4.4. Banking discovering connections

When first opening a bank account, there can be a number of choices and factors to consider that will make the process seem quite discouraging. With time and patience, however, it becomes clear that the basics are actually fairly simple. A bank, in short, is simply a place to store one’s money, while offering access to it through a number of methods and from a variety of locations. It is important to research all of the available financial institutions in one’s area to determine which one offers the best services for your situation.

Answer the questions:

1. How often do you go to the bank? What do you usually do there?

2. What different kinds of services do banks offer to the public?

3. How will you comment on the following quote:

“A banker is a man who lends you umbrella when the weather is fair, and takes it away from you when it rains.” (Mark Twain)

Text 1

Types of Banks and their Functions

After reading the text choose the heading for each paragraph.

• Investment Banking

• Interest Rates

• Commercial Banking

• Universal Banking

• Central Banking

• Basic Types of Bank Accounts

• The Role and Classification of Banks

1. A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities. Banks are a fundamental component of the financial system, and are also active players in financial markets. The essential role of a bank is to connect those who have capital (such as investors or depositors), with those who seek capital (such as individuals wanting a loan, or businesses wanting to grow). According to their primary functions most common types of banks are central, commercial, investment and universal.

2. A central bank which is also called a reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend the government its currency. A central bank fulfils a number of key roles in the economy, acting as a bankers’ bank and as a lender of last resort, being responsible for monetary creation, and having overall responsibility for monetary policy. The central bank can use control of interest rates, open market operations and required reserves to influence the monetary base and overall interest rates in the economy.

3. A country’s minimum interest rate is the discount rate, at which the central bank makes secured loans to commercial banks. Banks lend to blue chip borrowers (very safe large companies) at the base rate or the prime rate; all other borrowers pay more, depending on their credit standing (or credit rating, or creditworthiness): the lender’s estimation of their present and future solvency. Borrowers can usually get a lower interest rate if the loan is secured or guaranteed by some kind of asset, known as collateral. By influencing the amount of real money in the economy by means of interest rate and other instruments, the central bank is able to influence aggregate demand, which in turn will influence prices. Thus the central bank has to balance the need to restrain inflation with the desire to allow economic growth.

4. Commercial or retail banks are businesses that trade in money. Commercial banks are also known as business banks and they make a profit by:

• lending to the money market;

• investing in sound shares and securities;

• charging interest payments on overdrawn accounts;

• making loans to businessmen and private individuals, etc.

The difference between the interest rates commercial banks pay to lenders or depositors and those they charge to borrowers is known a spread or a margin. When lending money, bankers have to find a balance between yield and risk, and between liquidity and different maturities. Commercial banks offer their clients a wide range of services. They receive and hold deposits, pay money according to customers’ instructions, offer investment advice and give advice on overseas matters, exchange foreign currencies, issue travellers’ cheques and so on.

5. The commercial bank provides its customers two basic types of accounts: deposit (BrE) or savings account (AmE) and the current (BArE) or checking account (AmE). The deposit/savings accounts pay interest but can not be used directly as money (for example, by writing a cheque).These accounts let customers keep liquid assets while still earning a monetary return. The current/checking account pays no interest and it provides access to funds on demand through a variety of different channels like check books, plastic cards and others. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts.

6. Investment banks, often called merchant banks in Britain, raise funds for industry on the various financial markets, finance international trade, issue and underwrite securities, deal with takeovers and mergers, and issue government bonds. They also generally offer stock broking and portfolio management services to reach 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. Investment banks make their profits from the fees and commissions they charge for their services. Unlike commercial banks and retail banks, investment banks do not take deposits.

7. The most recent trend in banking system has been the advance of universal banks, which attempt to offer their customers the full spectrum of financial services under the one roof. Deregulation in the USA and Britain is leading to the creation of ‘financial supermarkets’: conglomerates combining the services previously offered by banks, stockbrokers, insurance companies, and so on. In some European countries (notably Germany, Austria and Switzerland) there have always been universal banks combining deposit and loan banking with share and bond dealing and investment services.