Text 7. Commercial and Retail Banking

When people have more money than they need to spend, they may choose to save it. They deposit it in a bank account, at a commercial or retail bank, and the bank generally pays interest to the depositors. The bank then uses the money that has been deposited to grant loans - lend money to borrowers who need more money than they have available. Banks make a profit by charging a higher rate of interest to borrowers than they pay to depositors.

Commercial banks can also move or transfer money from one customer's bank account to another one, at the same or another bank, when the customer asks them to.

Banks also create credit - make money available for someone to borrow - because the money they lend, from their deposits, is usually spent and so transferred to another bank account.

The capital a bank has and the loans it has made are its assets. The customers’ deposits are liabilities because the money is owed to someone else. Banks have to keep a certain percentage of their assets as reserves for borrowers who want to withdraw their money. This is known as the reserve requirement. For example, if the reserve requirement is 10%, a bank that receives a $ 100 deposit can lend $ 90 of it. If the borrower spends the money and writes a cheque to someone who deposits the $ 90, the bank receiving that deposit can lend $ 81. As the process continues, the banking system can expand the first deposit of $ 100 into nearly $1,000. In this way, it creates credit of almost $ 900.

Before lending money, a bank has to assess or calculate the risk involved. Generally, the greater the risk for the bank of not being repaid, the higher the interest rate they charge. Most retail banks have standardized products for personal customers, such as personal loans. This means that all customers who have been granted a loan have the same terms and conditions - they have the same rules for paying back the money.

Banks have more complicated risk assessment methods for corporate customers – business clients – but large companies these days prefer to raise their own finance rather than borrow from banks.

Banks have to find a balance between liquidity – having cash available when depositors want it – and different maturities – dates when loans will be repaid. They also have to balance yield – how much money a loan pays – and risk.

Exercise 52. Translate into English.

Заощаджувати гроші, надавати позику, банківський рахунок, позичальник, вкладник, переказувати гроші, активи і пасиви, знімати гроші з рахунку, резервні вимоги, оцінювати ризик, ліквідність, строки платежу, дохідність, умови кредиту.

Exercise 53. Complete the sentences from banks’ websites with the following words: conditions, corporate customers, personal customers, bank account, grant loans.

1. If you need instant access to all your money, this is the __________ __________ for you.

2. Our products for _________ _________include business overdrafts, loan repayments that reflect your cash flow, and commercial mortgages.

3. Our local branch managers are encouraged to help local businesses and are authorised to _________ _________ and overdrafts.

4. We offer standardised loans: you can be sure you won’t get less favourable terms and ________ than our other _________ _________.

Exercise 54. Match the two parts of the sentences.

Banks lend savers’ deposits	banks have to assess the risk involved.
They also create credit by	depends on the reserve requirements.
How much credit banks can create	depends on how risky it is for the bank to lend the money.
Before lending money,	so they can’t lend all their money in loans with long maturities.
The interest rate on a loan	lending the same original deposit several times.
Banks always need liquidity,	to people who need to borrow money.

Exercise 55. Translate the sentences into English.

1. Якщо люди бажають заощадити гроші, вони можуть відкрити рахунок у комерційному банку, який виплачує вкладникам відсотки. 2. Банки використовують вкладені гроші, щоб надавати позики. 3. Банки заробляють прибутки, встановлюючи вищі відсоткові ставки для позичальників, ніж вони виплачують своїм вкладникам. 4. Капітал, який належить банку, і позики, які він видав, - це активи банку. 5. Вклади клієнтів – це пасиви, бо банк винен ці гроші. 6. Обов’язковий резерв – це відсоток активів, який банк зберігає для клієнтів, які бажають забрати свої гроші. 7. Перед тим, як надати позику, банк повинен оцінити ризик. 8. Всім приватним клієнтам надається персональна позика за однакових умов. 9. Банки повинні знайти баланс між ліквідністю та строками платежів, а також між прибутком і ризиком.

Exercise 56. Look at some commercial bank websites from your country. Which bank offers the best rates to borrowers and lenders? Discuss in pairs.

Exercise 57. Complete the text with the words from the box.

accounts	return	salary	liquidity
deposits	bank loan	transfer	spread
lend	debt	cheque	wages
overdraft	liabilities	depositors	customers’
current account	optimize	standing orders	withdraw

Commercial banks are businesses that trade in money. They receive and hold 1) … , pay money according to 2) … instructions, 3) … money, etc.

There are still many people in Britain who do not have bank 4) … Traditionally, factory workers were paid 5) … in cash on Fridays. Non-manual workers, however, usually receive a monthly 6) … in the form of a cheque or a 7) … paid directly into their bank account.

A 8) … (US: checking account) usually pays little or no interest, but allows the holder to 9) … his or her cash with no restrictions. Deposit accounts (in the US also called time or notice accounts) pay interest. They do not usually provide 10) … (US: check) facilities, and notice is often required to withdraw money. 11) … and direct debits are ways of paying regular bills at regular intervals.

Banks offer both loans and overdrafts. A 12) … is a fixed sum of money, lent for a fixed period, on which interest is paid; banks usually require some form of security or guarantee before lending. An 13) ... is an arrangement by which a customer can overdraw an account, i.e. run up a debt to an agreed limit; interest on the 14) … is calculated daily.

Banks make a profit from the 15) … or differential between the interest rates they pay on deposits and those they charge on loans. They are also able to lend more money than they receive in deposits because 16) … rarely withdraw all their money at the same time. In order to 17) … the return on their assets (loans), bankers have to find a balance between yield and risk, and 18) … and different maturities, and to match these with their 19) … (deposits). The maturity of a loan is how long it will last; the yield of a loan is its annual 20) … - how much money it pays - expressed as a percentage.

Exercise 58. Learn the following words and word combinations.

monetary policy	грошово-кредитна політика, грошова політика
financial stability	фінансова стабільність
supervise	спостерігати, наглядати, інспектувати, контролювати
issue currency	випускати валюту
reserve-asset ratio	норма резервного покриття, резервний норматив
bank run/ run on the bank	панічне вилучення банківських вкладів
lender of last resort	кредитор останньої інстанції
bail out	брати на поруки, виручати з біди, допомагати
exchange rate	обмінний курс
intervene	втручатися
currency market	валютний ринок

Exercise 59. Read and translate text 8 - an interview with an expert in central banking.