Banking Glossary
Plain-English definitions for 32 banking and financial terms. Understand the metrics behind your bank's health rating, how FDIC insurance works, and what regulators look for when evaluating bank safety.
Capital & Reserves
Tier 1 Capital Ratio
The ratio of a bank's core equity capital to its total risk-weighted assets, measuring its ability to absorb losses without failing.
Capital Adequacy
A measure of whether a bank holds enough capital to cover its risk exposures, meet regulatory minimums, and continue lending during economic stress.
Risk-Weighted Assets
A bank's total assets adjusted for credit risk, where safer assets like government bonds receive lower weights and riskier assets like commercial loans receive higher weights.
Retained Earnings
The cumulative profits a bank has kept rather than distributing as dividends, serving as a key component of its capital reserves.
Risk & Credit Quality
Nonperforming Loans
Loans where the borrower has stopped making payments for 90 or more days, or where the bank no longer expects full repayment.
Loan Loss Reserves
Funds a bank sets aside to cover expected losses on its loan portfolio, acting as a financial cushion against defaults.
Net Charge-Off Rate
The percentage of loans a bank has written off as uncollectible, net of any recoveries, over a given period.
Credit Risk
The risk that borrowers will fail to repay their loans, causing financial losses for the bank.
Commercial Real Estate Exposure
The share of a bank's loan portfolio invested in commercial properties like offices, retail, and multifamily housing.
Interest Rate Risk
The risk that changes in interest rates will reduce the value of a bank's assets or increase its funding costs, eroding profitability and capital.
Deposits & Insurance
FDIC Insurance
Federal guarantee that protects bank deposits up to $250,000 per depositor, per bank, per ownership category if a bank fails.
Deposit Insurance Fund
The fund maintained by the FDIC from bank-paid premiums that finances payouts when insured banks fail.
Savings Account vs. CD
Two common deposit products: savings accounts offer flexible access with variable rates, while CDs lock funds for a fixed term at a fixed rate.
Uninsured Deposits
Bank deposits that exceed the $250,000 FDIC insurance limit and are not guaranteed if the bank fails.
Brokered Deposits
Deposits placed at a bank by or through a third-party broker, often to obtain the highest available interest rate.
Regulation & Compliance
Stress Test
A regulatory exercise that simulates severe economic scenarios to determine whether a bank has enough capital to survive a crisis.
Dodd-Frank Act
The landmark 2010 financial reform law enacted after the financial crisis that strengthened bank regulation, created stress testing, and established the Consumer Financial Protection Bureau.
Community Reinvestment Act
A federal law requiring banks to serve the credit needs of their entire community, including low- and moderate-income neighborhoods.
Prompt Corrective Action
The regulatory framework that requires banking agencies to take increasingly severe enforcement actions as a bank's capital falls below specified thresholds.
CAMELS Rating System
The confidential supervisory rating system (Capital, Asset quality, Management, Earnings, Liquidity, Sensitivity) used by bank examiners to evaluate a bank's overall condition.
Financial Metrics
Liquidity Ratio
The proportion of a bank's assets held in cash and easily convertible securities, measuring its ability to meet withdrawal demands.
Return on Assets
A profitability metric showing how much net income a bank generates for each dollar of assets it holds.
Net Interest Margin
The difference between interest income a bank earns on loans and investments and the interest it pays to depositors, expressed as a percentage of earning assets.
Loan-to-Deposit Ratio
The ratio of a bank's total outstanding loans to its total deposits, indicating how aggressively the bank is lending relative to its deposit base.
Efficiency Ratio
The percentage of revenue a bank spends on operating expenses, where lower numbers indicate more efficient operations.
Bank Health Score
BankHealthData's proprietary 0-100 rating that grades every FDIC-insured bank from A (healthiest) to F (weakest) based on four financial factors.
Bank Types & Structure
Bank Failure
When a bank is closed by its chartering authority (state or federal) because it can no longer meet its obligations to depositors and creditors.
Too Big to Fail
The concept that certain financial institutions are so large and interconnected that their failure would cause catastrophic damage to the broader economy.
Bank Holding Company
A corporation that owns or controls one or more banks, subject to regulation by the Federal Reserve.
Community Bank
A locally focused bank, typically with under $10 billion in assets, that emphasizes relationship-based lending and community service.
Neobank
A digital-only financial company that offers banking services through a mobile app, typically without its own bank charter or FDIC insurance.
Credit Union
A member-owned, nonprofit financial cooperative that provides banking services, insured by the NCUA rather than the FDIC.
Common Questions
What is a Tier 1 capital ratio?
The Tier 1 capital ratio measures a bank's core equity capital relative to its risk-weighted assets. Regulators consider 8% or above "well-capitalized." It is the most important measure of whether a bank can absorb losses.
What does FDIC insurance cover?
FDIC insurance protects deposits up to $250,000 per depositor, per bank, per ownership category. It covers checking accounts, savings accounts, CDs, and money market deposit accounts. It does not cover stocks, bonds, mutual funds, or cryptocurrency.
What is a nonperforming loan?
A nonperforming loan (NPL) is a loan where the borrower has stopped making payments for 90 or more days, or where the bank no longer expects full repayment. A high NPL ratio is a warning sign for bank financial health.