Dotted about the City, but mostly close to the Bank of England are the eleven discount houses. These relatively small City businesses make their living by borrowing money from those who have it to spare and investing it in various easily liquidated paper assets. In particular, they finance the Government by buying its Treasury bills each week. To the Bank of England this “covering” of the weekly Treasury bill issue by the discount houses is a useful service. The quid pro quo of this arrangement is that the Bank of England will act as “lender of the last resort” to the houses, if it so chooses, or buy paper assets from the houses to provide them with cash when they can’t obtain it elsewhere.
To understand the role of lender of last resort it is necessary first to have grasped the extremely delicate nature of the discount houses’ business. Practically all the money which they invest has itself been lent to them. What is more, most of it will have been lent to them for very short periods of time like a week or even overnight, or else it will be subject to recall at very short notice. Using this sort of money, the houses purchase bills and even bonds in the open market, some of which might not be repurchased or redeemed from them for months or years. This practice is known as “borrowing short and lending long” and can be hazardous. Should those who have lent to the houses recall their money, the houses would have some difficulty getting it back in a hurry. On any given day, each house will find some of its assets falling due for repayment and will also receive new loans, but it quite often happens that the proceeds of these transactions are insufficient to provide for all the calls that are made that day by those who have lent to the house. It is then that the Bank may help in one of a variety of ways. In particular, it may offer to buy back some Treasury bills to provide the necessary money, or it may lend the required sum charging at least the minimum lending rate. This rate is defined as the lowest rate at which the Bank of England will lend and is fixed each week a little above the Treasury bill rate for that week.
The chief sources for cash for the discount houses – often known collectively as the discount market – are the banks, particularly the commercial banks. These are the ordinary High Street banks with which we are all familiar. Their business requires them to hold a certain proportion of the money which the general public has deposited with them in a liquid form, that is in the form of cash or some assets which can be turned into cash quickly and without losing its value. For example, a building or something like that is not a liquid asset because it takes time to sell, a quick sale can only be achieved if the owner is prepared to see it go at a knockdown price. Loans to the discount market are ideal from the point of view of the commercial or any other type of bank. They can be at an agreed rate for an agreed period, although it can be for as short as they like, in which case the houses call them “fixtures”, or they can be simply “at call”, again at an agreed rate, and then they can be withdrawn whenever the lender needs them. An important part of the job of the money manager in a discount house is to make sure that he has the right balance between fixtures and call money. If there is general trend in the market for rates of interest to rise so that borrowers have to pay more this week than last and will have to pay more next week than this, it is in the interests of the house to persuade institutions to lend to it for fixed periods. Otherwise call money will be quickly withdrawn and offered back to them again at a higher rate. Similarly, when the rate in the market is rising, the houses themselves take care not to make too many long-term loans, the rate of interest on which will soon fall below the general market rate. The houses that can judge best which way things will go make the greatest profit.
Questions on the text:
1. In what way do the discount houses earn money?
2. On what terms is the money lent to the discount houses?
3. How do the discount houses invest the money lent to them?
4. Why can the practice known as “borrowings short and lending long” be hazardous?
5. In what circumstances does the Bank of England act as “lender of last resort”?
6. Why do commercial banks lend money willingly to the discount houses?
7. What are “fixtures” and “call money”?
8. What must the money manager in a discount house do to make the greatest profit?
Exercise 1.
Choose the best answer:
1. “to clear items of exchange at par” means:
a) to exchange checks between banks at their face value,
b) to make profit out of exchanging check between banks.
2. “commercial papers” in the USA are:
a) business letters,
b) short-term obligations of industrial companies.
3. “a quotation on listed stocks” is:
a) making a bid for stocks accepted for sale on a stock exchange,
b) a statement of the current price of stocks accepted for sale on a stock exchange.
4. “to endorse a check with recourse” means:
a) to be legally responsible for making payment of the amount due,
b) to endorse in such a way that the party which indorses it must make payment if the other party to the transaction refuses payment.
5. “to be held liable for the amount” means:
a) to be the party to whom a payment is made,
b) to be required to make payment.
6. “to be subject to recall at very short notice” means:
a) the money is lent on the condition that it will be returned any time,
b) the money is lent on the condition that the lender will call up the borrower first.
7. “borrowings short and lending long” means:
a) small amounts of money are borrowed and large amounts of money are lent,
b) money is borrowed for short periods and lent for longer ones.
Exercise 2.
