BANKING
DISCOVERING CONNECTIONS
When first opening a bank account, there can be a number of choices and factors to consider that will make the process seem quite discouraging. With time and patience, however, it becomes clear that the basics are actually fairly simple. A bank, in short, is simply a place to store one’s money, while offering access to it through a number of methods and from a variety of locations. It is important to research all of the available financial institutions in one’s area to determine which one offers the best services for your situation.
Answer the questions:
1. How often do you go to the bank? What do you usually do there?
2. What different kinds of services do banks offer to the public?
3. How will you comment on the following quote:
“A banker is a man who lends you umbrella when the weather is fair, and takes it away from you when it rains.” (Mark Twain)
Text 1
Types of Banks and their Functions
After reading the text choose the heading for each paragraph.
– Investment Banking
– Interest Rates
– Commercial Banking
– Universal Banking
– Central Banking
– Basic Types of Bank Accounts
– The Role and Classification of Banks
1. A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities. Banks are a fundamental component of the financial system, and are also active players in financial markets. The essential role of a bank is to connect those who have capital (such as investors or depositors), with those who seek capital (such as individuals wanting a loan, or businesses wanting to grow). According to their primary functions most common types of banks are central, commercial, investment and universal.
2. A central bank which is also called a reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend the government its currency. A central bank fulfils a number of key roles in the economy, acting as a bankers’ bank and as a lender of last resort, being responsible for monetary creation, and having overall responsibility for monetary policy. The central bank can use control of interest rates, open market operations and required reserves to influence the monetary base and overall interest rates in the economy.
3. A country’s minimum interest rate is the discount rate, at which the central bank makes secured loans to commercial banks. Banks lend to blue chip borrowers (very safe large companies) at the base rate or the prime rate; all other borrowers pay more, depending on their credit standing (or credit rating, or creditworthiness): the lender’s estimation of their present and future solvency. Borrowers can usually get a lower interest rate if the loan is secured or guaranteed by some kind of asset, known as collateral. By influencing the amount of real money in the economy by means of interest rate and other instruments, the central bank is able to influence aggregate demand, which in turn will influence prices. Thus the central bank has to balance the need to restrain inflation with the desire to allow economic growth.
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4. Commercial or retail banks are businesses that trade in money. Commercial banks are also known as business banks and they make a profit by:
– lending to the money market;
– investing in sound shares and securities;
– charging interest payments on overdrawn accounts;
– making loans to businessmen and private individuals, etc.
The difference between the interest rates commercial banks pay to lenders or depositors and those they charge to borrowers is known a spread or a margin. When lending money, bankers have to find a balance between yield and risk, and between liquidity and different maturities. Commercial banks offer their clients a wide range of services. They receive and hold deposits, pay money according to customers’ instructions, offer investment advice and give advice on overseas matters, exchange foreign currencies, issue travellers’ cheques and so on.
5. The commercial bank provides its customers two basic types of accounts: deposit (BrE) or savings account (AmE) and the current (BArE) or checking account (AmE). The deposit/savings accounts pay interest but can not be used directly as money (for example, by writing a cheque).These accounts let customers keep liquid assets while still earning a monetary return. The current/checking account pays no interest and it provides access to funds on demand through a variety of different channels like check books, plastic cards and others. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts.
6. Investment banks, often called merchant banks in Britain, raise funds for industry on the various financial markets, finance international trade, issue and underwrite securities, deal with takeovers and mergers, and issue government bonds. They also generally offer stock broking and portfolio management services to reach corporate and individual clients. Investment banks in the USA are similar, but they can only act as intermediaries offering advisory services, and do not offer loans themselves. Investment banks make their profits from the fees and commissions they charge for their services. Unlike commercial banks and retail banks, investment banks do not take deposits.
7. The most recent trend in banking system has been the advance of universal banks, which attempt to offer their customers the full spectrum of financial services under the one roof. Deregulation in the USA and Britain is leading to the creation of ‘financial supermarkets’: conglomerates combining the services previously offered by banks, stockbrokers, insurance companies, and so on. In some European countries (notably Germany, Austria and Switzerland) there have always been universal banks combining deposit and loan banking with share and bond dealing and investment services.
