UNTT 14. BANKING LEARNING OBJECTIVES ‘After you have ead and studied this unit, you should be able to ‘+ Understand banking products and services and diferent types of banks ‘Discuss te subprime criss and microfinance KEY TERMS Nc ipa uve yg auc tca Umeda een a Sees ce See ae | pee eee aca toe eee Se oe ee ee SYoeaie Heats oes tare pian nti eae npn mann netertnalieales See eee cee leans ea. situa sinad naceaniontanstasiaciam ier eee Se eee ee ieee ty are ea aia sien Sakon eee | a [oes ee tae, eee Se au eae ao Piva Roe oe ee | Gotten ee | «anew CD or enable the CD to renew automatically. LEAD-IN Which ofthe following banking products or services do you find the most useful or necessary?1 eurrent account (BYE) or checking account ] ~ buying or selling foreign currency for (Ame) teavelling (BrE) or traveling (AmE) +a savings or deposit account (BrE) or time | -a mortgage (a oan to buy property (Br) oF or notice account (AME) realestate (AE) - cashponts (BrE) or ATMs (Automated | -an everdraft the possibility to borrow Teller Machines, AmE) ‘money by spending more than you have in +a chequebook (BrE)orcheckbook (AmE) | ¥°u bank account) kee eal + investment advice debi card = Iniemet banking (payments, transfers) an telephone banking (payments, transfers) ‘What other banking services do businesses use? READING ‘The Goldsmith bankers were an early example ofa fnaneal intermediary, A financial intermediary is an institution that specializes in bringing lenders and borrowers together. ‘A commercial Bank borrows money ftom the publi, creating them with a deposit. The deposits 8 Tsbily ofthe bank. Iis money owed to depositors. a tum the banks lend money to fim, househols, or governments wishing to borow. Banks ae not the only financial intermediaries. Insurance companies, pension funds, and building societies also take in money inorder to relend i. The erucial feature of banks is that some oftheir lables are used as a means of payment, and ae therefore part ofthe money stock. ‘Commercial banks are financial intermediaries witha goverament ficense to make loans and issue epost, including depesits aginst which cheques can be writen. We begin by looking atthe present-day UK banking system. Although the deta vary from country to country, the general principle is much the same everywhere. ln the UK, the commercial banking system comprises about 600 registered banks, the National CGire-bank operating tough post offices and about a dozen tte savings banks. Much the most imporant single group is the London clearing banks. The clearing banks are so named because they have central clearing house for handling payments by cheque. A clearing sytem isa sof arangements in which dbts between banks are settled by adding up all the transaction ina given period and paying only the net amounts needed to balance inter. ‘bank account Suppose you bank with Barclays but visit a supermarket tht banks with Lloyds. To pay for your shopping you write a cheque agains your deposit t Barclays. The supermarket pays ths cheque into its account at Lloyds. In tum, Lloyds presents the cheque to Barclays which will credit yds acount at Barclays and debit you account at Barclays by an equivalent amount. Because ou purchased goods from a supermarket using a different bank, a transfer of funds between the ‘wo banks is required. reiting or debiting one banks account at another bank isthe simplest ‘way achieve this,However, on the same day someone else cll her Joan Groover, is probably writing a cheque on 1 Lloyd's deposit account to pay for some stereo equipment from a sbop banking with Barclays. The stereo shop pays the cheque into its Barclay's account, increasing its deposit. Barclays then pay the cheque into its account at Lloyds where Ms Groover's account is simultaneously debited Now the transfer flows from Lloyds to Barclays. ‘Although in both cases the cheque writer's account is debited and the cheque recipient's aesount is credited, it does not make sense forthe two banks to make two separate inter-bank transactions between themselves. The clearing system calculates the net flows between the member clearing, banks and these are the setlements that they make beoween themselves. Thus, the system of clearing cheques represents another way society reduces the costs of making transactions, Read the passage and decide ifthe following statements are T (True), F (False), or NG (Not piven): 1, The role of financi intermediary serves asa bridge to link lenders and borrowers 2 Banks are the biggest financial intermediaries. 