Text 1 banking systems

Exercise 1.2 Re tad and translate the text:

The operations of individual banks (how they acquire, use, and manage funds to make a profit) are roughly similar throughout the world. In all countries banks are financial intermediaries in the business of earning profits.

Banks today accept checkable deposits such as a demand deposit or a NOW (Negotiable Order of Withdrawal) account as well as time deposits, and use their depositors' funds mainly to make loans and buy securities.

Banks thus operate as financial intermediaries standing between the primary lenders (depositors) and the ultimate borrowers. In this way they provide many services. One is the pooling of risks. A bank that makes many loans is spreading its risks. It is highly likely to experience losses on a few loans but most unlikely to experience losses on all or most. (In contrast someone who makes only a single loan faces an all-or-nothing situation.) Another service of banks is providing liquidity. Someone who opens a checking account in a bank can get his or her money back whenever required. The bank meanwhile can make loans with his or her deposits and others' deposits while keeping only a small fraction of such deposits as a liquid reserve. Because it has many depositors who usually want to withdraw deposits at different times a bank normally can meet the demands of those depositors who want to withdraw their deposits.

Another service that banks provide is expert judgment in making loans. Most savers cannot evaluate the creditworthiness of those who wish to borrow. Hence, instead of lending directly to the ultimate borrowers they ‘lend’ their savings to banks by depositing them, and the banks then use those savings to make loans to the ultimate borrowers.

- Banks have an incentive to take risks because risky loans have a higher rate of return. All of these higher earnings accrue to the banks. But most of the funds at risk belong to depositors. Accordingly much of the risk that banks take is borne by depositors and by the Federal Deposit Insurance Corporation (FDIC), which insures their deposits in the USA. This is one reason why banks are heavily regulated by the government. Another, perhaps even more important reason is that banks are custodians of the checkable deposits that make up most of society's circulating medium of exchange. If banks fail and there is no deposit insurance, then depositors have to reduce their expenditures. As a result sales fall and firms have to throw employees out of work.