A) Bank Loans and Overdrafts

There are two principal ways in which a businessman can borrow money from his bank: by means of a loan and by means of an overdraft.

An overdraft is "a sum of money drawn from a bank by a customer that is more than the amount he holds in his account with the bank". Permission of the bank has to be obtained for this facility, and interest is charged on the outstanding amount.

Here is an extract from Statement of Terms and Conditions for Non-U.S. Banks of Citibank, N.Y.:

"Customer? will receive overdraft interest statements monthy. However, under exceptional temporary circumstances, statements may be issued daily. Charges for overdrafts will be calculated in accordance with normal backing practice at Citibank, New York."

When the bank makes a loan, a separate loan account is opened at the bank in the borrower's name. The amount of the loan is debited in the loan account and credited in the customer's current account. Interest is charged on the full amount of the loan even though the borrower might not draw on the full amount immediately.

Because bank funds must be kept fluid, loans are nearly always short term, and a bank will not lend money to a customer unless it knows that the money can be repaid quickly. Normally the bank likes to have its loans repaid or its overdrafts charged, within a year.

Words you may need:

to charge interest взимать проценты

outstanding amount (зд.) сумма превышения

extract n выдержка, отрывок

terms and conditions условия

statement n выписка

temporary adj временный

charges n pl расходы, издержки

calculate v рассчитывать

separate adj отдельный

to keep fluid (зд.) работать (о деньгах)

b) In a country with a developed banking system there are different kinds of banks with widely varying activities: They are:

1. The Universal banks. Those banks (commonly found in Switzerland, West Germany and the Netherlands) are allowed to do almost anything financial, from lending other people's money to underwriting, advising on investments, stockbroking, etc. Some frown on universal banking in the belief that it creates too many conflicts of interest within one bank. Can a bank give advice on a share for which it is the underwriter and also broker and banker to the issuer? That question has not stopped foreigners from wanting a Swiss bank account and taking their Swiss banker's investment advice.

2. The ordinary deposit banks. These include the commercial or joint-stock banks, large and small, some private banks. All these have direct contact with the public which deposits money with them and draws cheques on them.

3. The savings banks. The chief function of these banks is explained by their name. In old times savings banks were banks which accepted only the deposits of small savers. They did no business with industry and provided no money-transmission service, had no cheque-drawing facilities. These distinctions between savings banks and other banks are now being eroded.

4. The merchant banks, or "acceptance houses". Merchant banks are British banks which concentrate on advising companies about raising new capital and about buying or selling other companies. They do a bit of lending too. Some of them also specialize in fund management. Merchant banking is the business carried out over the last two hundred years or so by a small number of London-based institutions. The origins of merchant banking in London lie in the 18th century.

The name "merchant bankers" refers to their origin as mercantile houses specializing in the export of British products and the import of products from foreign countries. This involved remitting money from one country to another, and the bill of exchange on London became the means of financing the import and export trades, which allowed the vendor and purchaser of traded goods to achieve liquidity; the role of the merchant was to put its name to or to "accept" a bill, which was then discounted in the market. The skill of the general merchant was to assess the credit of the purchaser whose bill it had accepted. Trade arid its finance continued to form the backbone of their business and the growing significance of their ability to provide credit transformed a number of general merchants into merchant banks, specializing in accepting bills. In doing so they assisted London to become the world's financial centre: the bill of exchange on a London accepting house, denominated in sterling, became a means of settlement in trade throughout the world.

Merchant banks maintained excellent connections with leading British companies and frequently joined their boards. As a result, from the 1950s a small number of merchant banks, in addition to their acceptance business, came to dominate the business of corporate issues in the form of offers for sale of formerly private companies to the public, rights issues of equities and debenture issues. In these issues merchant banks acted both as advisers and as primary underwriters in guaranteeing a sale price to the vendor. Merchant banks took full advantage of the development of the Eurocurrency markets in London in 1970s, and were amongst the most active syndicators of currency loans to the international banking community. Merchant banks have built up a substantial business as investment managers on behalf of UK institutions, such as pension funds, as well as overseas governments and major institutions worldwide. They played a leading role in developing the international investment management industry in London.

