Kaupthing Bank - Comprehensive commercial and investment banking services
Kaupthing Bank offers comprehensive commercial and investment banking services to individuals, companies and institutional investors. The Bank is a leading player in all the main areas of the Icelandic financial market, and in addition to Iceland, the Bank's key markets are Denmark and the United Kingdom.
The Bank focuses on the growth and development of its international activities and aims to be one of the leading investment banks in northern Europe. As of 30 June 2008 the number of full-time equivalent positions was 3,207 at Kaupthing Bank and its subsidiaries.
Kaupthing´s shares are listed on the OMX Nordic Exchange in Iceland and Stockholm.
On this page you will find a list of definitions of financial terms.
The purpose of this glossary is to clarify terms used on Kaupthing Bank's website and in its publications, and in relevant cases to describe how such expressions are related to the Bank's operations.
We encourage you to send us any terms you feel are missing from this list by entering your suggestion in the "missing terms" box to the right.
Asset-Backed Securities are bonds or notes backed by pools of financial assets that typically have predictable income flows. Examples of such assets include credit card receivables, trade receivables and auto loans. ABS enable the originator to raise cash by borrowing against assets. As with any interest bearing security, the investor is paid a coupon.
A set of international banking regulations established by the Basel Committee on Banking Supervision, which set out the minimum capital requirements for financial institutions with the goal of minimizing credit risk. Banks that operate internationally are required to maintain a minimum amount (8%) of capital based on a percent of risk-weighted assets.
Basel II is the second of the Basel Committee on Banking Supervision's recommendations, and unlike the first accord, Basel I, where the focus was mainly on credit risk, the purpose of Basel II was to create standards and regulations on how much capital financial institutions must have put aside. Banks need to put aside capital to reduce the risks associated with its investing and lending practices.
The Icelandic Financial Supervisory Authority (FME) supervises Kaupthing on a consolidated basis and, as such, receives information on the capital adequacy of, and sets capital requirements for, Kaupthing as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, who set and monitor their capital adequacy requirements relative to risk-weighted assets.
The allocation of capital between specific operations and activities is, to a large extent, driven by the optimisation of the return on allocated capital (ROAC). The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory requirements do not fully reflect the varying degree of risk associated with different activities. In such cases the internal capital requirements may be inflated to reflect different risk profiles.
Capital stress testing is a simulation technique used on assets and liabilities to determine their reaction to different financial situations. Their purpose is to determine the size, but not the frequency, of potential losses related to specific scenarios. They form an important diagnostic tool to improve the Bank’s understanding of its risk profile. The traditional focus of stress testing relates to exceptional but plausible events.
A Collateralized Debt Obligation is a security backed by a pool of various types of debt, which may include corporate bonds sold in the capital markets, loans made to corporations by institutional lenders, and tranches of securitizations.
A Credit Default Swap is a swap designed to transfer the credit exposure of fixed income products between parties.
The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the creditworthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.
Credit risk is the current or prospective risk to earnings and capital arising from the failure of an obligor to repay principal or interest at the stipulated time or failure otherwise to perform as agreed. This risk is compounded if the assigned collateral only partly covers the claims made to the borrower, or if its value is variable or uncertain. Credit risk arises anytime the Bank commits its funds with the result that capital or earnings are dependent on a counterparty’s, issuer’s or borrower’s performance. This type of risk is composed of concentration risk, residual risk, credit risk in securitisation, cross-border (or transfer) risk and others.
Currency risk is the risk of loss due to adverse movements in foreign exchange rates. The Bank is exposed to some foreign exchange risk, in particular regarding the repatriation of non-ISK results.
The Bank hedges part of the equity base against adverse movements in foreign exchange rates. The objective of the hedging is to minimise fluctuations in the capital ratio due to currency fluctuations.
The percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin and collateral levels. When they are used as collateral, securities will generally be devalued since a cushion is required by the lending parties in case the market value falls.
Liquidity risk is the current and/or prospective risk that the Bank, though solvent, either does not have sufficient financial resources available to meet its liabilities when they fall due, or can secure them only at excessive cost. Liquidity risk arises from the inability to manage unplanned decreases or changes in funding sources.
An allowance for credit losses is established if there is objective evidence that the Bank will be unable to collect all amounts due on a claim, i.e. a loan, commitment, guarantee etc., according to the original contractual terms or the equivalent value. An allowance for credit losses is reported as a reduction of the carrying value of a claim on the balance sheet, whereas for an off-balance sheet item such as a commitment a provision for credit loss is reported in other liabilities. Additions to the allowances and provisions for credit losses are made through impairment on loans.
Market risk is the current or prospective risk to earnings and capital arising from adverse movements in market prices and rates. Broadly speaking, the Bank concerns itself with three main components under market risk:
Equity price risk is the risk of loss due to adverse changes in equity markets.
Interest rate risk is the risk that the value of an interest rate sensitive instrument will change as a result of a change in market interest rates.
Foreign exchange risk is the risk of loss due to adverse changes in foreign exchange rates.
Operational risk is the risk of direct or indirect loss or damage to the Bank’s reputation resulting from inadequate or failed internal processes or systems, or from human error or external events that affect the Bank’s image, operational earnings and/or have adverse effects on the share price. Strategic risk, reputation risk, legal risk and compliance risk are considered sub-categories of operational risk. Operational risk is therefore inherent in all activities within the Bank.
The number of shares, i.e. the amount of capital, issued by the Bank to finance operations. Shares that have been repurchased by the company are not considered outstanding shares.
The price-book ratio compares a stock market value to its book value (total assets minus intangible assets and total liabilities). P/B ratio is an indicator of whether a stock is fairly valued.
Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security or collateral available and/or the stage of collection of amounts owed to the Bank.
Risk adjusted return on capital measures the return on investments involving a certain risk. This is different from other measures of return on capital as every investment's yield is put into relation with the risk incurred by undertaking the venture in question.
The return on allocated capital is the gain produced by a certain investment. This may also be used to measure the productivity of different areas of operation within the Bank.
Return on equity is the ratio of the Bank's net income in relation to total equity capital. It is a performance measure indicating how much profit is created with shareholders' capital.
Secured liquidity is the primary measure of liquidity at Kaupthing Bank. Secured liquidity consists of cash, repo-able bonds and committed alternative liquidity sources. The Bank's policy is always to have enough secured liquidity to repay all maturing obligations for at least 360 days and still maintain a stable level of business without resorting to any access to the debt and capital markets.
A Structured Investment Vehicle is a credit arbitrage fund investing in asset-backed securities (ABS) and/or bonds, with the aim of making gains from the spread between short-term borrowing and long-term returns.
A Special Purpose Vehicle is a legal entity created for a specific purpose. The structure is often that the SPV owns certain assets and funds it by issuing asset-backed or mortgage-backed securities.
Tier 1 capital, which includes ordinary share capital, share premium, perpetual bonds (which are classified as innovative tier 1 securities), retained earnings, translation reserve and minority interest after adjusting for items reflected in shareholders' equity which are treated differently for capital adequacy purposes. The book values of goodwill and intangible assets are deducted on arriving at Tier 1 capital.
Tier 2 capital, which includes qualifying subordinated loan capital and unrealized gains arising on the fair valuation of equity instruments held as available-for-sale.