Comprehension. Discuss with your partner the following questions:

Discuss with your partner the following questions:

1. How do you understand the role of the central bank ‘to act as a bankers’ bank’?

2. For what purposes may the central bank regulate interest rates?

3. How do the commercial banks earn money?

4. What sort of balance do bankers have to find when lending money?

5. What are the main functions of merchant banks in England?

6. How do investment banks in America differ from merchant banks in England?

7. What is the difference between an interest rate and a discount rate?

8. How are interest rates determined?

9. Why are there so many dollars deposited outside the USA?

10. Why did American legislation separate commercial and investment banking?

Text 2

Scan the text for the information about the functions of commercial banks, accounts and services they offer their customers.

Commercial Banks of Britain

A bank is an intermediary between a depositor will and a borrower. The interest rate which the commercial banks charge borrowers and pay to depositors will be influenced by the interest rate which is quoted from time to time by the Bank of England, which is, of course, controlled by the British government. If the Bank of England recommends that the interest rates will have to rise, then the commercial banks and most other financial institutions will also raise their interests rates.

A rise in the interest rate will make borrowing more expensive and saving more attractive. A fall in the interest rate will make borrowing cheaper, saving less attractive.

The government may use the interest rate (sometimes called the bank rate) to regulate the economic climate of the country. By this we mean that borrowing becomes more expensive, businessmen will become more reluctant to borrow and develop their business, but if it falls, then they probably become more active.

If the economy becomes too active, there is usually a tendency for inflation to occur, and this is usually caused by too many goods produced and too much money circulating in the economy.

To combat inflation the government will often raise the interest rate. If the economy was stagnant then the interest rate would probably be lowered so that to encourage it to expand and become more active. There are, of course, factors which the government must consider before it influences the institutions to raise or lower their interest rates.

Commercial banks make a profit by:

1. Making loans to businessmen and private individuals.

2. Charging interest payments on overdrawn accounts.

3. Lending to the money market.

4. Investing in sound shares and securities.

The bank's most important activity is the extension of credit. In order to provide a loan, a bank must have funds to lend. This comes from paid-in capital, earnings of previous years, borrowed funds and the bank's customers' deposits. The banker must always remember that the money he lends is not his bank's own money. It is the money deposited by the bank's customers. To evaluate the risk, a banker must first obtain certain basic information about the potential borrower. The banker must learn how much money the borrower needs, the purpose and the term of the loan, and how the borrower will repay the loan. The borrower's ability to repay depends on the purpose of the loan.

Banks will lend money in two ways:

– by a personal loan;

– by an overdraft loan arrangement.

The personal loan is charged at a fixed rate of interest repayable over a fixed period of time.

The overdraft is used mostly by businessmen. The advantage with overdrafts is that interest is repayable only on the amount owed at a particular time. Interest is calculated on a daily basis. The borrower will have to pay a lot of interest when the debt is large, but if he is able to make a good deposit and reduce the size of the overdraft then the interest charged will be lowered accordingly. Overdrafts may be recalled by the bank at a very short notice.

The commercial bank offers its customers accounts of two types: deposit account and the current account. The deposit account will probably be used to pay a fixed rate of interest, and will sometimes issue the saver with a saving book. The current account pays no interest. A cheque book is used to make payments from an account and a paying-in book is used when money is paid into the account.

Banks will normally give statements to both deposit and current holders about once every three months, or more frequently if required by the account holder. Statements give a detailed account, on a day to day basis, of all money and cheques which have either been paid into account or withdrawn from the account.

Money is the commodity that banks sell. A bank seeks to buy money cheaply and to sell it dearly. This is what the banks are busy doing. Naturally, the banks put their money where it brings the highest profit. That is why they always keep up to date with the market situation by shifting money from one geographical region to another, the banks activity stimulates progress in industry, construction and agriculture.

Banks are interested in keeping most of their money in circulation so that it should bring them profit. They seek to reduce their lending rates in order to attract buyers.

In their pursuit of high profit, the banks sometimes get involved in risky operations fraught with bankruptcy. That is why the government takes measures to minimize the danger of banks going broke. Every bank is obliged to take out insurance against robbery or bankruptcy lest the clients should lose their money in any case.

Technological innovations and increased competition in the face of deregulation are changing the face of British banking. Banks and other financial institutions are using computer technology now, that is why they can offer their clients different types of services:

1. Accept deposits from depositors.

2. Make loans to borrowers.

3. Conduct deposit and current accounts for customers.

4. Keep valuables in safe custody.

5. Give advice on income tax matters.

6. Give advice on overseas trading.

7. Buy and sell shares for customers.

8. Issue foreign currency and travellers' cheques.

9. Act as executors and trustees for deceased persons.

10. Change old bank-notes for new ones.

The commercial banks cater to big companies, small companies and to individuals.