5. The consortium banks. A consortium bank is a bank owned by a group of other banks from a number of different countries, no one of which owns a majority share. Consortium banks were children of the Euromarket. Born in the 1970s they gave smaller banks a way into the Euromarket hand in hand with bigger bank partners. The advantage to the bigger banks lay in their easier access to the big domestic customers of the smaller banks.

Some consortium banks continue to thrive by staying at the forefront of new financial techniques, acting as a type of merchant bank, some other were gobbled up by one or other of their shareholders.

Words you may need:

universal bank универсальный банк

underwriting n андеррайтинг, гарантирование размещения (ценных бумаг)

frown v не одобрять, относиться отрицательно

to draw a cheque on a bank выписать чек на банк

savings bank сберегательный банк

distinction n различие

erode v размывать(ся), разрушать(ся)

fund management управление финансовыми средствами

London-based расположенный в Лондоне

mercantile adj коммерческий, торговый

to remit money переводить деньги (по телеграфу)

vendor n торговец, продавец

purchaser n покупатель

backbone n хребет, основа

rights issues of equities выпуск новых акций, предлагаемых акционерам компаний

debenture n облигация (акционерной компании)

consortium bank консорциальный банк

majority share контрольный пакет акций

thrive v процветать

gobble v (зд.) поглощать (букв, пожирать)

Commercial Banks in Russia

Foreigner: As far as I know, Russia has a two-tier banking system.

Russian: Yes, our banking system consists of the Central Bank of Russia (CBR) and commercial banks, which is typical of many countries in the market economy.

F.: How do your commercial banks operate? Is the regulatory control strong enough?

R.: Banking in Russia is regulated by the Law on Banks and Banking in the Russian Federation. As to the CBR, it is constantly strengthening its regulatory and supervisory role. For instance, now banks can start operating only after they get registered and obtain a license from the CBR.

F.: Your banking legislation provides for the existence of banks and credit institutions. How do they differ?

R.: Our credit institutions are only allowed to perform cash settlement operations, collect money and documents, buy and sell foreign currency.

F.: How are your banks run?

R.: It depends on the organizational and legal form of the bank. Banks with the authorized capital made up of contributions, have the status of limited liability societies. The founders' contributions may be in the form of money, property and other tangible assets. A joint-stock bank forms its authorized fund by issuing shares. The governing body in a bank is a meeting of the founders or shareholders. Between the meetings, this function is performed by the bank's council. They determine the bank's policy. Day-to-day management is carried out by the board, which is an executive body. The board is headed by the President. The board members determine the bank's structure and functions of its departments.

F.: In the West, bankers' services cover an enormous range of activities today. What about your banks?

R.: In principle, we offer practically the same services. All operations can be divided into active and passive. Passive operations are bank's resources consisting of a bank's own and outside funds. I mean the authorized capital, the reserve and special funds as well as the retained profit.

F.: But the bulk of a bank's resources are formed by outside resources, in other words, loans obtained by the bank and deposits.

R.: You are right. Speaking about active operations, I'd like to stress that they are placement operations aimed to get a profit and guarantee a bank's liquidity. They are cash, credit and investment operations.

F.: What operations prevail in the assets structure?

R.: Lending operations. Their share is the largest.

F.: Then the loan management departments must be most careful with applicants.

R.: They are. They study creditworthiness of applicants and their credit history most carefully before they give recommendations to lending operations departments.

F.: Banks sometimes follow a risky credit policy. Are your banks tempted by quick and easy profits?

R.: They are. Moreover, sometimes they infringe normative documents of the Central Bank, particularly about the capital and reserve requirements. Some banks also infringe rules for accounting and reporting and requirements for reserves for possible losses.

F.: What is the position of the Central Bank in this critical situation?

R.: Banks are controlled regularly for capital adequacy, asset quality and liquidity, I mean cash and "near cash" investments.

