's purchases and sales of securities, resulting in the net position of each participant. See also settlement and VP. CLS. Continuous Linked Settlement is an international currency-settlement system. 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. Core capital. In credit institutions, this comprises paid-up share, cooperative or guarantee capital, additional paid-in capital and reserves, adjusted for e.g. own shares and deficit for the year. Furthermore, hybrid core capital may be included. Cost ratio. A banking institution's ordinary costs, excluding losses and provisions, as a ratio of its ordinary profit. Credit derivative. A term used for a number of financial derivatives that can be used for trading in credit risk. Credit risk. The risk of suffering a loss should the counterparty default on its payment obligations. Credit spread. The difference between the yield on a lower rated bond and a higher rated bond. Credit standing. Assessment of a debtor's willingness and ability to honour its commitments. See also rating. Depositor Guarantee Fund. The Guarantee Fund for Depositors and Investors is a private, independent institution established by act of parliament. 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 depositor guarantee scheme. Derivative. See Financial derivative. Distance to default. The risk measure "distance to default" illustrates the probability that the estimated market value of a company's assets becomes lower than the value of its debt (i.e. insolvency). The distance is measured by the number of standard deviations for the estimated market value of the company's assets. 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 decrease in the assets' estimated market value does not cause the banking institution to fall below the statutory solvency requirement.The distance is measured by the number of standard deviations for the estimated market value of the assets. See also distance to default. Economic capital. The credit institution's assessment of the adequate capital base for the risk profile chosen. The calculation takes account of unexpected losses in relation to various risk types, e.g. market risk, credit risk and operational risk. See also solvency requirement. Equity capital. The owners' share of the company's capital, including share capital, accumulated profits, etc. ESCB. The European System of Central Banks consists of the European Central Bank (ECB) and the central banks of all EU member states. Estimated failure rate is in this publication for companies estimated in a failure-rate model based on key accounting ratios, etc. The estimated failure rate indicates the probability that a company is compulsorily liquidated within the next few years. European passport. The option to operate across borders within the EU on the basis of approval in one member state. Exchange-rate risk. The risk of losses due to exchange-rate fluctuations.See also market risk. Fair value.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 value of the liability on market terms. See also amortised cost. Fee and commission income includes brokerage and custody commission, guarantee commission, fees for use of payment systems and remortgaging fees, as well as ordinary loan fees. Financial derivative. 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. Floor risk. The risk arising from the fact that the deposit rate cannot be negative. This situation may arise when the market interest rate is so low that if it declines further the deposit rate cannot be lowered correspondingly, whereby the interest margin narrows. Forward rate. An implicit short-term interest rate at a future point in time. It is derived on the basis of bonds with different, long maturities. The forward rate reflects expectations of the future interest rate, including, inter alia, a risk premium to take account of the uncertainty of the future interest rate. FSAP. The EU's Financial Services Action Plan.FSAP was initiated in 2000 to put into effect the EU's single market for financial services. Gearing (financial). Debt (loan capital) as a ratio of equity. Going concern. A description of a company that is expected to continue its activities. Used e.g. as a basis for valuation of assets and liabilities. Guaranteed benefits. Payment obligations guaranteed to the policyholders in a pension company. See also guaranteed interest-rate and life-insurance provisions. Guaranteed interest rate, also called technical interest rate. 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. Hedge association. The Danish equivalent of a hedge fund. Unlike e.g. investment associations, hedge associations will not be subject to limitations to their gearing and short-selling options. Hybrid core capital. Capital that may, under certain conditions, be included in the banking institutions' core capital. Hybrid core capital has characteristics resembling a debt instrument, but is subject to stricter rules. For instance, the maturity must not be fixed, and interest on debt lapses if the banking institution has no free reserves. Hybrid core capital must not exceed 15 per cent of the core capital. IAS/IFRS. 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. See also standard deviation. 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. Inter-bank market. In Denmark, the market for krone-denominated loan agreements and interest-rate derivatives with a maturity of up to a year transacted between banking institutions and mortgage-credit institutes. Often referred to as the money market. Interest margin. The difference between the rate of interest for lending and deposits. Interest-rate guarantee. See guaranteed interest rate. Interest-rate risk. The risk that interest-rate fluctuations generate losses. The key ratio "interest-rate risk" is an expression of the part of the core capital after deductions that is lost on a parallel shift of the yield curve by 1 percentage point. Internal interest rate. See yield to maturity. IOSCO. The International Organization of Securities Commissions, established in 1983, is an international forum for securities supervisors. Issue.The issue of e.g. securities on a stock exchange. KFX. Equity index consisting of the 20 most traded and liquid Danish equities listed on the Copenhagen Stock Exchange. The composition of the index is revised twice a year. Lamfalussy procedure. A procedure determining the framework conditions for a new, faster legislative process within the EU, respecting the competences of the various EU institutions. The Lamfalussy procedure consists of 4 levels: at level 1, the European Parliament and the Council jointly adopt the framework regulation. More technical provisions are laid down in legislative acts issued by the European Commission following consultation of a special committee of member state representatives, i.e. level 2. Level 3 comprises close cooperation between the member states' supervisory authorities, etc., while level 4 is enforcement of the provisions by the European Commission. Liable capital.A term previously used for base capital in credit institutions. Liquidity. 