Busting Financial and Banking Jargons: Part 2

Here’s more to expand your vocabulary of jargons and how to use them correctly.
Carmen Teh
Writer, gradsingapore
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We’ve introduced some key technical terms used in the financial services and banking sector in Part 1 of this article. Here’s more to expand your vocabulary of jargons and how to use them correctly.

Middle office (n.)

What is it?

This is the area or function of a bank that does not generate profit, but instead supports the front office in financial and legal matters[CT3] . In essence, they are responsible in managing risk and ensuring that transactions are executed correctly.

Example:

Treasury is part of the middle office, alongside Legal and Risk Management.

Nearshoring (v.)

What is it?

The practice of outsourcing work to companies to another country but with the benefits of a closer offshore location.

Example:

Nearshoring to Indonesia is a better solution than offshoring to China because of the country’s proximity to Singapore which makes contact easier and more efficient while also reducing running costs.

Opportunity Cost (n.)

What is it?

Refers to a benefit that a person could’ve received, but gave it up to take another course of action. In other words, it is an alternative given up when a decision is made.

Example:

When making big decisions like investing in treasury bonds for instance, clients will likely diligently research the pros and cons prior to making this financial decision to outline the potential opportunity costs.

Parallel Loan (n.)

What is it?

This one may be useful for graduates who are looking to join the international banking segment.

A parallel loan usually involves two parent companies taking loans from their respective national financial institutions and then lending the resulting funds to the other company’s subsidiary.

Example:

In a parallel loan, ABC, a Singaporean company, would borrow Singaporean dollars from a Singaporean bank. On the other hand, XYZ, a Malaysian company, would borrow Malaysian Ringgits from a Malaysian bank. ABC would then lend the Singaporean funds to XYZ’s Singaporean subsidiary and XYZ would lend the Malaysian Ringgits to ABC’s Malaysian subsidiary.

Quid Pro Quo

What is it?

A Latin phrase typically used in financial circles to describe a mutual agreement to exchange goods or services of roughly equivalent value. [CT10] 

Example:

A soft dollar agreement is a quid pro quo agreement whereby Firm A uses Firm B for research. In return, Firm B executes all of Firm A’s trades as an exchange of services.[CT11]

Recourse (n.)

What is it?

The legal right for the lender to collect the pledged collateral in the event that the borrower is unable to satisfy the debt obligation.

Example:

Recourse lending provides protection to financial institutions, as they’re assured to have some sort of repayment, either in cash or liquid assets.

Seed Capital (n.)

What is it?

The initial capital used to start a business that usually comes from the founders’ personal assets, or from their close ones with the aim of covering initial operating expenses and attracting venture capitalists.

Example:

Seed capital is needed to support the preliminary activities for the launch of XYZ company, such as market research, product research and development (R&D) and business plan development.

Turnkey Business (n.)

What is it?

A term to describe a business that is ready for immediate operation.

Example:

ABC is considered a turnkey business as it has a proven, successful business model that merely requires capital and labour.

Underwriting (v.)

What is it?

The process of determining whether to accept a risk and if so, what amount of insurance the company will write on the acceptable risk, and at what rate.[CT16] 

Example:

Underwriting has helped insurance companies manage risks and to accurately price risk in order to adequately cover the true cost of insuring policyholders. If an applicant’s risk is deemed to be too high, underwriters may refuse to cover it.

Vulture Capitalist (n.)

What is it?

Not to be confused with venture capitalists, this kind of capitalists invest to exploit and profit from unsuccessful individuals or organisations that lack the resources to achieve success.

Example:

Vulture capitalists have purchased controlling interest in the troubled company and used its own assets as collateral for the loan used to purchase it. The vulture capitalists then sold the company at a profit.

Yield Building (v.)

What is it?

The illegal practice of underwriters [CT19] (see No. 9) marking up the prices on bonds for the purpose of reducing the yield on the bond.

Example:

Yield burning was attempted to reduce the amount of tax that was incurred on fixed-income investments.

Zakat (n.)

What is it?

A term used in Islamic finance to refer to the mandatory process for Muslims to donate a certain proportion of wealth each year to charitable causes.

Example:

Examples of wealth liable for Zakat include gold and silver, paper currency held in cash or in the bank, tradable assets owned by your business as well as crops and herded animals.