F.: Refinancing is a tested technique to regulate bank's liquidity. Your Central Bank arranges refinancing, doesn't it?

R.: Yes, it does. Refinancing is done by granting lombard credits, through sale and repurchase agreements (REPOs), and by crediting correspondent accounts of banks acting as primary dealers in the GKO market.

F.: I see that your financial sector is really developing at a great pace.

Words you may need:

credit institution кредитная организация

cash settlement operations расчетно-кассовые операции

founder n учредитель

contribution n взнос

tangible assets материальные активы

council n совет

active/passive operations активные/пассивные операции

outside funds привлеченные средства

retained profit нераспределенная прибыль

placement operations размещение средств

primary dealer первичный дилер, дилер по правительственным облигациями

applicant n заявитель

creditworthiness n кредитоспособность

credit history «кредитная история», досье заемщика

tempt v соблазнять

infringe v нарушать (правила, законы и т.п.)

The Discount Market

The discount market is the fusion of the London markets for sterling money-market security and short-term sterling deposits in the operations of the discount houses.

For many years it was synonymous with the London money market but with the rise to prominence of the parallel markets it became known as the "traditional" money market in comparison especially with the interbank market in sterling funds. The discount market is a comparatively recent development in English monetary history. Its origins lie in the London bill market of the early 19th century.

Now this market in short-term financial instruments consists of ten big discount houses, who are members of the London Discount Market Association, and simple bill-brokers (discount houses) who do not have a large portfolio. Through this market the Bank of England fine-tunes the nation's money supply.

The participants in the market specialize in "bill-broking" form of banking, i.e. the provision of short-term money by way of discounting bills to borrowers. Some twenty years ago much of the discount market's business was in treasury bills. Now the market deals in a wider range of short-term assets, in particular, bank bills and certificates of deposit. Generally speaking, the discount market performs the same function for the banks as the banks themselves perform for their clients: it employs profitable funds which are temporarily unused by banks and other financial houses. It participates substantially in the financing of the short-term requirements of the government by buying Treasury Bills; it holds short-term government bonds and thereby carries some of the Government's unfunded debt; and it accepts and discounts bills of exchange, thereby financing short-term commercial operations and foreign trade.

Words you may need:

discount market учетный рынок

fusion n (зд.) слияние, объединение

prominence n важность, значимость

bill market рынок векселей

fine-tune v (букв.) «точно настраивать» (регулировать колебания рыночных тенденций)

"bill broking" учет векселей

unfunded debt срочный долг, текущая задолженность

A crucial aspect of the development of a country's domestic banking system and financial markets is the payment system, which is used by enterprises and individuals to discharge obligations incurred in a market economy. Payment systems are the foundations on which a stable and efficient economy can be built. The principal objective of the payment system is to support the country's economy. Moreover, the payment system is one of the first places where financial stress will manifest itself, as firms in financial difficulty fail to meet their payment obligations.

The payment system is the apparatus through which obligations resulting from economic activity are discharged by transfers of monetary value. Obligations can be discharged through the payment system using cash or deposits held in banks. In the case of payments made using bank deposits, it is necessary to use some form of payment instrument, such as a paper or electronic credit or debit payment, to move funds. For a debit payment, such as a check, the receiver of money (the payee) initiates an instruction to the bank holding the deposit of the sender of money (the payer), ordering the paying bank to pay. This is done by presenting a check, which must be honoured by the payer, who is the customer of the paying bank, once the check is authenticated.

For a credit payment, such as a payment order, the party making the payment initiates an instruction to his bank to pay money to the intended receiver by initiating a payment order.

When using deposit money in banks to make payment, the process for discharging an obligation can be divided into two parts. The first part is clearing, the process by which payment information is conveyed between the payer and payee and between the banks holding the accounts of the two parties to the transactions. Once a payment is initiated, clearing should take place quickly and reliably in order to minimize financial risk as funds are being transferred. Commercial banks play an important role as intermediaries in the clearing process because they provide account services to the public.