3. Commercial banks are not allowed to lend and issue deposits. 4. Besides banks, there ae other types of finencial intermediaries, among which are insurance companies. 5. Ina clearing system, debts between banks ae seitled by adding up all the transactions. 6. Settlements made between member clearing banks are calculated bythe clearing system. makes the costs of transections 7. Society can benefit from the system of clearing cheques lower. 8, Because you used a separate bank o pay for your grocery purchases, a money transfer between the two banks is necessary. Fillin the Blanks with suitable words Lender of ast resort, Fised, Transfer, LA of funds berween the two banks is required if you purchased goods from a supermarket using a different bank. 2. Alotof'small companies ere in danger of, because of the worse economic Situation inthe country and in the world. 3. For processing ‘as payment, the clearing banks have a central clearing house 4, When prices are by the government, it means thatthe market mechanism is not working. 5. The government sets an ination and the Bank's Monetary Policy ‘Committee tries to meet it by raising or lowering the official interest rate when necessary. 6. The Bank sometimes acts as to financial instcutions in difficulty, to prevent panic of a loss of confidence spreading through the whole financial system, 7. Imadditioa, the ESCB contributes tothe smooth conduct of polices relating othe supervision of credit institutions andthe ofthe financial system.READING 2; Insert the names ofthe following types of financial institutions in the spaces Inthe text. ‘Banks and financial instit ‘commercial banks hedge finds investment Ranks stockbrokers Islamic banks ‘non-bank financial intermediaries private banks Retail banks or (1). (often called High Street banks in Briain receive deposits from and make loans to, individuals and small companies. (2) ‘work with big ‘companies, giving financial advice, raising capital by issuing stocks or shares and bonds, arranging mergers and takeover bids, and so on. They also generally offer stockbroking and portfolio ‘management services torch corporate and individual clients. Wealthy individuals ean also use (3) Which provide them with banking and investment services, and (4) which are private investment funds for wealthy investors (both individuals ‘and institutions) that use a wider variety of (risky) investing strategies than traditional investment funds, in order to achieve higher retus. Inthe USA, where many banks went bankrupt following the WallStreet Crash in 1929, alaw was passed in 1934 (the Glass-Steagall Act that separated commercial banks and investment banks or ‘tockbroking fms. For the ret of the 20th century, there were regulations inthe US, Britain and Japan that prevented commercial banks from doing investment banking business. In other countries, ineloding Germany and Switzerland, large banks did ll kinds of financial business, But starting inthe 1980s, many rules were ended by financial deregulation, and Glass-Steagall was ‘repealed in 1999, Large banks became intemational conglomerates offering a complete range of financial services that were previously provided by banks, (5) companies. © in Islamic-counties and major financial centres, offer interest-free ‘banking. They do not pay interest to depositors or charge interest to borrowers, but invest in ‘companies and share the profits (or losses) with ther depositors ‘Some car manufacturers, food retailers and department stores now offer products like personal loans, credit cards and insurance. Technically these are not banks but (7) ‘and insurance ‘Vocabulary: Find the words or expressions inthe text which mean the following: 1 money placed ina bank ‘sum of money borrowed from a bank 3 the money invested in a business 4. certificates representing part-ownership ofa company 5. cenifcate of debt issued by governments or companies to raise money 6. when one company combines with another one when one company offers to buy or acquire another one 8 buying and selling stocks or shares for clients 9 al the investments owned by an individual or organization10. the profits rade on investnents LU. unable to pay dedts or continue te do business 12, the ending o relaxing of egal restitions 13, group of companies, operating in different elds, which have joined together 14 the price paid for borrowing money, pid othe lenders ‘CASE STUDY I: Jill and Zoki are two friends who want to open a new beauty salon. They aze both skilled hairdressers, but they have not owned their own business before. They are applying foro large ‘bank loan to help with ‘set-up costs |. What ‘set-up costs will ned to be paid before the business stars to trade? Sta two examples. 