12. Comprehension questions

1. Name some of the government agencies that are involved in financial markets and tell what they do.

2. Name some common financial intermediaries.

3. Define liquidity.

4. Describe what a t-bill is.

5. List some of the major financial markets.

13. Speak about the classification of financial markets and their role. You can use the following graph

Classification of Financial Markets

The Role of Financial

Markets

World, local

national, regional

Some major types of markets

Primary/

secondary

Spot/ futures

Money

Capital

Mortgage

Consumer credit

Assets

Claims

UNIT 11

Pre-reading

1. What does the …………..

2. Do you know that ther……….

3. Can you describe………..

1. Read and translate the text

BANK INVESTMENTS

The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

The investment policy of a bank is based upon the reconciliation of two conflicting aims. On the one hand the bank wants to make as much profit as it can and for this reason it must take the risks of lending money. On the other hand its funds belong to its depositors and must be available whenever they wish to make withdrawals.

There are two things that the bank must therefore do. First, it must keep a proportion of its assets in the form of cash to meet demands. The amount that this needs to be varies very little from one bank to another or from one day to another and experience suggests that it is about six percent. As a cushion against unexpected demands a further proportion of funds is invested at low rates of return in highly liquid lending mostly to firms in the money and capital markets.

The second thing that the bank must do is to ensure that the investments it chooses arе safe. This also means that they are relatively low yielding since high yields are associated with risk and with lending for long periods of time. Much of a bank's investment is in short and medium term government and local government bonds. They yield certain incomes and arе readily saleable should the occasion demand.

Advances by a bank to its customers are the least liquid of their assets since there are few borrowers who could repay a loan at very short notice. However, they are also the most profitable of them yielding the highest rate of return. Advances to customers are likely to account for more than two thirds of the banks investment portfolio although this will vary on a day-to-day basis since overdrafts arе the most common form of advance and are not immediately controllable by the bank. In general banks do not lend to industry for long periods of time or for investment projects. They regard themselves as providing working capital rather than fixed capital.

Banks receive money in the form of deposits to checking accounts, savings accounts and certificates of deposit. To pay interest on these deposits, and to operate the business of banking, management must invest in income-producing securities and services. The Federal Reserve (FRB) dictates the percentages of reserves, loans and investment securities a bank may hold. These percentages change according to Federal Reserve monetary policy, which reflects economic risks, the needs of the nation and the dictates of the Office of the Controller of the Currency (OCC).

Investment Policies. Banks, savings & loans, credit unions, and other financial institutions are strictly regulated by the Federal Reserve as well as their individual state banking authorities. They are required to have written investment policies that set forth the types and amount of loans they will make, and the size of their investment portfolio and permissible investment types. OCC lists permissible investments as United States government obligations; various federal agency bonds; state, county, and municipal issues; special revenue bonds; industrial revenue bonds; and certain corporate debt securities that, first, provide safety; and, secondly, a relatively reasonable rate of return.

Investment Portfolio. Bank investment portfolios emphasize short and intermediate term U.S. government, agency and high-quality corporate debt securities. The investment portfolio must contain securities that can be easily liquidated and which represent low credit and interest rate risk. Repurchase agreements backed by Treasury or Agency bonds, U.S. Treasury bills and notes maturing within two years, high-quality commercial paper, certificates of deposit, and bankers acceptances make up the majority of portfolio holdings. Longer term investments with maturities to five years make up the rest of the portfolio. Ten-year maturities are sometimes acceptable as mortgage pass-through securities and other derivatives, but they are subject to limitations.