Fill in the blanks:
The central banking system of the United States is called …. It differs from that of most other countries’ … in that it consists not of one bank but of twelve … and some twenty four branches under the control of the Federal Reserve Board in Washington. The Federal Reserve Banks perform a lot of services for …. Checks flowing through the System are cleared at …. These checks are endorsed in such a way that the parties who endorse them must payment if the other … to the transaction refuse …. The checks are …. The Federal Reserve Banks assist their … banks in many other ways. For instance when their cash … becomes low, The Federal Reserve Banks will accept from them any notes that can be sold below their value at maturity. They will accept any notes that can be …. They also help in the … of new bonds to replace ones that have matured.
Unit Eight
Active Vocabulary:
Payment in advance авансовый платеж
Open account открытый счет
Bill of Exchange переводной вексель, тратта
Documentary Letter of Credit товарный аккредитив; документарный аккредитив
Cash with order 1) платежное поручение
2) предъявительская тратта
Cash on delivery оплата наличными в момент поставки,
наложенный платеж
Remit переводить, перечислять деньги
Integrity целостность
Consignment 1) консигнация
2) партия груза
Methods of Payment
Read the text:
Compared to selling in the domestic market, selling abroad can create extra problems. Delivery generally takes longer and payment for goods correspondingly can take more time. So exporters need to take extra care in ensuring that prospective customers are reliable payers and that payment is received as quickly as possible.
In the first and in the last analysis, payment for exports depends on the conditions outlined in the commercial contract with a foreign buyer. As explained previously, there are internationally accepted terms designed to avoid confusion about cost and price.
The way exporters choose to be paid depends on a number of factors: the usual contract terms adopted in an overseas buyer’s country, what competitors may be offering, how quickly funds are needed, the life of the product, market and exchange regulations, the availability of foreign currency to the buyers, and, of course, whether the cost of any credit can be afforded by the buyer or the exporter.
There are four basic methods of payment providing varying degrees of security for the exporter:
1) payment in advance,
2) open account,
3) Bills of Exchange,
4) Documentary Letter of Credit.
I. Payment in advance.
Clearly the best possible method of payment for the exporter is payment in advance. Cash with order (CWO) avoids any risks on small orders with new buyers and may even be asked for before production begins. However, this form of payment is extremely rare in exporting since it means that an overseas buyer is extending credit to an exporter – when the opposite procedure is the normal method of trade.
Variations in this form of payment are cash on delivery (COD) where small value goods are sent by Post Office parcel post and are released only after payment of the invoice plus COD charges.
II. Open account.
An exporter receives the greatest security of payment from cash with order or from cash on delivery. At the other extreme payment on open account offers the least security to an exporter. The goods and accompanying documents are sent directly to an overseas buyer who has agreed to pay within a certain period after the invoice date – usually not more then 180 days. The buyer undertakes to remit money to the exporter by an agreed method.
The open account method of payment is increasingly popular within the EEC because it is simple and straightforward. 70 per cent of UK exports are paid for under open account terms. It saves money and procedural difficulties but the risk to the exporter is obviously greater. It is only successful if an exporter trusts the business integrity and ability of an overseas buyer, something that has probably been established through a sustained period of trading.
A variation of open account payment is the consignment account where an exporter supplies an overseas buyer in order that stocks are built in quantities sufficient to cover continual demand. The exporter retains ownership of the goods until they are sold, or for an agreed period of time, after which the buyer remits the agreed price to the exporter.
However, a large proportion of export contracts cannot be settled by payment in advance or by open account, particularly with sales outsides the EEC. So, parallel with the development of international trade throughout the world, the trading community has developed methods of payments which involve the transfer of documents for exported goods using the international banking system – with the aim of speedily settling export transaction at minimum risk to exporters and to overseas buyers.
Answer the following questions:
1. Why does selling abroad create extra problems as compared to selling in the domestic market?
2. What helps to avoid misunderstandings in payment for exports?
3. What factors does the choice of a method of payment depend on?
4. Which method of payment provides the best/greatest security for the exporter?
5. Why is payment in advance of order not frequently used in exporting?
6. Which method of payment offers the least security to an exporter?
7. If the open account method offers so little security to an exporter, why is it becoming more and more popular?
8. When does an exporter agree to deliver goods on open account?
9. How does the consignment account operate?
10. Besides payment in advance and by open account, what other methods of payment has the trading community worked out?
Exercise 2.
Fill in the missing words:
The methods of obtaining payment of an export order is usually a matter … negotiation … the exporter and his buyer and will in many instances be governed … the exporter’s knowledge of the buyer and the buyer’s financial standing. In deciding the terms … payment to negotiate, the exporter may perhaps wish the degree … security he obtains, the speed … remittance and any additional costs involved.
