This week we take a look at banks and financial risk. We are going to learn some very useful terms used in banking in English and we will also discuss your opinion on the conclusions of the video taken from the Economist.

Questions:

1) What factors converged to cause the financial crisis?

2) In Spain, which sectors were/are affected the most?

3) What role should the public, private and banking sectors play in economic recovery?

4) What is the capital ratio of your bank? Has this indicator changed recently, in light of the crisis?

Glossary

bell curve: the curve that explains the normal distribution of values of the same set or series, where individual values decrease as they distance themselves from the average.

fatter tails: in this video, the probability curve becomes a curve with ‘fatter tails’ – this means that price distribution or the law of averages, does not apply to finacial risk.

LIBOR: The interest rate at which banks lend to each other.

T-Bill: Letra de Tesoro – This note is basically a short-term government bond. The interest rate on a T-Bill (yield) determines the return on the investment in this type of bond. Under normal circumstances, the LIBOR and rate of the T-Bill have the same/similar values.

a spread: a deviation or difference in value between two indicators. In the video, they talk about the spread between T-Bill rates and Libor.

leveraged: financed by loans or credit.

borrowing: to give money to someone and await its return in the future.

capital ratio: the amount of capital or money kept in reserves in relation to the amount of outstanding (pending) loans. For years, this ratio was allowed to dangerously decrease, leaving banks open to potential problems in case of loan defaults.