GLOSSARY
You will find here the glossary of all our published studies.
Click on the studies below to reach the corresponding glossary.
1. LBOs in France: why do some fail?
2. How does an LBO-type transaction create value for investors in the middle-market segment?
3. What if GAFA replaced traditional banks?
4. What would be the impact of changing market risk measurement models on banks' regulatory capital?
5. Is it possible to generate returns from bond peer trading using the cointegration method?
6. How can Islamic Finance develop in the Western world?
7. How can IFRS 16 change business strategy?
8. How can FinTechs contribute to risk management for traditional banks?
9. Is it possible to forecast VaR on oil with GARCH models?
10. How does the correlation of international markets evolve in times of crisis?
1. LBOs in France: why do some fail?
Top management
Senior executives of a company, essential element in the context of an LBO operation especially LMBO.
Covenant
Represent all the clauses appearing in loan contracts and imposed by the creditor. The borrower must immediately repay the capital initially borrowed if certain criteria are not met.
Cost of capital
Weight Average Cost of Capital, WACC. It's the cost of money needed to finance the business. This economic indicator represents the average annual rate of return expected by shareholders and creditors in return for their investment.
Deleverage
This term is used when an economic entity tries to decrease its debt ratio in order to reduce its risk of insolvency.
Monetary creation
Operation which consists in putting into circulation a payment, reserve and standard instrument. (Fiduciary, electronic, non-cash money ...)
Mezzanine debt
Source of corporate finance (especially popular with SMEs). It is the riskiest debt, but the one that pays the most. It must be repaid after the senior debt.
Senior debt
Classic bank debt of a company with a banking establishment. In the case of LBOs, senior debt is presented in different tranches: A, B and C depending on the amortization period.
Private equity
Translated from English as “Capital investment”, we speak of private equity when financial institutions invest in unlisted companies.
External growth
Development operation of the firm which generally consists of the buyout of a company (Concentration ...).
Leverage Buy Out (LBO)
A financial technique that allows a holding company to buy another company by resorting to bank or bond loan. The holding company, created specifically for this operation and therefore without its own activity, becomes the parent company of the purchased company.
Leverage
A financial fundraising operation, the outcome of which allows a cost of capital lower than the financial profitability of the operation, as opposed to the club effect.
Ad hoc structure
Entity in an LBO whose object is to support the debt known as a holding company, or NewCo.
2. How does an LBO-type transaction create value for investors in the middle-market segment?
Return On Investment (ROI)
Translated into French by what is called the "return on investment". It is the amount of money earned (or lost) compared to the initial investment.
Middle market
Medium-sized enterprise segment (ETI). It depends on the valuation of the company.
Capital investment
An investor uses part of his equity to develop a business that is not yet listed and has growth, transmission or turnaround needs. In return, it asks for a participation in the capital and consequently a return on the invested capital.
Market capitalization
This is the total value of the outstanding securities (shares) of a listed company. (share price x number of shares).
Target company
Operation which consists in putting into circulation a payment, reserve and standard instrument. (Fiduciary, electronic, non-cash money ...)
Valuation
Financial technique for determining the value of an asset. Several methods exist, for example Discounted Cash-Flow (DCF).
Leverage Buy Out (LBO)
A financial technique that allows a holding company to buy another company by resorting to bank or bond loan. The holding company, created specifically for this operation and therefore without its own activity, becomes the parent company of the purchased company.
Private equity
Translated from English as “Capital investment”, we speak of private equity when financial institutions invest in unlisted companies.
Standardization
Set of processes allowing the harmonization of method, tools related to a specific field.
Economic model
Organizational diagram to define the value creation circuit with the objective of competitive differentiation and profitability.
EBITDA
Also called EBITDA (Profit Before Interest, Taxes and Depreciation) EBITDA is a quantified financial indicator designating the income of a company without counting expenses, depreciation and amortization and taxes. It is very close to the Gross Operating Surplus (EBITDA).
3. What if GAFA replaced traditional banks?
Market capitalization
This is the total value of the outstanding securities (shares) of a listed company. (share price x number of shares).
Leverage
A financial fundraising operation, the outcome of which allows a cost of capital lower than the financial profitability of the operation.
FinTech
Contraction of the terms Finance and Technology. The company uses new technologies to provide cheaper and more efficient financial services.
Cryptocurrency
Digital currencies exchanged peer to peer. No central bank supervises them but the traceability and security of transactions are ensured by a system of blockchain and cryptographic algorithms.
