4 The merchant banksare in many ways different from commercial banks as they deal mainly with businesses. 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 stockbroking and portfolio management services to rich corporate and individual clients. Some merchant banks are known as accepting houses* as they specialise in acceptance credit*. Others are called issuing houses* as they float* new issues of shares on the capital market, both at home and overseas*. 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.

5A country’s minimum interest rate is usually fixed by the central bank. This 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.

Read the text and give it the title.

Monetary policy is the branch of financial policy that is concerned of controlling the supply of money and credit. Monetary policy is important because of its impact on inflation and on interest rates. If a government pursues an «easy» monetary policy it means that it allows the amount of money in circulation to rise and it lets banks increase the volume of loans.

If government pursues a «tight» monetary policy, it restricts the amount of money in circulation and reduces the funds available banks for making loans.

When money is tight:

1. Interest rates rise, because commercial banks have to borrow a higher rate on the interbank market.

2. Credit falls, because people and businesses borrow less higher rates.

3. Aggregate demand falls, because people and businesses buy less, as they have less money.

4. Output falls, too, because of less consumption, firms produce less.

5. Unemployment rises, because companies are producing and selling less, and so need less labour.

6. Inflation falls, because there is less money in circulation.

7. The exchange rate will probably rise, if there is the same demand but less money, or if there is higher demand, as foreigners take advantage of the higher interest rates to invest the currency. Increasing the money supply, making more reserves available, has the opposite effects.

The amount of money in circulation and its velocity of circulation determine the average level of prices and wages. Many central banks now set money supply targets. Increasing or decreasing the money

supply, the central bank indirectly influences on interest rates, demand, output, growth, unemployment and prices. The central bank can reduce the reserves available for commercial banks by changing the reserve requirements. This reduces the amount of money that banks can create and makes the money tight or scarce.

Alternatively, the central bank can engage in what are called open- market operations, which involve selling short-term government bonds (such as three-month Treasury bills) of the commercial banks or buying them back.

And we can put up the question is monetary policy needed?

Many people believe that central banks should conduct an active interventionist monetary policy even though most countries are abandoning other forms of state intervention in their economies, such as price controls, income policies, and industrial planning. These and other forms of intervention, such as agricultural policies and state ownership of business enterprises, waste economic resources and distort markets.

Monetary policy, which represents government intervention in the marketplace for credit, exhibits the same negative effects. The time has come to challenge the need for monetary policy as practised by central bankers (often with finance ministry guidance). The financial markets, operating under appropriate tax and structural policies, will produce far greater price stability and smoother economic growth than central bankers can.

Some people still believe that controlled growth of the money supply will minimise inflation. In fact, the quantity of money in the industrialised nations today is essentially demand-driven. Currency, a key component of the money supply, is demand-driven when people can easily exchange unneeded currency for interest-bearing financial assets, such as bank deposits and bonds. Currency-driven inflations occur only when governments finance their deficits by paying the obligations in currency that cannot be converted easily into other assets.

Bank deposits, the main component of the money supply in industrialised countries, are demand-driven as well. This demand reflects the willingness of individuals and businesses to provide credit to the economy in which they operate, versus investing in real assets or moving funds to other countries.

Reserve requirements on bank deposits, still a favoured monetary policy tool of some central bankers, do not restrict bank lending.

As a practical matter, monetary policy in the industrialised world today essentially takes the form of announced official rates for lending to banks and central bank «steering» of short-term rates.

The credit markets do not differ from other markets. Interest, like any other price, should clear the market at a rate that balances supply with demand.

Exercises

Answer the questions.

1. What is the monetary policy?

2. Why is monetary policy so important?

3. What happens when a country pursues a “tight” or an “easy” monetary policy?

4. What are the peculiarities of the situation when money is tight?

5. What does determine the average level of prices and wages?

6. How can central bank influence on interest rate, demand, output, etc.?

7. What are the negative effects of monetary policy?

8. Is it true that controlled growth of the money supply will minimise inflation?

9. When does currency-driven inflation occur?

10. What does demand reflect?

11. What practical matter does monetary policy have?

Wstawienie brakujących słówek. Proszę 🙂

Słowka do wstawienia: do, face, forecast, pay, prepare, process, provide, set up

tutaj do wstawienia wybrane wyrażenia z tych:
1. act on information
2. disclose information
3. issue securities
4. organize takeovers
5. raise capital
6. raise funds
7. take on risk
8. underwrite transactions

Próbowałam, dosyć długo ale jest tu wiele podobnych znaczeń po prostu, które niby mogą pasować do kilku miejsc, ale pewnie są jakieś połączenia tych słów które tworzą pełne zwroty lub najlepiej pasują.
Ale spróbuję, to co na brudno nabazgrałam

Drugie zadanie, niestety, ale naprawdę nawet nie wiem jak zacząć. To jest tylko jeden podpunkt z kilku, które już zrobiłam.