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Vocabulary Focus
Ex. 1. Mind the use of the verbs lend, borrow, owe.
1) If you borrow money, somebody gives you it on a temporary basis:
He is always borrowing money but he usually pays it back quite quickly.
2) Lend is the opposite of borrow. It is an irregular verb:
Could you lend me some money? The bank has lent us $5000.
3) Owe means to have debts; to need to pay or give something to someone because they have lent money to you, or in exchange for something they have done for you
I owe Janet ten pounds. We still owe $1000 on our car (= We still need to pay $1000 before we own our car). I think you owe (= should give) me an explanation/apology.
Complete the sentences with the correct form of the verbs lend, borrow, owe.
1) She … some money from me. 2) The bank … me $12,000. 3) I … five pounds from my brother and forgot to pay it back. 4) We … money from the bank at 8% interest. 5) If you … someone money, you have to give them a particular amount of money because you have bought something from them or have … money from them. 6) Money that you … is called a debt. 7) The word is … from Latin. 8) The bank will … you money at a lower interest if you provide a security.
Ex. 2. The text contains a number of common verb-noun partnerships (e. g. to lend money, to finance international trade). Match up the verbs and nouns below to make common collocations. Give their Russian equivalents.
| A | B |
| 1) influence 2) restrain 3) exchange 4) issue 5) make 6) offer 7) raise 8) receive 9) underwrite 10) charge 11) do | a) advice b) bonds c) business d) currencies e) deposits f) funds g) interest h) profits i) security issues j) monetary base k) inflation |
Ex. 3. Match the definitions in A with the words from the text in B.
| A | B |
| 1) the currency supplied by the Central bank both to the commercial banks and to private circulation | a) to underwrite securities |
| 2) to place money in a bank; or money placed in a bank | b) yield |
| 3) how much money a loan pays, expressed as a percentage | c) maturity |
| 4) available cash, and how easily other assets can be turned into cash | d) to (a) deposit |
| 5) the date when a loan becomes repayable | e) deregulation |
| 6) to guarantee to buy all the new shares that a company issues, if they cannot be sold to the public | f) a monetary base |
| 7) when a company combines with another one | g) liquidity |
| 8) taking care of all a client’s investments | h) a merger |
| 9) ability to pay liabilities when they become due | i) portfolio management |
| 10) a group of companies, operating in different fields, that have joined together | j) a conglomerate |
| 11) when a company buys or acquires another one | k) solvency |
| 12) the ending or relaxing of legal restrictions | l) a takeover |
Ex. 4. Match the Russian words and word combinations from A with their English equivalents from B.
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| A | B |
| 1) последний кредитор в критической ситуации | a) a collateral/security |
| 2) обязательный резерв | b) to restrain inflation |
| 3) сдерживать инфляцию | c) spread/margin |
| 4) платежеспособность | d) a lender of last resort |
| 5) разница между себестоимостью и продажной ценой; | e) a required reserve |
| 6) срок погашения платежа | f) credit standing/rating/ worthiness |
| 7) погасить долги | g) a merger |
| 8) доход по ценным бумагам с фиксированным процентом | h) to secure/guarantee |
| 9) поглощение | i) maturity |
| 10) слияние | j) to settle a debt |
| 11) учетная процентная ставка | k) solvency |
| 12) имущество, активы | l) yield |
| 13) обеспечение кредита, залог | m) a discount interest |
| 14) гарантировать, ручаться | n) a takeover |
| 15) кредитоспособность | o) to make a loan |
| 16) получить заем | p) assets |
| 17) предоставлять ссуду | q) to make loan |
Comprehension
Ex. 1. Answer the questions:
1. How will you comment on the fact that bank is an intermediary between a depositor and a borrower?
2. What are basic types of banks?
3. What are the key roles of the central bank?
4. What are the basic instruments that central banks use to regulate money supply?
5. What is a discount interest rate?
6. For what purposes may the central bank regulate interest rates?
7. How do the commercial banks earn money?
8. What kind of services do commercial banks offer to their clients?
9. What are the main functions of merchant banks in England?
10. How do investment banks in America differ from merchant banks in England?
11. In what way did deregulation in America and Europe influence the banking system?
Ex. 2. Are the following sentences true or false? Say why.
