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Introduction to Banking and Financial Markets
(1) A commercial bank borrows money from the public, crediting them with a deposit. The deposit is a liability of the bank. It is the money owed to depositors. In turn the bank lends money to firms, households, or governments wishing to borrow.
(2) Commercial banks are financial intermediaries with a government license to make loans and issue deposits, including deposits against which cheques can be written.
(3) Major important banks in most countries are included in the clearing system in which debts between banks are settled by adding up all the transactions in a given period and paying only the net amounts needed to balance inter - bank accounts.
(4) The balance sheet of a bank includes assets and liabilities. We begin by discussing the asset side of the balance sheet.
(5) Cash assets are notes and coins kept in their vaults and deposited with the Central Bank. The balance sheet also shows money lent out or used to purchase short - term interest – earning assets such as loans and bills. Bills are financial assets to be repurchased by the original borrower within a year or less. Loans refer to lending to households and firms and are to be repaid by a certain date. Loans appear to be the major share of bank lending. Securities show bank purchases of interest - bearing long - term financial assets. These can be government bonds or industrial shares. Since these assets are traded daily on the Stock Exchange, these securities seem to be easy to cash whenever the bank wishes, though their price fluctuates from day to day.
(6) We now examine the liability side of the balance sheet which includes, mainly, deposits. The two most important kinds of deposits are sure to be sight deposits and time deposits. Sight deposits can be withdrawn on sight whenever the depositor wishes. These are the accounts against which we write cheques, thus withdrawing money without giving the bank any warning. Therefore, most banks do not pay interest on sight deposits, or cheque accounts.
(7) Before time deposits can be withdrawn, a minimum period of notification must be given within which banks can sell off some of theirhigh – interest securities or call in some of their high – interest loans in order to have the money to pay out depositors. Therefore, banks usually pay interest on time deposits. Apart from deposits banks usually have some other liabilities as, for instance, deposits in foreign currency, cheques in the process of clearance and others.
(8) Today every country has a Central Bank. It acts as a lender to commercial banks and it acts as a banker to the government, taking responsibility for the funding of the government's budget deficit and the control of the money supply which includes currencyoutside the banking system plus the sight deposit of the commercial banks against which the private sector can write cheques. Thus, money supply is partly a liability of the Central Bank (currency in private circulation) and partly a liability of commercial banks(cheque accounts of the general public).
(9) The Central Bank controls the quantity of currency in private circulation and the one held by the banks through purchases and sales of government securities. In addition, the Central Bank can impose reserve requirements on commercial banks, that is, it can impose the minimum ratio of cash reserves to deposits that banks must hold. The Central Bank also sets discount rate which is the interest rate commercial banks have to pay when they want to borrow money. Having set the discount rate, the Central Bank controls the money market.
(10) Thus, the Central Bank is responsible for the government’s monetary policy. Monetary policy is the control by the government of a country's currency and its system for lending and borrowing money through money supply in order to control the level of spending in the economy.
(11) The demand for money is a demand for real money, that is, nominal money deflated by the price level to undertake a given quantity of transactions. Hence, when the price level doubles, other things equal, we expect the demand for nominal balances to double, leaving the demand for real money balances unaltered. People want money because of its purchasing power in terms of the goods it will buy.
Пояснения к тексту
1. to write cheques against the account – выписывать чеки против счёта
2. to balance an account - уравнять, погасить счёт, сбалансировать статьи расходов
3. vault – сейф, хранилище
4. on sight – по предъявлении (без предварительного уведомления)
5. reserve requirements – процент резерва, т.е. отношение денежной суммы, которая должна храниться на резервном счёте в банке, к объёму вкладов до востребования
6. discount rate – учётная ставка
7. level of spending – зд. общий объём расходов
8. real money, that is, nominal money deflated by the price level – реальные деньги, т.е. номинальная сумма с учётом текущего уровня цен (реальные деньги – деньги с учётом их покупательной силы)
II. Письменно ответьте на следующие вопросы:
1. Does a commercial bank borrow money from the public, crediting them with a deposit?
2. What system are major important banks in most countries included?
3. The balance sheet of a bank includes assets and liabilities, doesn’t it?
4. Does the Central or Commercial Bank act as a lender to commercial banks and as a banker to the government?
5. Who is responsible for the government’s monetary policy?