Get Ready for the Postgraduate Entrance English Exam. Working with Texts. Часть 1. Учебное пособие

rope, big banks are very diversified groups that, among other services, distribute also insurance, whence the banc assurance term.

Susceptibility to crisis

The traditional bank has an inherent susceptibility to crisis, in that it borrows short term and lends leveraged long term. The sum of deposits and the bank's capital will never equal more than a modest percentage of the loans the bank has outstanding.

Even if liquidity is not a concern, if there is no run on the bank, banks can simply choose a bad portfolio of loans, or more precisely incorrectly price the interest rates of those loans, and lose more money than they have.

The United States Savings and Loan Crisis in the late 1980s and early 1990s has been interpreted by some as a symptom of this inherent susceptibility of banking to crisis. By others, though, it is taken to be a sign of the dangers of moral hazard generated by government guarantees and quasi-public insurance schemes.

Role in the money supply

A bank raises funds by attracting deposits, borrowing money in the inter-bank market, or issuing financial instruments in the money market or a securities market. The bank then lends out most of these funds to borrowers.

However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve so that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a central bank. This behavior is called fractional-reserve banking and it is a central issue of monetary policy. Some governments (or their central banks) restrict the proportion of a bank's balance sheet that can be lent out, and use this as a tool for controlling the money supply. Even where the reserve ratio is not controlled by the government, a minimum figure will still be set by regulatory authorities as part of banking supervision.

Regulation

The combination of the instability of banks as well as their important facilitating role in the economy led to banking being thoroughly regulated. The amount of capital a bank is required to hold is a function of the amount and quality of its assets. Major banks are subject to the Basel Capital Accord promulgated by the Bank for International Settlements. In ad-

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dition, banks are usually required to purchase deposit insurance to make sure smaller investors are not wiped out in the event of a bank failure.

Another reason banks are thoroughly regulated is that ultimately, no government can allow the banking system to fail. There is almost always a lender of last resort – in the event of a liquidity crisis (where short term obligations exceed short term assets) some element of government will step in to lend banks enough money to avoid bankruptcy.

II. Vocabulary Items

balance sheet – балансовый отчет, баланс

banking n – банковское дело, банковские операции borrow v – занимать деньги, брать взаймы cashiers check – чек, выписанный банком на себя checking account – текущий счет (в банке)

deposit n – вклад, депозит

Federal Reserve Bank – федеральный резервный банк (США) fractional-reserve n – частичное резервное покрытие insurance n – страхование

investment bank – инвестиционный банк lend v – ссужать, давать взаймы

lender of last resort – кредитор последней инстанции license n – лицензия

liquidity n – ликвидность loan n – заем, ссуда, кредит

merchant bank – торговый банк (Великобритания) monetary a – денежный

moneylender n – кредитор, ссудодатель offshore bank – оффшорный банк

outstanding a – выпущенный в обращение, не предъявленный к платежу

raise v – находить, добывать

retail bank – банк, обслуживающий мелкую клиентуру safe deposit box – сейф для хранения ценностей в банке savings account – сберегательный счет

securities market – рынок ценных бумаг, фондовая биржа share n – акция

subsidiary n – дочерняя компания, филиал

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supervision n – надзор

tax-haven – страна с низкими налогами

underwrite v – подписываться, гарантировать размещение ценных бумаг

venture capital firm – инвестиционный фонд, вкладывающий капиталы в создание новых предприятий

wire transfer – телеграфный денежный перевод withdraw v – отзывать

III. Exercises

1.Read the text.

2.Learn the vocabulary items by heart.

3.Translate the text in written form.

4.Retell the text using the following expressions and terms: the storing of deposits, the extending of credit, financial supervision authorities, to conduct services, accepting deposits and making loans, to issue checking and savings accounts, to lend out money, to cash checks, to facilitate money transactions, to issue credit and debit cards, to store valuables, monetary policy, to be the lender of last resort, in the event of a crisis, to underwrite stock and bond issues, to advise on mergers, to manage the assets, to be located in jurisdictions with low taxation and regulation, subsidiaries in tax-havens, to offer offshore banking services to customers, to withdraw deposits, interest rates, money supply, banking supervision.

IV. Test III (2)

1.Read the text again and decide which statements are true.

1.Banks are a part of the financial services industry.

2.Bank reserves are typically kept in the form of bonds with a central bank.

3.Banks are usually required to purchase deposit insurance to make sure smaller investors are not destroyed in the event of a bank failure.

4.Offshore banks were traditionally banks which engaged in trade financing.