Peer-to-peer
Digital payment / money transfer system between individuals
Value chain
It is a set of stages of an economic model whose objective remains the realization of profit
Neobank
It is a digital bank not attached to traditional banks. It can only be accessed through a mobile application. It often comes from fintechs.
Cashback
Cashback is a commercial technique allowing to have a "return", a reduction, on the expenses carried out via the credit card of his bank with partner companies of the bank in question.
Monetary creation
Operation which consists in putting into circulation a payment, reserve and standard instrument. (Fiduciary, electronic, non-cash money ...)
Transformation of maturity
Also called maturity transformation, it consists, for a commercial bank whose activity is the intermediary and transformation, of lending short resources over the long term.
4. What would be the impact of changing market risk measurement models on banks' regulatory capital?
Backtesting
Simulation technique applied to historical data for the validation of a trading strategy or a risk assessment model.
Compliance
Translated into English by the term "Compliance". This notion is used in law and in management. The objective of compliance is to verify the agreement between the elements and the respect of the rules dictated in the financial institutions.
Coupon
Cash flow or interest paid periodically to the holder of a bond between the bond issue date and its maturity.
Exposure at default (EAD)
Exhibition in case of default in French. It is a parameter used in the calculation of economic capital or regulatory capital under Basel2. This is the amount of risk that the creditor may incur in the event of default by the debtor.
Loss Given Default (LGD)
One of the three credit risk indicators of the Balle II regulation. It represents the percentage of loss that a bank or a financial institution may incur in the event of default by the counterparty.
Market value
Resulting from supply and demand, the market value of a security is the price at which that security is traded on the market. Market value also refers to the market capitalization of a company.
Counterparty risk
Refers in the context of a financial transaction the potential loss to which the bank or a creditor is exposed, in the event of default by its debtor.
Residual Risk Add-on
Risk that persists even after installation through the management of risk mitigation measures. In fact, the residual risk is the current risk, in a real and existing context, with risk control measures in place.
Sovereign rates
It is also called the government loan rate. Government loans organize the market for medium and short-term interest rates.
Volatility
Reflects fluctuations in the value or profitability of a security. It makes it possible to measure the risk of a financial instrument.
Banking book
Translated as "bank portfolio". It lists all the stable properties of a banking establishment. All medium and long-term transactions are recorded in this portfolio.
Internal control
Control system within administrations and establishments to ensure the proper implementation of procedures and regulations. Internal control aims to control risky operations carried out by the establishment with a view to increasing its performance.
Yield curve
Graphically shows the evolution of interest rates as a function of maturities.
Governance
Represents all the measures, rules and information and monitoring entities to ensure good management. In business, governance defines the actions to be taken to ensure financial sustainability and protect the interests of shareholders.
Financial market
Place of exchange and negotiation between issuers and buyers of assets in the form of securities (stocks, bonds, commodities) for money. It is a market that consists of a primary market and a secondary market.
Wallet
A set of assets held by an investor (stocks, bonds, commodities, derivatives).
Market risk
Is related to the risk of impairment caused by fluctuations in market prices of assets and financial values. There are four types of market risk: interest rate risk, currency risk, equity risk and commodity risk.
Credit spreads
The spread reflects a difference between two rates. The credit spread is the difference between a risk-free rate and a risk-free rate. This is a risk premium intended to cover the credit risk.
Trading book
French trading portfolio. It represents all the assets held for short-term trading are recorded in this portfolio.
Backtesting
Simulation technique applied to historical data for the validation of a trading strategy or a risk assessment model.
Regulatory capital
A capital available to any company to legally ensure its activity. This capital is essentially made up of the share capital and the reserves. It is a kind of reserve that can be used at any time to avoid over-indebtedness or respond to unforeseen repayments.
Corporate bond
Bonds issued by companies to raise financing on the market unlike government bonds issued by states.
Expected Shortfall
Also called CVaR or Conditional Value at Risk is a measure of the market risk or the credit risk of a portfolio. This is an alternative to value at risk which is more sensitive to the shape of the distribution of losses in the tail of the distribution.
Financial instrument
Refers to a negotiable security that can be listed on the stock exchange. A distinction is made between spot financial instruments (traditional financial securities, shares, bonds) and forward financial instruments (derivative products).
Interbank market
A money market compartment reserved exclusively for financial institutions allowing those with excess liquidity to finance the liquidity needs of others. Transactions on this market cover the short and very short term (between 1 day and 12 months).
