Glossary

ABCP (Asset-Backed Commercial Paper). A short-term debt certificate against safe assets as collateral. An ABCP typically has a high rating because of the safe value of the collateral.

ABS (Asset-Backed Securities). Securities against underlying assets as collateral.

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

Basel II.Description of the Basel Committee's standards for new capital-adequacy rules that entered into force on 1 January 2007.

Capital adequacy. See solvency ratio.

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

Capital need. Under Basel II, a credit institution must assess its capital need, i.e. capital adequacy in relation to its risks The capital need is expressed as a percentage of risk-weighted items. See also solvency requirement.

Capital requirement. See solvency requirement.

CDO(Collateralised Debt Obligation).A structured bond. Other credit bonds, including other CDOs, are included in a portfolio of assets pledged as collateral for a CDO.

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

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

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

Cost ratio. A banking institution's costs (excluding losses and write-downs on loans) as a ratio of income.

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 two otherwise similar claims where the issuers have different credit standings.

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

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

EURIBOR.The Euro Interbank Offered Rate is a reference interest rate for liquidity offered on an uncollateralised basis in the euro area interbank market to banking institutions with a high credit standing.

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

Gearing.An expression of a company's debt ratio. Can be calculated as debt (loan capital) as a ratio of equity or assets as a ratio of equity.

Group 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 group 1 have working capital of kr. 50 billion and above; group 2 from kr. 10 billion to kr. 50 billion; group 3 from kr. 250 million to kr. 10 billion; and group 4 less than kr. 250 million.

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.

Hybrid core capital. Capital that may, under certain conditions, be included in the banking institutions' core capital. Hybrid core capital is loan capital subject to requirements, including that the maturity must not be fixed, and that 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.

IFRS. International Financial Reporting Standards. 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.

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

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

Interest-rate guarantee. See guaranteed interest rate.

Interest-rate risk. The risk that interest-rate fluctuations generate losses. The Danish Financial Supervisory Authority's 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. See also market risk.

Kronosis Danmarks Nationalbank's real-time gross settlement (RTGS) system for Danish kroner and euro and is thus a core element of Danish payment systems. The system is used primarily for time-critical large-value payments between account holders at Danmarks Nationalbank, as customer or interbank payments.

Liquidity risk. The risk of not being able to procure the necessary financing (at a reasonable price) as existing obligations mature or new business opportunities arise.

Market risk. The risk that fluctuations in market prices (interest or exchange rates or equity prices) will result in losses. 

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

Percentile. The numerical value representing the share of the observations below that value. For example, the 10th percentile for the estimated failure rate illustrates that the estimated failure rate for 10 per cent of the companies (observations) is below this value.

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.

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 banking institutions will also have to take the operational risk into account. See also solvency requirement.

SIV (Structured Investment Vehicle).A geared investment unit investing in high rated ABS and CDO tranches, partly financed by issuing ABCP.

Solvency requirement. The statutory capital requirement imposed on financial companies. In a credit institution, the capital base must constitute at least 8 per cent of its risk-weighted items or capital need if higher than 8 per cent. 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.

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

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

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 jeopardise financial stability. Events leading to systemic risk may occur suddenly and unexpectedly, or the risk builds over time, e.g. in case of insufficient regulation.

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.

Traffic lights for pension companies.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.

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. VP Securities Services A/S. VP's most important tasks are electronic issuance of securities, registration of ownership and rights concerning electronic securities, and clearing and settlement of securities transactions.

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

Write-down on loans. For loans on which a loss is expected (i.e. there is objective evidence of impairment), the banking institutions must write down the loan to the present value of the expected future payments, including realisation of collateral.