Section 3: Money and Banking - Part 2: Types of Bank

3.3 Central Banking

3.3.1 Central Banks, such as the Bank of England, the Federal Reserve Board in the US, and the Bundesbank in Germany:

1. Function/Act as banks for the government and for other banks.

2. Implement monetary policy - eithet the government's, as in Britain, or their own, if they are independent, as in Germany and the USA.

3. Control the money supply, measured by different aggregates such as MO, M1, M2, M3, etc.

4. Fix the minimum interest rate.

5. Act as lender of last report to commercial banks with liquidity problems.

6. Issue coins and bank notes.

7. Influence (floating) exchange rates by intervening in foreign exchange markets.

8. Supervise the banking system.

3.3.2 PARAGRAPH:

     Because a commercial bank can lend most of the money deposited with it to other borrowers, who in turn may lend it to another borrower, each sum of money deposited in a bank is multiplied several times. To ensure the safety of the banking system, central banks impose reserve requirement, obliging commercial bank to deposit a certain amount of money with the central bank at zero interest. Central banks in different countries also impose different "prudential ratios" on commercial banks. These are ratios between deposit and liquid assets that are considered sufficient to meet demands for cash (A bank's assets are its loan, which should, in theory, all be paid back one day, and its liabilities are the customers' deposits, which can all be withdrawn one day.) For example, a bank's capital ratio is between its capital and reserves on the one hand, and its total assets on the other. They reserve asset ratio is between deposits with a maturity of under two years, called "eligible liabilities," and reserve assets, which include cash and assets that are liquid - i.e. quickly convertible into cash - such as reserve deposits held by the central bank, and securities such as treasure bills. 

3.5 Commercial Banking

    Commercial banks are businesses that trade in money. They receive and hold deposits, pay money according to customers' instructions, lend noney, etc.

      There are still many people in Britain who do not have bank accounts. Traditionally, factory workers were paid wages in cash on Fridays. Non-manual workers, however, usually receive a monthly salary in the form of a cheque or a transfer paid directly into their bank account.

     A current account (US: checking account) usually pays little or no interest, but allows the holder to withdrawn his or her cash with no restrictions. Deposits accounts (in the US also called time or notice accounts) pay interest. They do not usually provide cheque (US: check) facilities , and notice is often required to withdraw money. Standing orders and direct debits are ways of paying regular intervals.

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

       Banks make a profit from the spread or differential between the 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 depositors rarely withdraw all their money at the same time. In order to optimize the return on their assets (loans), bankers have to find a balance between yield and risk, and liquidity and different maturities, and to match these with their liabilities (deposits). The maturity of a loan is how long it will last; the yield of a loan is its annual return - how much money it pays - expressed as a percentage.

"Look - if you have five pocket calculators and I take two away, how many have you got left?"

3.6 Types of Bank

     Central banks supervise the banking system; fix the minimum interest rate; issue bank notes; control the money supply; inluence exchange rates; and act as lender of last resort.

     Commercial banks are businesses that trade in money. They  receive and hold deposits in current and savings accounts, pay money according to customers’ instructions, lend money, and offer investment advice, foreign exchange facilities, and so on. In some countries such as England these banks have branches in all major towns; in other countries there are smaller regional banks. Under American law, for example, banks can operate in only one state. Some countries have banks that were originally confined to single industry, e.g. the Credit Agricole in France, but these now usually a far wider customer base.

     In some European countries, notably Germany, Austria, and Switzerland, there are universal banks which combine deposit and loan banking with share and bond dealing, investment advice, etc. Yet even universal banks usually form a subsidiary, known as a finance house, to lend money – at several per cent  over the base lending rate – for hire purchase or instalment credit, that is, loans to consumers that are repaid in regular, equal monthly amounts.

     In Britain, the USA and Japan, however, there is, or used to be, a strict separation between commercial banks and banks that do stockbroking or bond dealing. Thus in Britain, merchant banks specialise in raising funds for industry on the various financial market, financing international trade, issuing and underwriting securities, dealing with takeovers and mergers, issuing government bonds, and so on. They also offer stockbroking and portfolio management services to rich corporate and individual clients. Investment banks in the USA are similar, but they can only act as intermediaries offering advisory services, and do not offer loans themselves.

     Yet despite the Glass-Steagall Act in the USA, and Article 65, imposed by the Americans in Japan in 1945, which enforce this separation, the distinction between commercial and merchant or investment banks has become less clear in recent years. Deregulation in the US and Britain is leading to the creation of “financial supermarkets” – conglomerates combining the services previously offered by stockbrokers, banks, insurance companies, etc.

     In Britain there are also building societies that provide mortgages, i.e. they lend money to home-buyers on the security of houses and flats, and attract savers by paying higher interest than the banks. The savings and loan associations in the United States served a similar function, until most of them went spectacularly bankrupt at the end of the 1980s.

   There are also supranational banks such as the World Bank or the European Bank for Reconstruction and Development, which are generally concerned with economic development.

3.7 Banking Products

     My salary is paid directly into a low-interest current account I can withdraw money from automatic cash dispensers with a cashcard, so I hardly ever actually go into a bank. I pay regular, monthly bills by way of a standing order the bank pays them according to my instructions, and debits my account. I pay irregular bills by cheque. Nearly everyone I know in Britain has a chequebook, but when I lived on the Continent, I found that people hardly used them. They ofen paid cash, or paid at a post office with a paying-in slip.

     I also have a credit card which is useful for ordering things by post or on the telephone, and for travelling worldwide. I also use it in shops and restaurants, but try not to spend more than I can pay when the bill comes a month later, as this is a very expensive way of borrowing money. The annual interest is exorbitan – well over 20%.

     I used to have a deposit account in a building society which paid higher interest than the current account at the bank, but had restrictions as to how and when I could withdraw my money. But then we bought a flat. I got a 90% mortgage from the building society: i.e. we had to pay a deposit of 10% with our own savings.

     That is why I have no more money and no more deposit account. In fact I have arranged an overdraft with the bank, which means I can occasionally withdraw more money than is actual in my account. Interest is calculated daily. Last year I ask the bank for a loan to by a car. I (only) wanted two months salary, but they refused. Since I don’t like the high interest rates that the garage’s hire purchase people charge, I bought a chip second-hand car instead.

     I always use the bank to buy foreign currency when I go abroad, because their rates are better than the bureaux de change. I don’t like travellers’ cheques, and I never had my money stolen – yet.

     My bank is also always trying to sell me a private pension plan, for when I retired, but I’m not interested. They also keep offering me investment advice about shares, bonds, unit trusts, mutual funds, and so on. They don’t seem to realize that if I could afford to buy all these things. I wouldn’t need an overdraft.

3.8 Word Partnerships - Bank

1.  bank account                                      2.  bank balance
3.  central banking/bank                         4.  bank clerk
5.  commercial bank                               6.  bank deposit
7.  bank holiday                                       8.  investment bank
9.  bank manager                                    10.merchant bank
11.bank note                                            12.off-shore banking
13.retail banking                                     14.bank robbery
15.savings bank                                       16.bank statement
17.bank system                                        18.wholesale banking


* In my county the most important types of bank are:  Central bank (or National bank), Commercial bank.
*  The banking services that I use are: banking products:.............