1. If the banks lends money to a company, the banks is one of the company’s debtors.
2. If you borrow money from the bank at a variable rate of interest, you might have to pay back more than you think you will.
3. Creditors prefer low interest rates.
4. Debtors prefer high interest rates.
Text 2
Banking in the USA
At the centre of the U.S. banking system is the Federal Reserve System (FRS or “the Fed”, as it is usually called) which was established in 1913. The Federal Reserve System consists of 12 central banks that service banks and other financial institutions within each of the Federal Reserve districts. Each Federal Reserve bank serves as a central banker for the private banks in its region. The United States is the only nation in the world to have 12 separate regional banks instead of a single central bank. In addition, there are 25 Federal Reserve branch banks located throughout the country.
The organization’s main task is to set and implement monetary policy, which is a set of rules for handling the economy and the money supply. Following are brief descriptions of some of the principal functions of the Federal Reserve.
The Fed (1) regulates the money supply by four basic tools. It can set the discount rate and change the reserve requirements, that is the sum of money (called reserves) equal to a certain percentage of deposits that a bank must keep on hand. Another tool the Fed uses is its power to buy and sell government bonds on the open market. These are known as open-market operations, which are major instruments for controlling the money supply in the US. The last tool employed by the Fed involves selective credit controls, or the setting of credit terms on various kinds of loans.
Another function performed by the Fed includes (2) clearing checks. Banks can use the Federal Reserve’s check-clearing service to clear checks drawn on banks outside their Federal Reserve districts.
One more important task of the Fed is (3) maintaining and circulating currency. Note that the FRS does not print currency – it maintains and circulates money. The Federal Reserve must be ready to ship extra money from its large vaults by armoured trucks.
The Fed also (4) supervises the activities of member banks abroad and regulates certain aspects of international finance.
Apart from that, the Fed (5) protects consumers by receiving and trying to resolve consumer complaints against banks. There are certain regulations, for example, that prohibit discrimination based on race, colour, sex, religion, or national origin in the extension of credit.
In addition, the (6) Fed maintains the federal government checking accounts and gold. The U.S. Treasury has the Fed handle its checking account. From this account, the federal government pays for such expenses as federal employees’ salaries, social security, tax funds, veterans’ benefits, defence, and highways. Gold, stored in the Fed belongs mainly to foreign governments and is one of the largest accumulations of this precious metal in the world.
Commercial banks accept deposits and use these funds to make loans. There are two types of commercial banks: national banks and state banks. National banks are chartered by the federal government, and state banks are chartered by state government. These banks are prime sources of capital for business and also provide loans as well as checking and saving accounts for consumers. Both savings banks and savings and loan associations perform many of the same functions as commercial banks (e. g., checking and savings accounts, loans) but use the majority of their assets for financing home mortgages.
Credit unions are non-profit, member-owned, financial cooperatives. They are operated entirely by and for their members. When you deposit money in a credit union, you become a member of the union because your deposit is considered partial ownership in the credit union.
Other financial institutions include finance companies (which provide short-term loans), large brokerage houses, insurance companies, pension funds, and investment banks (which help corporations raise capital). Most financial institutions operate on the principle of attracting deposits and then lending some of this money to other customers.
Ex. 1. Match the Russian word combinations with their English equivalents.
| A | B |
| 1) филиал федерального резервного банка | a) to implement monetary policy |
| 2) осуществлять кредитно-денежную политику | b) money supply |
| 3) предоставление кредита | c) a mortgage |
| 4) предоставлять ссуду | d) the Federal Reserve branch bank |
| 5) ипотечный кредит, закладная | e) make loan/ to lend |
| 6) денежная масса | f) selective credit controls |
| 7) выборочный кредитный контроль | g) an extension of credit |
| 8) поддерживать денежный оборот | h) to raise capital |
| 9) увеличивать, добывать капитал | i) to maintain currency |
Ex. 2. Answer the questions:
1. What is the head of the U.S. banking system and when was it established?
2. What is the main task of the FRS?
3. What four basic tools does the Fed use to regulate the money supply and to expand economy? Which of them is the most powerful in America?
4. What are other functions performed by the Fed?
5. What are the most common types of financial institutions in the U.S.? How are they characterized?
Text 3