Ex. 1. Expand the sentences.

1. The interest rate which the commercial banks charge...

2. A rise in the interest rate will...

3. The banker must always remember that the money he lends …

4. The government may use the interest rate to...

2. The advantage with overdrafts is that …

3. Banks will normally give statements to...

4. To combat inflation...

5. If the economy becomes too active...

6. By shifting money of various costs the bank activity...

7. Banks make a profit by...

8. The banks cater to …

Ex. 2. Are the following sentences true or false? Say why.

	True	False
a. If the banks lends money to a company, the banks is one of the company’s debtors.	€	€
b. If you borrow money from the bank at a variable rate of interest, you might have to pay back more than you think you will.	€	€
c. Creditors prefer low interest rates.	€	€
d. Debtors prefer high interest rates.	€	€

Ex. 3. Answer the questions.

1. What is a commercial bank according to the text?

2. What does the interest rate the commercial banks offer depend on?

3. What are the ways of making a profit by banks?

4. What do the funds that banks use to provide a loan come from?

5. What factors should a banker consider to evaluate the risk when providing a loan?

6. What are the two ways that banks lend money?

7. What is the advantage with overdrafts?

8. What types of accounts do commercial banks offer to their customers? How do they differ?

9. What measures does the government take to minimize the danger of banks going broke?

10. What types of services can customers get in a bank?

Text 3

While reading the text focus on the information describing the procedures of the Fed and other financial institutions of the USA, put down a plan choosing key words to each point of the plan.

Banking in the USA

At the centre of the U.S. banking system is the Federal Reserve System (FRS or “the Fed”, as it is usually called) which was established in 1913. It consists of 12 regional banks and has its task in controlling the national banking system.

The Federal Reserve serves as a “banker’s bank” and the typical bank customer never enters the door of a Federal Reserve district bank or one of its branch banks.

The organization's main task is to set and implement monetary policy, which is a set of rules for handling the economy and the money supply. Following are brief descriptions of some of the principal functions of the Federal Reserve.

The Fed (1) regulates the money supply by four basic tools. It can set the discount rate and change the reserve requirements, that is the sum of money (called reserves) equal to a certain percentage of deposits that a bank must keep on hand.

Another tool the Fed uses is its power to buy and sell government bonds on the open market. These are known as open-market operations.

The last tool employed by the Fed involves selective credit controls, or the setting of credit terms on various kinds of loans.

Another function performed by the Fed includes (2) clearing checks. Banks can use the Federal Reserve's check-clearing service to clear checks drawn on banks outside their Federal Reserve districts.

One more important task of the Fed is (3) maintaining and circulating currency. Note that the FRS does not print currency – it maintains and circulates money. The Federal Reserve must be ready to ship extra money from its large vaults by armoured trucks.

The Fed also (4) supervises the activities of member banks abroad and regulates certain aspects of international finance.

Apart from that, the Fed (5) protects consumers by receiving and trying to resolve consumer complaints against banks. There are certain regulations, for example, that prohibit discrimination based on race, colour, sex, religion, or national origin in the extension of credit.

In addition, the (6) Fed maintains the federal government checking accounts and gold. The U.S. Treasury has the Fed handle its checking account. From this account, the federal government pays for such expenses as federal employees’ salaries, social security, tax funds, veterans’ benefits, defence, and highways. Gold, stored in the Fed belongs mainly to foreign governments and is one of the largest accumulations of this precious metal in the world.

Commercial banks accept deposits and use these funds to make loans. There are two types of commercial banks: national banks and state banks. National banks are chartered by the federal government, and state banks are chartered by state government. These banks are prime sources of capital for business and also provide loans as well as checking and saving accounts for consumers. Both savings banks and savings and loan associations perform many of the same functions as commercial banks (e.g., checking and savings accounts, loans) but use the majority of their assets for financing home mortgages.

Credit unions are member-owned corporations that offer checking and savings accounts, credit cards, and consumer loans. Most of the 16.326 credit unions in this country serve employee groups.

Other financial institutions include finance companies (which provide short-term loans), large brokerage houses, insurance companies, pension funds, and investment banks (which help corporations raise capital). Most financial institutions operate on the principle of attracting deposits and then lending some of this money to other customers.

Ex. 1. Find in the text answers to the following questions:

1. What is the head of the U.S. banking system and when was it established?

2. What is the Fed’s most powerful body and how many members does it consist of?

3. What is the main task of the FRS?

4. What four basic tools does the Fed use to regulate the money supply and expand economy? Which of them is the most powerful for controlling the money supply?

5. What are other functions performed by the Fed?

6. What different forms of financial institutions are there in the U.S.? How are they characterized?