AN ENGLISH COURSE FOR STUDENTS OF FINANCE. Учебно-методический комплекс

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

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BEFORE

AFTER

Grammar Reference

SINCE

Наиболее употребительные составные предлоги

Наиболее употребительные составные союзы

Составные союзы с as даны выше.

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

Reading Training for Blocks

What is a bank?

The answer to the question "What is a bank?" might seem quite simple. In reality, however, the answer is rather complicated. A bank offers transaction accounts (such as demand deposits) to its customers. It also offers various types of savings accounts and certificates of deposits and makes a variety of loans. It might be argued then that a bank is an organization that offers these services.

Two problems immediately come to mind with such a definition. First, organizations other than commercial banks also provide these services. Savings and loan associations, savings banks, and credit unions provide deposit and loan services that are virtually identical to those of commercial banks, and money market funds and investment brokers such as Merrill Lynch also provide similar services. Second, banks do many things that are not included in the functions of offering deposit and loan services. They provide trust services, arrange mergers and acquisitions, and guarantee payment from one party to another through letters of credit and other devices.

Perhaps the best definition of a bank is the following: "A bank is an organization that has been given banking powers either by the state or the federal government." Although this definition might seem to be somewhat circular (a bank is as a bank does) and perhaps somewhat trivial, the definition provides useful insight into the nature of the institution by recognizing the dynamic and ever-changing nature of banking.

Imagine the entire range of financial services that exists in a modern economy. These services would certainly number in the hundreds, perhaps in the thousands. At a given time, government will allow banks to provide some of those services. At that time, commercial banks may be defined in terms of those services. As time passes, however, new financial services will be created and attitudes may change about the desirability of allowing banks to offer certain existing financial services. As a result, the range of fi-

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nancial services permissible for commercial banks may be altered— either expanded or reduced. In the last 20 years, the range of permissible services has been expanded considerably, both because of deregulation and the actions of bank managers who have created innovative financial services not expressly prohibited by legislation or regulation. Hence, a bank today is not like a bank 20 years ago (in terms of the services offered), which is again not the same as a bank 20 years earlier. Yet all are commercial banks. Table 1 provides some perspective on the types of services that banks now offer and compares them with the traditional range of services.

Definition of a commercial bank in terms of permissible activities also provides insight into the perpetual dispute over the limits of bank powers. Not surprisingly, managers of commercial banks attempt to have laws and regulations changed in order to obtain expanded powers to provide additional financial services. Managers of the firms that provide those financial services not now permitted to banks work just as hard to prevent bank competition in those areas. Much of the debate over bank regulation centers on the controversy between bankers and other financial service firms over the limits of bank powers.

Table 1

Bank Services: Old and New

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AN ENGLISH COURSE FOR STUDENTS OF FINANCE

What do banks do?

Because banks perform a large number of functions, we should discuss the general activities of banks rather than attempt to describe in minute detail the activities of banking organizations. Most of the functions performed by commercial banks may be subsumed under three broad areas:

1.Payments

2.Intermediation

3.Other financial services.

Payments

Banks are at the very core of the payments system. Most of the money supply of the United States is held in the form of bank money (i.e., transactions accounts at commercial banks). Because an efficient payments system is vital to a stable and growing economy, the role of banks in the payments system takes on an important social dimension. At one time, commercial banks had a monopoly on transactions accounts. In recent years, however, savings and loans, savings banks, and credit unions (known collectively along with commercial banks as depository institutions) have obtained the authority to offer transactions accounts. Also, other types of financial service organizations, such as money market mutual funds (often referred to simply as "money funds"), have developed financial products against which checks may be written.

Commercial banks (along with the Federal Reserve System) are also at the heart of the electronic payment system, which is rapidly supplanting paper-based payment methods such as checks. For example, electronic payments between commercial banks are done through fad-wire (a wholesale wire transfer system operated by the Federal Reserve System), with more than 300,000 transfers per day amounting to about $ 1 trillion. In addition, CHIPS (The Clearing House Interbank Payments System) is a private electronic transfer system operated by large banks in New York that trans-

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fers another $1 trillion per day, principally involving international movements of funds. Further, SWIFT (the Society for Worldwide Interbank Financial Telecommunication) is operated by almost 2,000 banks throughout the world.

Intermediation

Commercial banks act as intermediaries between those who have money (i.e., savers or depositors) and those who need money (i.e., borrowers). The role of banks in the intermediation process is illustrated in Figure 1.1. Banks obtain deposits from savers by offering interest and other features that meet those customers' needs better than alternative uses of funds. Commercial banks are able to provide deposit instruments with low denomination, low risk, and high liquidity, characteristics that meet the needs of most savers better than stocks and bonds, which often have high denominations, high risk, and lesser liquidity. Commercial banks are able to package large amounts of small deposits and lend those funds to borrowers. Although at one time commercial bank loans were concentrated in short-term commercial lending (hence the term commercial bank), most banks now make any type of loan legally permissible that meets internal credit-quality standards. In the intermediation process of gathering funds (stage 1 of Figure 1.1) and using funds (stage 2) banks incur noninterest expenses such as employee salary expenses and premises and fixed asset expenses.

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Figure 1.1.

Banks in the intermediation process

Some banks, however, do concentrate on drawing funds from and lending funds to businesses (those banks are known as wholesale banks], whereas other banks draw their funds from consumers and concentrate their lending to consumers (those banks are known as retail or consumer banks). In either case, however, the banks are performing an intermediation function.

Financial intermediation between savers and investors is crucial to the efficient operation of the economy. Economic growth fundamentally depends on a large volume of saving and the effective allocation of that saving to productive uses.

Efficient financial markets contribute to such an allocation. By offering depositors financial instruments that have desirable risk/return characteristics, commercial banks are able to encourage a greater volume of saving and, by effectively screening credit requests, they are able to channel funds into socially productive uses. Although the social role of commercial banks in financial intermediation is somewhat different than in the payments function, it is no less important.

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