Quantitative easing
Translated by quantitative easing. It is a monetary tool making it possible to revive the economy in the event of a major financial crisis. It is an unconventional monetary policy whereby the central bank massively buys securities on the financial market in order to increase the money supply in circulation in the economy.
Liquidity risk
Refers to the risk for a financial institution of not being able to meet its commitments to its customers (withdrawal) at a given time.
Policy rate
Interest rate predefined by a financial institution (central bank) of a country or a group of countries (having a monetary union). This rate impacts the price of credit or savings from private banks. There are three types of policy rate: interest rate on deposits, refinancing rate and marginal lending rate in Europe or discount rate in the United States.
Value at Risk (VaR)
The Var is defined in relation to a time horizon and a confidence threshold. It represents the amount of risks not to be exceeded, taking into account the two aforementioned parameters.
5. Is it possible to generate yield from pair trading with the cointegration method?
Cointegration
A test that is used to analyze correlation between two or more time series measured accounts. The aim is to reveal an arbitration opportunity. In other words, two cointegrated assets do not evolve in the opposite direction to the norm, and even if this were to happen, it is a simple disturbance and a quick return to the average will happen.
Efficient market
An efficient market refers to when all relevant information is known; All knowledge is priced into securities, therefore making the market unbeatable
Bullet bond
The entire principle of the bond fully paid upon maturity date
Open-Adjusted-Spread
The spread between a fixed-income security rate and the risk-free rate of return
Augmented Dickey-Fuller Test (ADF)
Statistical test that examines whether the statistical properties of a series (expected value, variance, correlation) change over time or remain stationary.
Z-spread
The spread between the Treasury spot rate and the present value of cash flows.
Index
Measure of the overall performance of the market or a given sector. It serves as a barometer. The CAC 40 and the S&P 500 are examples of index.
Bond market
Financial Market for purchasing and selling debt securities
Callable bond
The issuer can recall the bond from the investor prior to the maturity date of the bond
Derivative
A tradable contract that derives value from an underlying asset such as commodities.
Its value varies depending on the rate or price of the underlying asset over time. Derivatives were created so that companies could hedge against financial risks.
Yield
Profit, by way of interest or dividends, to the investor
Statistical test that examines whether the statistical properties of a series (expected value, variance, correlation) change over time or remain stationary.
Accrued interest
They designate within the framework of financial products which pay income at fixed deadlines, a fraction of the accrued interest which is due by the debtor on the due date.
Jump
A debt-based security. The parameters of a bond are: nominal price, selling price, interest rate, maturity and valuation
Long position
It is a technique where the investor is placed in a buying position when he anticipates an increase in the price of a security in the future
Short position
It is a technique where the investor is placed in a selling position when he anticipates a decrease in the price of a security in the future.
Pair-Trading
Utilization of history trends and correlation between two securities to capitalize on arbitrage and hedge downside risk.
Applied to bonds, the pair trading consists on finding peer bonds with a long-term relationship, and to take advantage of the differences that might exist by selling one and buying the other.
6. How can Islamic Finance be developed in the Western World?
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)
Translated as “The Accounting and Auditing Organization for Islamic Financial Institutions”. Autonomous institution responsible for the development of accounting standards for the Islamic financial industry, meeting the requirements of the Shari'ah.
IASB (International Accounting Standards Board)
Bureau International des Normes Comptables, international body responsible for drawing up international accounting standards IAS / IFRS.
Istisna'a
Contract between a Client “Owner” and a Bank “Owner”. By means of this contract, the customer asks the bank to build or build a good for him. Then the bank rents it to him according to the terms negotiated in the contract.
Murabaha
Sales contract in which the bank buys a good at a price and resells it to a customer at a price plus an explicit and determined margin. This mechanism makes it possible to avoid borrowing with interest for the acquisition of a property.
Credit risk
Risk related to the possibility of customer default. The debtor may be unable to meet his obligations or voluntarily decides to fulfill his payment commitment.
Sukuk
Bond instruments, structured so that they comply with Islamic rules. It is backed by a tangible asset with a fixed maturity and it does not pay interest, but a share of the profit generated by the asset.
Tangible asset
Physical assets, material.
Ijara
Financing contract where the bank is presented in the form of “owner” and the customer in the form of “tenant”. The bank acquires the property and rents it to the customer for a predefined period with the possibility of purchase. Payments cannot be rearranged and there is no late payment interest like in conventional banks.
Moucharaka
Association contract between two or more parties in the capital of a project. The participants share the gains and losses in proportion to the capital contributions and also participate in the work.
