Working assignment:___

1. Translate the terms and expressions boldfaced into Russian and make them stick in your mind.

2. Use Internet resources to add up brief characteristics to the list of the biggest international and domestic banks.

3. Why do we compare the bank with a sort of lubricant that oils the wheels of international Economy?

4. Explain the concept of bank as intermediary.

5. What is the typology of banks?

6. Explain the concept of bank clearing and its social significance.

7. Summarize the contents of the extract on banks typology.

8. Go to www.youtube.com to examine a video material “How Islamic Banking works?”. What differentiate Islamic banks from that of other countries?

Amazing facts about banks. Do you know that…?______________

· To open the vaults at the Bank of England, you need a key which is 3 feet long.

· As of 2009, the USA had 8,200 banks, while Canada had 72.

The principles of banking

Jokes:___________________________________________________________

A guy walks into a bank and says to the teller at the window, “I want to open a fuckin’ checking account”. To which the lady replied, ‘I beg your pardon, what did you say?”

“Listen up dammit, I said I want to open a fucking’ checking account right now”

“Sir, I’m sorry but we do not tolerate that kind of language in this bank!”

The teller left the window and went over to the bank manager and told him about the situation. They both return and the manager asked, “What seems to be the problem here?”

“There is no damn problem”, the man said, “I just won 50 million in the lottery and I want to open a fuckin’ checking account in this damn bank!”.

“I see sir”, the manager said, “and this bitch is giving you a hard time?”_____________________

How does a bank make money (generate revenues)? Some people think banking is the easiest way to get material welfare to its owners because it suggests money comes just out of the blue on a silver platter. Just from nowhere. This is far from the truth.

The goldsmith bankers were an early example of a financial intermediary standing between lenders and borrowers. They rendered intermediary services. Although the details of banking activities vary across countries, the general principle is much the same everywhere.

A commercial bank borrows money from the public, crediting them with a deposit. The deposit is a liability of the bank. It is money owed to depositors. In turn the bank lends money to firms, households, or governments wishing to borrow. Each intermediary hopes to receive some material reward for their services and indeed they get a commission for each transaction they have performed.

The crucial thing here is that some of their liabilities are used as a means of payment, and are therefore part of the money stock. Let’s examine how it all works.

Financial assets controlled by the bank are of twofold origin: bank’s own funds and borrowed funds. Bank’s own funds are composed of its authorized fund (seed capital), fixed assets like premises, equipment, land, etc. and some revenues generated as a result of bank’s professional activities.

How does the bank generate revenues? It makes money by:

· lending to individuals (retail banking) as well as to corporate customers other banks included (wholesale banking) according to their loan requests.

· overdrafts. Overdraft is a technical loan granted to a customer who has spent more money than he or she has in their bank account to settle short term disbalance between withdrawals and the remainder.

· getting commissions from transactions such as money transfers, currency exchange, accounts opening, etc.

· receiving return on investment (ROI)

· account opening

· issuing guaranties and LCs (Letters of Credit)

It must be added that one of most efficient way to raise a vast amount of capital by the bank suggests issuing shares to be hereinafter floated on the Stock Exchange. Unfortunately however this way of raising funds involves two essential reservations. The first – only public limited banks are authorized to issue shares. The second – shares issued by the bank are in fact its financial obligations to the customers and in accounting terms correspond to bank’s liabilities and not assets. In other words this is borrowed money subject to immediate return to the lender upon request.

Now let us examine the origin of bank’s borrowed funds. They could be customers’ deposits and loans received from the Central Bank and other banks. In turn deposits could be further subdivided into sight (on call) deposits and fixed or time deposits. Sight or on call deposit is money you place on your bank account and that could be easily withdrawn at any moment. The reverse side of the coin stems from the fact that basically no interest is offered (accrued) on sight deposits. Fixed or time deposits are those that can not be withdrawn until the stipulated date. Time inflexibility is balanced here with a good chance to make your wallet thicker since this type of deposits usually offers interest.

As we see it now, banks can use their own funds as well as customers’ deposits to execute banking transactions ante omnia those of lending. The banks have to find profitable ways to lend what has been borrowed. However, the question may arise, is it really safe way to conduct a business since borrowed funds might be massively withdrawn from the bank by the customers causing deadlock in its activities. Good question! The answer stems from the main principles of banking which is an art of compromise between two conflicting aims – profit maximization, on the one hand, and meeting basic customers’ demands in terms of hedging their assets, on the other hand.

The bank seeks to make as much profit as it can and thus takes risks of lending money (it’s own and customers deposits) on interest bearing terms. To reconcile these things the bank first must keep a proportion of its most liquid assets in cash to meet unexpected cash demand of customers. Multiyear experience suggests that a proportion of liquid assets in cash needed to meet customers’ demands for withdrawals varies very little from one bank to another and in most cases doesn’t exceed 6% of total bank’s liquid assets. It means the remainder can be used for lending.

The second thing the bank must do is to ensure that the investments and loans it grants as well as depositary function it offers are safe. To hedge its own and customers’ assets some money reserves should be kept to cover bad debts. Bad debt is a loan or other financial obligation which payment is overdue. Accordingly a thorough analysis of borrower’s loan request should be carried out by the bank’s loan department or committee before taking an appropriate decision to grant a loan.

Дата добавления: 2015-11-14