The second part of the process for discharging an obligation using deposit money in banks is settlement, in which the actual transfer of monetary value associated with the payments is made. Banks play a role in settlement because it is through the accounts held on their books that the transfer of monetary value occurs. Commercial banks settle for the non-bank public and sometimes for other banks with which they have correspondent account relationships.

The central bank, where all commercial banks hold accounts, is often used by commercial banks as the settlement entity for interbank transfers.

Clearing and settling payments can be complex. Therefore, an efficient payment system requires a high degree of cooperation and coordination among banks, which usually occurs through a clearing house. A clearing house is a legal entity, owned and controlled jointly by its member banks. Its primary function is to coordinate the exchange and settlement of payments among its members.

The activities of the clearing house might be limited simply to coordinating the physical exchange of payments among banks, for example, by organizing efficient and speedy transportation of payment documents. Clearing houses may also provide processing services to their members, in which case they may operate fairly large data processing and data communications systems to process payment instructions. Payment systems face a number of risks, like liquidity risk, credit risk, cross-currency settlement risk and systemic risk.

Thus, confidence in a payment system is crucial in a market economy. In the long term each country is likely to need a safe and efficient payments system for households; legislation governing payments; and a sound financial sector, including financially and operationally sound banks.

Words you may need:

crucial adj решающий, критический

to discharge obligations выполнять обязательства

payee n получатель платежа

to initiate an instruction (зд.) дать указание

payer n плательщик

to honour the check оплатить чек

payment order платежное поручение

convey v передавать

correspondent account корреспондентский счет

systemic adj системный

Paper-based systems are slow and costly to operate, involving physical movement of paper which must be sorted and cleared. They are prone to error, delays or disruptions because of returned cheques, missing documents or errors in data capture.

In recent years some countries have speeded up the documentation flows due to the rapid innovation of telecommunications and bank computer technology which has revolutionized payment systems. It is particularly true of debit or credit card-based transactions, in which bank customers may give instructions to effect funds transfers electronically through automated teller machines (ATMs), terminals or at retail outlets which operate electronic funds transfer at point of sale (EFTPOS). EFT systems have the advantage of speed, accuracy, convenience and greater efficiency relative to paper-based systems, but are much more costly to install and technologically complex to maintain.

Most developed countries now maintain a mixture of paper-based and EFT systems.

Modern payment systems generally cover the following key components:

a. cheque clearing system;

b. automated clearing houses for bank EFT payments;

c. credit/debit card systems including ATMs and EFTPOS;

d. giro payment system;

e. interbank funds transfer system (such as Fedwire); and

f. securities market clearing/settlement system.

Modern banking technology enables payment systems to handle larger volumes of information faster, with greater accuracy, thus reducing the float and the time lag between a transaction and its settlement. As banking systems and financial markets become more inter-linked, payment systems have become increasingly interconnected through harmonized document and telecommunication standards. The greater the degree of harmonization of standards, the more efficient the information flows.

Banks that engage in foreign trade and foreign exchange transactions find it useful to become part of the international electronic message switching network operated by SWIFT (the Society for Worldwide Interbank Financial Telecommunications).

Since payment systems also develop hand in hand with the volume of market transactions, modern payment systems are increasingly integrated with financial market settlement systems, where market transactions are automatically matched with payment instructions and settled on time.

Words you may need:

paper-based system система, основанная на обработке документов в бумажном виде

to be prone to error приводить к ошибкам, не исключать ошибок

delay n задержка

disruption n срыв, нарушение

data capture (зд.) считывание данных

documentation flow документопоток

to effect funds transfer осуществлять перевод средств

terminal терминал retail outlet торговая точка

electronic funds transfer at point of sale (EFTPOS) система электронных платежей в пункте продажи

giro payment system система жироплатежей (почтовая)

Fedwire «Федуаер» – система электронной связи, принадлежащая Федеральной

резервной системе США

float n срок между предъявлением чека в банк и его оплатой

time lag временный лаг, отставание, запаздывание

SWIFT СВИФТ