In rare cases an exporter is able to persuade his buyer to pay 100 per cent of the … value before … take place. It is quite common, however, for the buyer to make an … payment of a percentage of the contract value upon … of the contract with the balance being … by one of the agreed methods.
Where the exporter has complete faith in the buyer he may be willing to trade on an … account basis. This usually means that the buyer receives the …, takes … of the goods and thereafter makes … to the exporter in accordance with previously agreed ….
Unit Nine
Active Vocabulary:
Bill of exchange переводной вексель, тратта
Payment on presentation платеж по предъявлению
Payment on demand платеж по требованию
Bearer предъявитель, держатель
A bill drawn on … вексель, выставленный на …
Settlement заключение сделки
Sight draft 1) вексель на предъявителя
2) тратта на предъявителя
Term draft срочная тратта
Tenor of the bill срок векселя
Due date срок погашения кредитного обязательства,
Срок платежа
Acceptance 1) принятие, акцепт, согласие на оплату
2) акцептование векселя
Face of the bill номинал векселя
Forward a bill отправлять, посылать вексель
Collecting bank банк-инкассатор
Clean bill недокументированный вексель
Cash against documents платеж наличными против документов
Promissory note простой вексель, долговое обязательство
Direct collection 1) прямая инкассация
2) прямой денежный сбор
Reshipment перегрузка, перевалка
Recoup delay задержка окупаемости
Default невыполнение обязательств, неуплата
Notary нотариус
Notice of dishonour 1) уведомление о неакцептовании векселя
2) уведомление о неуплате векселя
BILL OF EXCHANGE (B/E)
Read the text:
An exporter can send a bill of exchange for the value of the invoice of goods for export through the banking system for payment by an overseas buyer on presentation. A bill of exchange is legally defined as “an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to which it is addressed to pay on demand or at a fixed or determinable future time a certain sum of money, to or to the order of a specified person, or to the bearer”.
In other words an exporter prepares a bill of exchange which is drawn on an overseas buyer, or even on a third party as designated in the export contract, for the sum agreed at settlement.
The bill is called a sight draft if it is made out payable at sight i.e. “on demand”. If it is payable “at a fixed or determinable future time” it is called a term draft, because the buyer is receiving a period of credit, known as the tenor of the bill. The buyer signs an agreement to pay on the due date by writing an acceptance across the face of the bill.
By using a bill of exchange with other shipping documents through the banking system, an exporter can ensure greater control of the goods, because until the bill is paid or accepted by the overseas buyer the goods cannot be released. Conversely, the buyer does not have to pay or agree to pay by some agreed date until delivery of the goods from the exporter.
An exporter can pass a bill of exchange to a bank in the UK. The UK bank forwards the bill to its overseas branch or to a correspondent bank in an overseas buyer’s country. This bank, known as the collecting bank, presents the bill to whomever it is drawn upon, for immediate payment if it is a sight draft, or for acceptance if it is a term draft. This procedure is known as a clean bill collection because there are no shipping documents required. Clean bill collections have become more popular, particularly in some European countries where the method is also used in internal trade. Also such collections provide more security than open account terms if there is some doubt about a buyer’s financial status.
However, it is more likely that bills are used in a documentary collection method of payment. In this case, an exporter sends the bill to the buyer through the banking system with the shipping documents, including the document of title to the goods, i.e. an original bill of lading. The bank then releases the documents on payment or acceptance of the bill by the overseas buyer.
An exporter can even use the banking system for a cash against documents (CAD) collection. In this case only the shipping documents are sent and the exporter instructs the bank to release them only after payment by the overseas buyer. This method is used in some European countries whose buyers often prefer CAD to a sight draft if the exporter insist on a documentary collection for settlement of the export contract.
In all the methods of payment using a bill of exchange, a promissory note can be used as an alternative. This is issued by a buyer who promises to pay an exporter a certain amount of money within a specified time.
It is even possible to send the documents and bill of exchange directly to an overseas buyer’s bank, by passing the UK bank. This system of direct collection is widely supported by US banks, but it dispenses with the help of the UK bank whose aid can be invaluable if something goes wrong in the collection. For example, there could be excessive shipping delays so that a buyer may refuse to accept or pay a draft on presentation. In this situation the UK bank can act as the exporter’s agent by arranging the warehousing of the goods or their reshipment, or even disposing of them at auction to recoup any outlay.
An overseas buyer may deliberately default on a term bill or just go bankrupt. In either case the UK bank can arrange legal action or act on instructions to initiate protests, i.e. engage a notary public in the buyer’s country to deliver a “notice of dishonour” to the defaulter, thus preparing a likely settlement in favour of the exporter if matter have to go to court.
Exercise 1.
Complete the following on the basis of the information given in the text.
