Introduction to Banking and Financial Markets

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.

Commercial banks are financial intermediaries with a government license to make loans and issue deposits, including deposits against which cheques can be written¹.

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.

The balance sheet of a bank includes assets and liabilities. We begin by discussing the asset side of the balance sheet.

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.

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 Sight deposits can be withdrawn on sight⁴ when­ever the depositor wishes.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 chequing accounts.

Before time deposits can be withdrawn, a minimum period of notification must be given within which banks can sell off some of their high-interest se­curities or call in some of their high-interest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.

Practice 1. Re-read the text and answer the questions.

1. What is deposit?

2. What does a balance sheet of a bank include?

3. Why do most banks do not pay interest on sight deposits?

4.Is a loan the major share of bank lending?

Practice 2. Give the Russian equivalents to the word-combinations from the text:

- a liability of the bank;

- the bank lends money to firms;

- loans and bills;

- the original borrower;

- long-term financial assets ;

- price fluctuates ;

- high-interest loans;

- deposits in foreign currency;

- pay interest on time deposits .

Practice 3. Match up the words on the left with the definitions on the right.

1. bill A. useful or valuable thing or person

2. loan B. buy, acquire by paying for it

3. account C. money obligations

4. transaction D. a printed or written statement of the money owed for goods or series

5. assets E. a report or description of an event or experience

6. liabilities F. a thing that is borrowed, especially a sum of money that is expected to be paid back with interest

7. purchase G. in instance of buying or selling something a business deal

Practice 4. Complete the sentences using the words from the table:

transactions purchased assets liabilities

account bill loan

1. The company insured its …

2. They … a car at 10 years.

3. A balance sheet includes assets and …

4. He paid … for electricity and water.

5. She closed individual … with bank.

6. Money … taken by the central government can be repaid at a low rate of interest.

7. The firm conducted profitable … with us car company.

Practice 5. Complete the table:

noun verbs adjective

original

deposit

foreign

include

commercial

Easy Money Getting Complicated

Economists are wrestling with the issue of “easy money,” the Federal Reserve’s policy of increasing the money supply and pushing down short-term interest rates. Easy money has helped steer the US into a fragile but sustained recovery, but the policy is also fueling concern that, longer term, all of this “free” money could lead to crippling inflation.

 

Fed Chairman Ben Bernanke’s repeated public pronouncements on America’s weak job and housing markets suggest that he could be willing to inject more money into the US economy, possibly even unleashing a third round of quantitative easing. Quantitative easing is an aggressive bond-buying program designed to shore up liquidity among commercial banks, but the prospect of QE3 is becoming a very real worry for a number of economists. Even several voting and non-voting members of the Fed’s policy-making Federal Open Markets Committee (FOMC) are expressing concern about the impact the $2.7 trillion already pumped into the US economy via quantitative easing could have on inflation.

 

A few weeks ago James Bullard, president of the St. Louis Federal Reserve Bank and a non-voting FOMC member, expressed his unease regarding inflation to attendees of Credit Suisse’s Asian Investment Conference (AIC). “Some say that if inflation increases, then we know how to combat it,” he said. “That is true, but the hard-learned lesson of the 1970s was that if the inflation genie is let out of the bottle, it can be extremely difficult to get it back into the bottle.”  Bullard argues that the US economy is on a strong enough footing for the Fed to at least temporarily halt easy money.

 

Bullard, who is largely perceived as a centrist on economic issues, isn’t the sole FOMC member who has pushed for a temporary halt in easy money. Atlanta Federal Reserve President Dennis Lockhart, who, unlike Bullard, is a voting member of the FOMC, has also called for a change in policy, arguing that the improving US outlook offers a platform to watch how the economy evolves. “I would have to see some pretty severe circumstances before I endorse another round of quantitative easing,” he recently told Bloomberg Radio.

 

Others are ready to be more forceful in their attempts to put the brakes on easy money. Jeff Lacker, the head of the Richmond Fed and an FOMC voting member, says he’s uncomfortable with the size of the US central bank’s balance sheet and has even called for an interest rate hike “sometime in 2013.”

 

Bullard and his FOMC colleagues don’t question easy money’s positive impact. The US economy has gained strength over the last several quarters. In the past six months the unemployment rate has fallen to 8.3 percent from 9.1 percent. The issue is really about negotiating a timely exit from this policy so it doesn’t lead to high inflation, which would ultimately hurt consumption and send the economy into another nosedive.

Which has fared best in the crisis, old money or new?

Which has fared best in the crisis, old money or new? It’s hard to say with any degree of accuracy, or indeed discern any meaningful patterns, without long and academic study.

The likes of Bill Gates have become the Rockefellers of the modern age and now look like the new old money. But the past five years certainly seem to have been relatively kind to the sort of new money represented by technology entrepreneurs (albeit often at the expense of other investors).

Russian and other natural resource oligarchs from ex-Sovietstan countries continue to pump money too, while China is beginning to rival the US for billionaires. London property prices bear witness to the success of new money over the past five years.

Old money is harder to track. It can often be tied up in property or in private trusts. The Sunday Times Rich List contains only one truly old money entry in its top 10, which is the Duke of Westminster. There are a couple of families with traditional businesses built up over decades but the elite is nouveau through and through.

Another proxy, however, for old money might be RIT Capital Partners, a quoted investment trust established in the 1960s to husband assets of the Rothschild family. Lord Rothschild remains chairman and the family speaks for a 20pc stake. Rothschilds have created wealth over centuries and have generally been good at keeping hold of it. It’s fair to say an old money approach to wealth creation courses through the trust’s DNA, although that’s not to say old money hangs back from new investments or that old money automatically means old economy.

Being early into opportunities can be the secret of accumulating significant wealth. The trick is to preserve it. RIT’s interim results, out yesterday, showed a 30pc profit, for instance, on the recent sale of half its stake in BTG Pactual, a Brazilian investment bank. It has a £15.5m investment in Dropbox, an American cloud computing company. And, being Rothschilds, they get early sight of many private opportunities most mortals never see. But certainly the past five years appear to have been tough for the old money approach. RIT’s total return is up 8.2pc over the period versus a return of double that for the benchmark MSCI World index. Over a year, RIT is down 5pc while its benchmark is up 9pc.

So what’s the problem? Basically the trust is betting against central banks and policy makers. It fears systemic risks are still building but disguised by various central bank money printing exercises around the world.

Negative real interest rates designed to keep an economic pulse going are forcing investors into ever riskier trades in search of yield. While markets have been driven by short term “risk on/risk off” trading strategies fuelled by ultra-loose monetary policies, fundamental value investing has lost out.

As a quoted trust, anyone can invest. It even has an ISA savings scheme starting at £20 a month. There are other trusts with similar track records and objectives, such as British Empire Securities. Despite short term volatility, old money seems to be faring well and sharing in its success is less exclusive than most people imagine.

November 30, 2012 5:18 am

Japan unveils $11bn stimulus