Profit Equalization Reserves (PER)
Translated as “Income equalization reserves”. These are the reserves that make it possible to deal with commercial risk. They are retained from the profit generated by an investment project before distributing the profits between the shareholders and the holders of the investment accounts.
Market risk
Is related to the risk of impairment caused by fluctuations in market prices of assets and financial values. There are four types of market risk: interest rate risk, currency risk, equity risk and commodity risk.
Takaful
Alternative form of insurance. Takaful is based on the idea that what is uncertain about one person can cease to be uncertain about a very large number of similar individuals. A common fund for all participants is set up, and allows volunteers to provide mutual insurance. The profits are redistributed between the contractors.
Credit ratings
Assessment of an entity's credit history and ability to repay debts.
Investment Risk Reserve (IRR)
Translated as “Reserve to face investment risk”. In the event that the projects financed by the investment accounts lead to losses, this reserve is drawn on to allocate to the investment accounts part of the profits made during previous operations.
Moudharaba
It is among other things, a contract between a bank playing the role of the investor (“Rab el Mal”) which undertakes to provide the funds for the project, and an entrepreneur (“Moudarib”) undertaking to manage the project. The remuneration is based on a distribution key fixed in the form of a percentage of the profits to the entrepreneur.
Qard hassan
Loan without consideration with a rate of 0%. The debtor will decide to pay an additional amount beyond the principal amount of the loan without promising it as a token of appreciation to the creditor. In the event that the debtor does not pay an additional amount to the creditor, this transaction is a true interest free loan.
Operational risk
Corresponds to the risk of losses caused by the failure or inadequacy of internal processes, personnel, external events, system or technological risk.
Securitization
Secure financing mechanism that allows institutions to access capital markets through the monetization of assets by transforming in the form of titles.
7. How may IFRS 16 change corporate strategy?
Shareholders
A shareholder or stockholder is a person who owns or holds shares in a company.
Gross income
Is the amount of money that a company earns after discounting the cost of good sales (COGS). It provides a neutral result related to the company's tax and investment financing policy.
Debt ratio
An indicator of solvency for the firm. It measures a firm's total liabilities as a percentage of its total assets.
Fixed asset
Assets that a company owns to use it in its daily operations, like PPE (Property, plant and equipment). A fixed asset may be tangible (material property), intangible (patents, licenses) or financial (equities, bonds).
IFRS 16
It is an International Reporting Standard promulgated by the International Accounting Standards, which provides guidance on accounting for leases. It carries forward the lessor accounting requirements in IAS 17. IFRS 16 is used for reporting information that faithfully represents lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainty cash flows arising from leases.
EBIT
Earning before interest and taxes
It represents the gross income before depreciation, amortization and provisions. It provides a neutral result regarding the company's financing and taxation policy
Depreciation expenses
Expenses that a company incurred due to fixed assets. A property loses its value mainly because of wear. A technological asset may lose its value if it has been overtaken by new models, for example.
KPI (Key Performance Indicator)
A KPI is a quantifiable measure a company uses to determine how well it's meeting its operational and strategic goals.
A KPI is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets.
Discount rate
Key parameter of The Net Present Value (NPV). It is used to assess the profitability of an investment. It allows you to update the cash flows potentially generated by an investment in order to assess its profitability, while taking into account the change in the value of money over time.
8. How could Fintechs contribute to manage risks for traditional banks?
Regtech
Approach using technology to help financial players,
especially banks to optimally manage regulatory constraints. In
in other words, Regtechs are financial technologies aimed at facilitating the management of
regulatory risks.
Initial Coin Offerings (ICO)
Equivalent to IPO (Initial Public Offering) in cryptocurrency, it is a method of raising funds through the issuance of digital assets called tokens or etons. Tokens, similar to shares, are however different insofar as most often, they represent a pre-purchase of the service or product that will be developed, rather than shares of the company.
Crowdfunding / Crowdfunding
Means by which project leaders, via an internet platform, raise funds directly from a set of contributors called “community”. The platform ensures the traceability of the financing which can be in the form of donations, loans or equity.
DSP2
The Payment Services Directive, which entered into force in 2018, aims to provide a framework for players in the online payments market, both legally and at European level.
Cryptocurrency
Digital currencies exchanged peer to peer. No central bank supervises them but the traceability and security of transactions are ensured by a system of blockchain and cryptographic algorithms.