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. 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 equity prices) will result in losses. See also Value-at-Risk. Median. The numerical value dividing data into two equal sets, one half being below and the other above the median. Corresponds to the 50th percentile. OMX AB. A Swedish company that owns, inter alia, the stock exchanges in Stockholm, Helsinki, Tallinn, Riga and Vilnius. In December 2004, an agreement was concluded to combine OMX AB and the Copenhagen Stock Exchange A/S. Operational risk. The risk of losses due to IT system failure, legal risk, human errors, fraud, etc. Option. A financial derivative granting the owner (buyer) the right, but not the obligation, to buy or sell an underlying asset (e.g. a product, a security, a currency or another derivative) at an agreed price (the strike price) at/before an agreed future point in time. The seller of an option is obliged to fulfil the owner's right. An option can also be an inherent element of securities in the form of the right of premature redemption. Ordinary costs of banking institutions include personnel and administrative costs, depreciation and amortisation, and losses and provisions. Ordinary profits of banking institutions include e.g. net interest income, net fee and commission income, value adjustments, and the result of capital investments in associated and affiliated companies. Percentile. The numerical value representing 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. Prime broker. An investment bank that services hedge funds in connection with their activities in the financial markets. Prime brokers offer the following services, among others: trading transactions, clearing and settlement, securities lending, help to set up hedge funds. See hedge associations. Profitability. See return on equity. Provisions for loans.See write-downs. Rating. An assessment of credit standing given by rating agencies such as Fitch, Moody's and Standard & Poor's. Rating is used e.g. in connection with the issue of securities and takes the probability of default and the size of the loss into account. Red and yellow lights.The Danish Financial Supervisory Authority's risk scenarios for pension companies aimed to illustrate whether the company's chosen relationship between investment risk, capital base and commitments is appropriate. Each risk scenario is used to test the pension companies' ability to sustain losses due to changes in interest rates, falling equity and real estate prices, etc. Return on assets. Describes a non-financial company's ability to achieve a return on invested capital. It is calculated as the company's profit before interest (primary operating result) as a ratio of its assets. Return on equity. A measure of a company's ability to achieve a return on the owners' investment. Calculated as the company's profit as a ratio of its equity capital. Risk-weighted items. The risk-weighted assets and off-balance-sheet items, i.e. items subject to credit risk and market risk. Under Basel II, the risk-weighted items will also include operational risk. See also solvency requirement. S&P 500. US abbreviation of Standard & Poor's 500 equity Index. It consists of the 500 most traded US equities and is e.g. used as an underlying index for equity futures and equity options. Settlement.Completion of trade by final settlement of agreed commitments. See also clearing and VP. Short-selling. Sale of securities or currency not yet possessed in the expectation that the position can subsequently be hedged by purchasing at a lower price. See also hedge association. Solvency. Indicators for a company's ability to sustain losses. More specifically the part of its assets that can be lost before the losses affect its loan capital. Calculated as the ratio of equity capital to assets. Solvency ratio. A key indicator for credit institutions, defined as base capital as a ratio of risk-weighted items. See also solvency requirement. Solvency requirement. The statutory solvency requirement imposed on financial companies. In a credit institution, the base capital must constitute at least 8 per cent of its risk-weighted items. In a pension company, the solvency requirement is calculated on the basis of life-insurance provisions with a number of minor additions. See also solvency ratio. Standard deviation. The average distance from the observations to e.g. the average in the data material. See also implied volatility. Subordinate loan capital. Debt that is subordinate to other liabilities in the event of the borrower's compulsory liquidation. Subordinate loan capital meeting certain requirements can be included in the credit institutions' additional capital. See also base capital. 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 variable interest rates. Credit default swaps are used to exchange credit risk between two borrowers. The overall value of a swap is usually zero when the agreement is made, but may subsequently become positive or negative, depending on market developments in interest and exchange rates. Swaption. An option on a swap. The buyer of a swaption has the right, but not the obligation, to conclude a swap on 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. Technical interest rate. See guaranteed interest rate. Term structure of interest rates. The relationship between securities' yields and maturities. 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 for measuring market risk based on volatility and correlations in historical market developments. For a given portfolio and within a fixed time horizon, the model calculates the maximum loss that may arise with a given probability (often 95 per cent). VaR. See Value-at-Risk. Variable interest rate. An interest rate that varies during the maturity of the loan, e.g. because it is agreed that it tracks another interest rate. 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. An 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, and clearing and settlement of securities transactions.All stock-exchange-listed securities and a number of unlisted securities are held electronically at VP. Working capital. Comprises deposits, issued bonds, subordinate loan capital and equity capital. See also category 1, 2, 3 or 4 banking institution. Write-down on loans. Under the new accounting rules, banking institutions' provisions are to be referred to as write-downs in future. For loans on which a loss is expected (i.e. there is an objective indication of a deterioration in value), the banking institutions must write down the loan to the present value of the expected future payments, including realisation of collateral. Yellow light for pension companies. See red and yellow lights. Yield curve. See term structure of interest rates. Yield to maturity or internal interest rate. The fixed discount rate at which the present value of a cash flow equals the investment.


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Glossary of Financial Terms