1. An exporter draws a bill of exchange on a foreign buyer means … for ….
2. The bill is called a sight draft if it is payable ….
1. The bill is called a term draft if it is payable ….
2. The tenor of the bill is ….
3. To accept the bill means to ….
4. A term draft does not have to be paid at sight but at ….
5. The goods cannot be released to a foreign buyer until the bill ….
6. The foreign buyer does not have to pay or accept the bill until the goods ….
7. A clean bill collection means that ….
8. A documentary bill collection means that …, the most important of which is ….
9. Under a documentary bill collection the bank … on ….
10. The foreign buyer cannot get hold of the goods unless he … or ….
11. If the exporter insists on immediate payment he ….
12. A promissory note is issued by … who in this way guarantees ….
13. A direct collection means that ….
14. The system of direct collection is supported by …, but it involves a certain risk particularly when there is ….
15. If the buyer refuses to accept or pay draft on presentation, the exporter’s bank ….
16. To protest a draft means to ….
Exercise 2.
Explain the following terms and give your own examples:
Account
Cash
Collection
Date
Default
Draft
Note
Notice
Payment
Settlement
Exercise 3.
Fill in the missing words:
The bill of exchange is often used as a means of … payment particularly for goods exported. The importer might, for example, ask to … delivery of goods before paying for them. The exporter, on the other hand, will probably not wish to … his control over the goods before obtaining … or a legal undertaking from the … to pay on a given future date. By use of the international … system, a document of title and a bill of …, the needs of both parties may be satisfied.
The exporter might … a bill exchange on the buyer and pass it with the … documents and … instructions to a bank in the buyer’s country, which would … the bill of exchange to the buyer for immediate payment in the case of a … bill or for acceptance in the case of a … bill. Should the buyer refuse, the documents will not be … and if the documents include a full set of … of lading then the control of the relevant goods remains with the … acting as … agent for the exporter who thereby also retains … of the goods.
SECTION III.
TEXTS.
Banks in Britain.
The biggest banks of the United Kingdom are the Bank of England, Lloyds’ Bank, Barclays Bank, and the National Westminster Bank.
The Bank of England is the state or national bank, which controls the British banking system. Like any other national bank, it issues banknotes and mints coins.
The other four banks are commercial banks. Very often they are called “The Big Four”. The National Westminster Bank is often referred to as “NatWest”.
Moscow Narodny Bank Ltd. is incorporated as a British registered company. It specializes in the finance of East – West trade. Their close working relationship with banks in East – European countries and in the West enables them to provide a unique service in this field.
The First Bankers in Britain.
The first bankers in Britain were Italians who came to do business in the City of London a few centuries ago. They came from Lombardy, a region in Northern Italy where there was a group of independent cities. This group was called the Lombard League.
The Lombards settled down in the part of the City of London which was later called after those Italians, Lombard Street.
The Lombards did not stay in London long. After a century or so they left London because they were made bankrupt. It happened mostly because they loaned money to kings who did not repay the loans.
So the Lombards left, but their mane is still alive in London. Lombard Street is still the centre of British banking. This is the street where the head offices of the biggest English and foreign banks are located.
SWIFT and Banks.
SWIFT, the Society for Worldwide Interbank Financial Telecommunications, is a non-profit making bank-owned, cooperative society. It was set up in Brussels in 1973 and now it has more than a thousand member banks in more than fifty countries.
SWIFT is a service organization which processes and transmits banking transactions electronically between member banks on all the five continents.
Electronic systems transfer large sums around the world quickly and effectively. In this way a new type of international banking is being established.
But payment procedures in international trade still rely heavily on paper-based documents. And specialists say that one day all the data of invoices, shipping documents, various receipts and other documents will be provided in computer from instead. No paper documents will be used any longer. All the information will be sent electronically.
This will certainly lead to a lot of technical problems.
Bank Holidays in the UK.
An official public holiday in the UK (on a day other than Saturday and Sunday) when all banks are closed, as well as most factories and shops is called “a bank holiday”. At present the following days are bank holidays in England and Wales:
New Year’s Day (or the first working day after it) Good Friday,
May Day Bank Holiday (the first Monday in May),
Spring Bank Holiday (the last Monday in May),
August Bank Holiday (the last Monday in August),
Christmas Day (or the Monday after it, if it falls on a Saturday or Sunday),
Boxing Day (or the next working day following Boxing Day).
There are some other bank holidays in Scotland and Northern Ireland.
Most of the British holidays are of religious origin, as the word “holy-day” says. But nowadays they have long lost their religious significance for the greater part of the British population and are simply days on which people relax, eat, drink and enjoy themselves.
SECTION IV