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2. Match the words given in the left column with the words in the

Unit 3

I. Information for study

Financial Markets

and Financial Intermediaries

The Nature of Financial Markets

Financial markets are the transmission mechanism between saverlenders and borrower-spenders. Through a wide variety of techniques, instruments, and institutions, financial markets mobilize the savings of millions and channel them into the hands of borrower-spenders who need more funds than they have on hand. Financial markets are conduits through which those who do not spend all their income can make their excess funds available to those who want to spend more than their income.

Saver-lenders stand to benefit because they earn interest or dividends on their funds. Borrower-investors stand to gain because they get access to money to carry out investment plans they otherwise could not finance (and that presumably yield more than the interest they pay). Without financial markets, savers would have no choice but to hoard their excess money, and borrowers would be unable to realize any investment plans except those they could finance by themselves.

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Ultimate lenders are typically households, although from time to time business firms and governmental bodies – federal, state, and local – also lend substantial amounts. Ultimate borrowers are mostly business firms and governments, although households are also important as consumer credit and mortgage borrowers.

The existence of highly developed, widely accessible, and smoothly functioning financial markets is of crucial importance in transmitting savings into the hands of those desiring to make investment expenditures. Those who can visualize and exploit potentially profitable investment opportunities are frequently not the same people who generate current saving. If the financial transmission mechanism is underdeveloped, inaccessible, or imperfect, the flow of funds from household saving to business investment will be impeded, and the level of economic activity will fall below its potential.

A concrete example of the failure of financial markets to channel funds effectively arises when there is a lack of adequate information about borrowers seeking funds and/or lenders wanting to lend them. This highlights the main function of any market – to bring buyers and sellers together. In financial markets, it is buyers and sellers of credit. If some potential borrowers, for example, are unaware of financial markets – or if knowledge about sources of funds is not widely disseminated – then some investments that could have been undertaken won't be, even though there are savers who would have willingly lent the funds at rates of interest equal to, or less than, what investors would have been willing to pay.

A similar situation could arise as far as savers are concerned. Some may not be aware of lending opportunities. Instead of being put to work, funds are put under the mattress and less investment takes place (which in turn lowers saving as income declines).

Several kinds of institutions have emerged to help channel funds between savers and investors. Perhaps the most prominent are investment banks, such as Salomon Brothers, Goldman Sachs, and Morgan Stanley. These firms gather information on the ultimate buyers of securities and, for a fee, help issuers market their securities at the most favorable price. In essence, investment bankers are information and marketing specialists for newly issued securities.

Once securities are issued, another related set of institutions helps to provide a "secondary market" where existing securities can be bought

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and sold by different investors. Perhaps the most prominent secondary market is the New York Stock Exchange, but there are also so-called over-the-counter markets in many securities as well.

The role of financial intermediaries

Financial intermediaries are nothing more than financial institutions – commercial banks, savings banks, savings and loan associations, credit unions, pension funds, insurance companies, and so on – that act as agents, transferring funds from ultimate lenders to ultimate borrowers. They borrow from Peter in order to lend to Paula. What all financial intermediaries have in common is that they acquire funds by issuing their own liabilities to the public (savings deposits, savings and loan shares) and then turn around and use this money to buy primary securities (stocks, bonds, mortgages) for themselves.

Because these institutions exist, savers who do not want to hoard their cash under a mattress but who feel hesitant about going directly into the financial market to purchase corporate bonds or stocks or mortgages (primary securities) because they feel that these assets are perhaps too risky – or because they don't know about the availability of such items – have a third choice. They can "purchase" savings deposits or savings and loan shares. In that way they can hold a relatively safe and quite liquid financial asset, yet still earn some interest income. At the same time, corporations and potential homeowners can sell their bonds, stocks, and mortgages to the financial intermediaries rather than to the original savers themselves. Financial intermediaries, in brief, "intermediate" between ultimate saver-lenders and ultimate borrowers.

Financial intermediation, or indirect finance, is precisely this process: savers deposit funds with financial institutions rather than directly buying bonds or mortgages, and the financial institutions, in turn, lend to the ultimate borrowers. Disintermediation is the reverse: savers take funds out of deposit accounts, or reduce the amounts they normally put in, and invest directly in primary securities such as stocks and bonds.

Financial institutions are in a better position than individuals to bear and spread the risks of primary security ownership. Because of their large size, intermediaries can diversify their portfolios and minimize the risk involved in holding any one security. They are experts in evaluating borrower credit characteristics. They employ skilled portfolio managers

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and can take advantage of administrative economies in large-scale buying and selling.