2, State three questions tha the bank managers likely to ask Jill and Zuki before giving the loan. Briefly explain why each question is important. 3. Jill and Zaki decide to draw up a business plan. Will this convince the bank manager to give @ loan? Explain your answer, CASE STUDY 2 “The directors ofa public limited company are planning to double the sizeof the existing factory. ‘wil cost $5m. The company already has substantial long-term loans. The drestors til control just over 50% ofthe shares between them. They are considering four possible sources of finance: new share issve, long-term loan, overdraft and retained profits. ‘Advise the directors on the mos suitable method of financing this expansion. Give reasoas for ‘your answer, VOCABULARY EXERCISE 1, Pot the correct word in each space. wecount Cain Cameney ole wae change banknotes slay waste borrowed leat em spend win Sum back 1. In the USA, “quarters” (25 cents) and "dimes” (10 cems) ar types of, 2. Inthe United Kingdom, "a tenner" means a ten pound, 3, The US doll, the Yen and the Euro are types of 4, Hundred dollar bills and twenty-pound notes are 5. 2,000,000 Swiss francs large of money. 6.1 ed 10 ‘Some Euros into Australian dollars. 7. My fiend ‘a bundred pounds from me. a1 hundred pounds to my fiend, When she can, shell pay me 9.1 buy a lottery ticket every week, but I never,10, Most dentists atleast £30,000 a year un, are paid to employees weekly. are paid to employees ‘monthly. 12. In business, you have o money to make money. 13, A: Do you have a bank 2B: Yes. bank with the Bank of Scoland. anything. 14. ln my opinion eating inexpensive restaurants isa of money. EXERCISE 2. Choose the correct word. 1. Spain now uses the euro. Peseta are no longer ‘4 good money blegal money legal tender 2. [bought a TV which doesn't work. Tl take it back tothe shop to get amy money retumed ba refund ‘¢-arepayment 3. Ina shop, to get a refund, you usually have to show the. a receipe berecipe payment ticket 4.1m paying for my new car in 36 monthly instalments ». pieces parts 5. Leama lot of money, but Ihave alot of, payouts, expenses paying 6. Famous paintings are usualy sold by abid bhighest price ¢. auction [Link] auction the item is sold to the person who makes the highest, abid price offer 8. In Japan, the US dolla is foreign money bi strange money ¢.2 foreign currency ot usual to discuss your personal bs. finances ‘¢. money arrangements fabouseand acer. hire / ent be hire hire rent feat or hire 11, Here's the fifty dollars 1 owe you [Link] youback —c. mustretum 12, The best things in life are a free [Link] _¢: not bought and sold EXERCISE 3. Complete the text using these words:‘accounts Bank Toa Sheque custome ccurrent account debt depositors deposits | lend liabilities liquidity optimize overdraft sslary spread standing order retum transfer wages withdraw Commercial banks are businesses that trade in money. They receive and hold (1) pay money according to (2) instructions, () inoney, es ‘There are sill many people in Britin who do not have a bank (4) “rationally, factory workers were pai (5) in esh on Fridays, Non-manual workers, however, usualy receive a monthly (@) inthe form ofa cheque or 10) paid directly into their bank scour A® usually pays litte or no interest, but allows the holder to (9) his her eash with no restrictions. Deposit accounts pay interest. They do ‘not usually provide (10) 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) fixed sum of money, lent fora fixed period, on which interest is paid, bank usually require some form of security or guarantee before lending. An (13) is an arrangement by which a customer ccan overdraw an account, ic. run up a debt (0 an agreed limit; interest on the (14) 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 match these with their (19) (deposits). The maturity of. loan is how long it wll last; the yield of the loan is its annual (20) ~ how much ‘money it pays ~ expressed as a percentage. UNIT REVIEW 1. Which ofthe banking facilites do you use? 2. What services do commercial banks offer in your country? '3. What changes have there been in personal banking recenthy”\ 4, Give the definition of «commercial bank. 5. Give the definition ofan investment bank. REFERENCES 1, Mackenzie, 1, 2010, English for Business Studies, Cambridge University Press. 2, Stimpson, P, & Farquharson, A, 2021, Business for Cambridge International ASA level, (Cambridge University Press.