Risk of non-compliance
The risk of non-compliance is defined by the Basel 1 Committee as a risk of judicial, administrative or disciplinary sanction, of loss
financial or reputational damage due to failure to comply with
legislative and regulatory or professional and ethical standards and practices,
specific to the activities of banks.
Open Banking
Principle based on the sharing of data from a bank with external financial players in a secure manner. The data mainly concern day-to-day banking operations, but also money deposit, the geographical location of counters or branches, etc.
AML / CFT device
Anti-Money Laundering and Terrorist Financing System applied to financial bodies and supervisory bodies.
ACPR
The Prudential Control and Resolution Authority is a body backed by the Banque de France and in charge of approving and supervising banking and insurance establishments and their intermediaries.
Scale-up
Mature start-up, having already raised at least 1 million euros.
Patriot Act
Law for the fight against terrorism, passed in the USA in 2001. In response to the attacks of September 2001, this law allows the American government authorities to carry out more heightened surveillance (communication between Internet users, telephone tapping) without informing anyone, as well as anyone. 'a much easier recourse to justice.
ORIAS
Body for the Register of Insurance Intermediaries. Delivers approvals which constitute the official passport to exercise the professions of Finance and Insurance, for operators such as loan or insurance brokers
PCI DSS (Payment Card Industry Data Security Standard)
Repository of security rules aimed at protecting data on payment cards. This is a standard applied to the payment card industry, the objective of which is to protect payment card holders against data theft on the Internet or any other fraudulent use.
Backtesting
Simulation technique applied to historical data for the validation of a trading strategy or a risk assessment model.
Confidence intervals
The confidence intervals, using a probability sampling method, are intended to frame a value that one seeks to estimate. They reflect the zone of uncertainty of the observed sample and determine its margin of error.
Arch model
The Arch model, AutoRegressive Conditional Heteroskedasticity, is used in modeling financial time series that have variable volatility over time. These series show strong fluctuations with periods of high concentrations followed by periods of calm. Oil is the perfect example.
Value at Risk (VaR)
Concept generally used to measure the market risk of a portfolio of financial instruments. This concept has been developed and has become a risk management tool in all areas. The Var is defined in relation to a time horizon and a confidence threshold. It represents the amount of risks not to be exceeded, taking into account the two aforementioned parameters.
Brent
Brent, named after the oil field in the North Sea, designates a type of light oil from this region. It constitutes one of the great references which one uses to negotiate the oil transactions.
Normal law
The Normal law, also called Gauss's law, is a law used both in statistics and in probability to model events made up of random phenomena. The law depends on two variables, its expectation and its standard deviation.
Linear regression model
Used in econometrics as well as in statistics, this modeling makes it possible to give future estimates from past estimates; the goal being to establish a linear relationship. It is a model that is widely used for stock market analysis.
Volatility
Reflects fluctuations in the value or profitability of a security. It allows to measure the risk of an instrument
Expected Shortfall
Also called CVaR, the Conditional Value at Risk is a measure of market risk. It measures the probable loss not taken into account by the traditional VaR, that is to say the α% scenario of the laqueue.
Student's Law
Statistical laws used when the samples follow a Normal law, they depend on an integer parameter n called the degree of freedom. These laws intervene in the comparison tests of two expectations. The Student test also makes it possible to compare the observed probability of a characteristic with a theoretical probability.
Vanilla options
A vanilla option is a derivative product that gives the right (and not the obligation) to buy or sell an underlying asset at a price fixed in advance and for a given time. The buyer of the option will therefore be able, depending on the evolution of the market, to choose to exercise his option or not.
WTI
WTI or West Texas Intermediate is a blend of several American light crudes. This is the benchmark value for the US oil market.
S&P 500
Created on March 4, 1957, it is a stock market index based on 500 large companies listed on the stock exchanges in the United States. It covers about 80% of the US stock market by capitalization.
Degree of freedom
In statistics, the number of degrees of freedom corresponds to the number of values in the final calculation of a statistic which are free to vary, without violating any constraint.
Copulas
They are a basic tool in the modeling of multivariate distributions in finance and insurance. They come from the theory of probabilities; and allow to measure the dependence between the different coordinates of a random variable without worrying about its marginal laws.
Volatility
Reflects fluctuations in the value or profitability of a security. It makes it possible to measure the risk of a financial instrument.
Yield
It represents the percentage of gains obtained compared to the initial investment. The yield of a share is calculated according to the dividend received by its owner compared to the price he invested for the purchase of the security.
WTI
WTI or West Texas Intermediate is a blend of several American light crudes. This is the benchmark value for the US oil market.