Competition among financial intermediaries forces interest rates to the lowest level compatible with the intermediaries' evaluation of the risks of security ownership. These yields are lower than if the primary securities were held by individual investors, who are unable to minimize their risks.

It is worth noting that since financial intermediation tends to lower interest rates, or at least to moderate any increase, it has been highly beneficial to the rate of economic growth. A high rate of economic growth requires a large volume of real investment. The lower the rate of interest that ultimate borrowers must pay, the greater their expenditure on real investment.

The beneficial effect of intermediation on economic growth can also be seen from the viewpoint of risk bearing. Intermediaries are better able than individuals to bear the risks of lending out capital. As financial intermediaries own a larger and larger portion of the marketable securities outstanding, the subjective risk borne by the economy is lowered, interest rates are reduced, and more real investment takes place. Funds are channeled from ultimate lenders, through intermediaries, to ultimate borrowers more efficiently than if the intermediaries did not exist.

II. Vocabulary Items

asset n – актив benefit n – прибыль bond n – облигация borrower n – заемщик buyer n – покупатель conduit n – канал

consumer credit – потребительский кредит expenditure n – расход

failure n – банкротство, неплатежеспособность fee n – комиссионный сбор

hoard n – запасать, копить household n – домохозяйство income n – доход

interest rate – процентная ставка

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intermediary n – посредник

issue v – выпускать, выпускать в обращение issuer n – эмитент

lender n – кредитор, ссудодатель lending account – ссудный счет liability n – денежное обязательство loan n – заем, ссуда, кредит mortgage n – ипотека

ownership n – собственность, владение

portfolio manager – сотрудник банка, отвечающий за управление инвестициями клиента

purchase v – покупать, приобретать securities n – ценные бумаги seller n – продавец

Stock Exchange – фондовая биржа stock n – акция

rate n – ставка, курс

III. Exercises

1.Read the text.

2.Learn the vocabulary items by heart.

3.Translate the text in written form.

4.Retell the text using the following expressions and terms: financial intermediaries, the transmission mechanism, saver-lenders, borrowspenders, to channel into, conduits, to stand to benefit (to gain), to hoard excess money, to make investment expenditures, to generate current saving, to channel funds, newly issued securities, secondary market, existing securities, Stock Exchange, to issue liabilities, liquid financial asset, to earn interest income, to invest in primary securities, to bear and spread the risks, to diversify portfolios, to minimize the risk.

IV. Test III (3)

1. Read the text again and decide which statements are true.

1.A high rate of economic growth does not require a large volume of investment.

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2.Those who can visualize and exploit potentially profitable investment opportunities are frequently not the same people who generate current saving.

3.Financial intermediation is precisely this process: savers take funds out of deposit accounts, or reduce the amounts they normally put in, and invest directly in primary securities such as stocks and bonds.

4.Intermediaries are better able than individuals to bear the risks of lending out capital.

2. Match the words given in the left column with the words in the

Unit 4

I. Information for study

Tax

A tax is a compulsory charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state. Taxes could also be imposed by a subnational entity.

Taxes may be part of a direct tax or indirect tax, and may be paid in money or as labor. In modern, capitalist taxation systems, taxes are levied in money, but in-kind taxation is characteristic of traditional or precapitalist states and their functional equivalents.

The means of taxation, and the uses to which the funds raised through taxation should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are frequently tendentious.

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Purposes and effects of taxation

Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out the functions such as:

•military defense,

•enforcement of law and public order,

•protection of property,

•redistribution of wealth,

•economic infrastructure – roads, legal tender, enforcement of contracts, etc.,

•public works,

•the operation of government itself.

Most modern governments also use taxes to fund welfare and public services, such as:

•education systems,

•healthcare systems,

•pensions for the elderly,

•unemployment benefits,

•energy, water and waste management systems,

•public transportation.

Colonial states and moderning states have also used cash taxes to draw or force reluctant subsistence producers into cash economies.

Governments use different kind of taxes and vary the tax rates:

•to distribute the tax burden between individuals or classes of the population involved in taxable activities, such as business,

•to redistribute resources between individuals or classes in the population. Historically, the nobility were supported by taxes on the poor; modern social security systems are intended to support the poor, the disabled or the retired by taxes on those who are still working,

•to influence the macroeconomic performance of the economy (the government's strategy for doing this is called its fiscal policy),

•to modify patterns of consumption or employment within an economy, by making some classes of transaction more or less attractive.

The collection of a tax in order to spend it on a specified purpose, for example collecting a tax on alcohol to pay directly for alcoholism rehabilitation centers, is called hypothecation. This practice is often disliked by finance ministers, since it reduces their freedom of action. Some eco-

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