Lesson 2

Task 1. Practice reading the following words.

to accept [ək`sept] agency [`eıGəntsi] to allow [ə`lau] to alter [`O:ltə] ancient [`eınt∫ənt] association [əֽsəusi`eı∫ən] com­mercial [kə`mə:∫əl] competitive [kəm`petətıv] corporate [`kO:pərət] crisis [`kraısıs] dealt [delt] demand [dı`mα:nd] / [dı`mænd] deposit [dı`pOzıt] / [dı`pα:zət] to derive [dı`raıv] differential [ֽdıfə`rent∫əl] entity [`entəti] financial [faı`nænt∫əl] Florentine [`flOrəntaın] / [`flO:rənti:n] Genoa [`Genəuə] historically [hı`stOrıkəli] / [hı`stO:rıkəli] impact n [`ımpækt] income [`ınkAm] indispensable [ֽındı`spentsəbəl] insurance [ın`∫uərənts] inventory [`ınvəntəri] / [`ınvəntO:ri] jar [`Gα:]

liquidity [lı`kwıdəti] mutual [`mju:t∫uəl] occasional [ə`keıჳənəl] to owe [əu] piggy [`pıgi] private [`praıvət] politics [`pOlətıks] quasi-regulatory [`kweızaıֽregju`leıtəri] / [`kweızaı`regjələtO:ri] to refer [rı`fə:] the Renaissance [rı`neısənts] / [ֽrenə`sα:nts] resort [rı`zO:t] / [rı`zO:rt] retail [`ri:teıəl] spread [spred] to supervise [`su:pəvaız] susceptible [sə`septəbəl] systemic [sı`sti:mık] tablecloth [`teıbəlklOθ] technically [`teknıkəli] tougher [`tAfə] / [`tAfər] thrift [ֽθrıft] trace [treıs] to transfer [trænts`fə:] wealth [welθ] withdrawal [wıθ`drO:əl] worth [wə:θ]

Task 2. Read the text.

What is a Bank?

Banks are very important. Just like a piggy bank or penny jar, banks are places where we can save our money, keep track of how much we have, and keep it safe.

Banks have influenced economies and politics for centuries. Traces of banking activity can be found even in ancient times. Nowadays a bank account is considered indispensable by most businesses, individuals and governments.

The term bank derives from the Italian word banco – “desk / bench”, used during the Renaissance by Florentine bankers, who made their transactions above a desk covered by a green tablecloth. When a banker was broke his bench that is his “banco” was broken by the angry people. So the English word “bankrupt” consisting of “bank” (i.e. “banco”) and “rupt(ure)”, meaning “the act of breaking”, actually reflects the procedure of “breaking the bench of a banker who failed.”

The first modern bank was founded in Italy in Genoa [`Genəuə] in 1406; its name was Bank of St. George (Banco di San Giorgio). In the 21^st century thousands of banks make up an extremely competitive industry of banking. Competing in the field of financial services has become tougher with the entrance of such players as insurance agencies, credit unions, savings and loan associations, check cashing services, credit card companies, etc.

The definition of a bank varies from country to country. U.S. federal law, for example, defines a bank as a “financial institu­tion that accepts demand deposits and makes com­mercial loans.” For that reason, savings and loan associations, mutual savings banks, and credit unions are commonly called thrift institutions or “thrifts.” The term “bank” technically refers only to a commercial bank.

Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold.

For centuries, the banking industry only dealt with businesses, not consumers. Banking services have expanded to include services directed at individuals, and risks in these much smaller transactions are pooled.

Banks’ activities can be divided into:

• retail banking: dealing directly with individuals and small businesses;

• business banking: providing services to mid-market business;

• corporate banking: directed at large business entities;

• private banking: providing wealth management services to high net worth individuals and families;

• and investment banking: relating to activities on the financial markets.

Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profits. Central banks are normally government owned banks, often charged with quasi-regulatory responsibilities, e.g. supervising commercial banks, or controlling the cash interest rate. They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis.

A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate.

Lending activities still provide the bulk of a commercial bank’s income. Many other financial activities were added over time. For example banks are important players in financial markets and offer financial services such as investment funds. Banks also accept and hold deposits, collect and transfer funds.

The changing economic environment has a significant impact on banks and thrifts. They are susceptible to many forms of risk which have triggered occasional systemic crises.

Risks include:

• liquidity risk (the risk that many depositors will request withdrawals beyond available funds);

• credit risk (the risk that those who owe money to the bank will not repay);

• and interest rate risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others.

Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. Prominent examples include the bank run that occurred during the Great Depression, the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, and, of course, the financial crisis of 2008 which altered the world’s financial landscape.