2 zla forma czasownika
5 simple present albo present continuous

Companies use banks to RAISE CAPITAL for them because it’s the bank which RAISE FUNDS the issue that ISSUE all the SECURITIES

tutaj do wstawienia wybrane wyrażenia z tych:
1. act on information
2. disclose information
3. issue securities
4. organize takeovers
5. raise capital
6. raise funds
7. take on risk
8. underwrite transactions

Companies use banks to RAISE CAPITAL for them because it’s the bank which RAISE FUNDS the issue that ISSUE all the SECURITIES

tutaj do wstawienia wybrane wyrażenia z tych:
1. act on information
2. disclose information
3. issue securities
4. organize takeovers
5. raise capital
6. raise funds
7. take on risk
8. underwrite transactions

COMMERCIAL BANKS

By definition, banks are institutions which accept money from people for safe keeping, lending it out to others, but particularly creating money by lending their credit, i.e. by making loans and advances to customers. Banks make money work at all levels in industry and commerce.

Thus, commercial (or in the UK clearing) banks are providers of payment services and they act as financial intermediaries. They offer a variety of services such as deposit and current accounts tailored to fit particular savers’ preferences 1 and they lend the funds they receive on a variety of terms which satisfy the needs of a range of borrowers.

By pooling risks, by studying the experience of many individuals and by acquiring the expertise to assess the prospect of profit and loss inherent in lending, banks are able to provide their savers with a combination of interest, ease of repayment and protection against loss that are better than these savers could obtain by lending directly to the ultimate borrowers. Banks mediate between these borrowers and savers to achieve a profit. In this intermediation process costs are incurred which must be met out of the bank’s margin between the borrowing and lending interest rates. 2 Banks are able to achieve these margins through economies of scale. But the margin is always under pressure from the basic costs of the business and from competition. They make their profit by paying a lower rate of interest for the money they lend.

Later, other activities were added to the original function of the banks. A modem joint-stock bank is expected to supply 3 the following services: to accept deposits; to provide cheque facilities; 4 to collect and pay cheques, bills and dividends; to grant loans to customers and arrange for overdraft facilities; to discount bills; to open letters of credit’, to issue travellers’ cheques; to transact foreign exchange business; 5 to provide safe-deposit strong-room facilities for clients’ valuables; to transact stock and share business 6 on behalf of their clients and hold securities in safe custody.

Banks write «insurance» type contracts 7 with depositors and borrowers. Thus, personal, corporate and bank depositors are assured that their deposits can be redeemed at full value.

Retail banking involves business with individuals and small businesses. Wholesale banking involves business primarily with other large banks, as well as some business with governments and very large multinational companies.

The more recent development in banking is the merging of investment and commercial banking. Investment banking involves information intermediation and underwriting roles.

In addition, offshore banking, which is part of a country’s banking business that is denominated in foreign currencies and transacted between foreigners, is developing too.

Notes

Features of the small business lending process in commercial banks

One of the main services of commercial banks is lending to legal entities and individuals. Increased competition in the banking sector, economic instability, the impact of economic sanctions and pandemics lead to increased opportunities for lending to small businesses, although this segment of services is characterized by increased risk [1,2].

However, when focusing on credit services for small businesses, commercial banks must take into account the specifics of small businesses. This is especially true for small and medium-sized banks, which can conduct their credit policy more flexibly [3,4,5].

In general, the traditional process of lending to small businesses can be represented as three stages: the assessment of the borrower, the provision of credit and subsequent control. But in our opinion, the process of bank lending to small businesses can be supplemented and presented in the form of the following scheme (fig. 1).

An important stage in the process of lending to small businesses is the choice of the borrower by the bank [6,7]. At the same time, banks are recommended to distinguish the typology of clients, which is shown in table 1.

This typology makes it easier to work at the initial stage of the lending process. The client contacts the bank, and the credit specialist asks him a simple question: «Are you a bank client?». Based on the response, the program issues either a questionnaire or a client’s dossier. Since the bank’s clients already have both a dossier and a credit history, it is no longer necessary to spend time on this. And if this is a potential or sleeping client, then you need to understand whether it is significant for this bank or not.

Figure 1. The process of small business lending

Typology of commercial bank clients

According to the proposed approach to the lending process, determination of significance will be exposed to two of the five categories of customers: potential, as this group of customers were not customers of the bank, has no record, a new customer, so the bank for decision-making requires full information about the client; the second group that needs to be tested for «significance» is dormant customers.

This approach allows you to characterize the external environment of an enterprise, show its place in the market and in the industry, confirm or deny the legality and effectiveness of its activities, and determine the level of diversification. Having this kind of information, a commercial bank can determine the feasibility of providing a loan. The minimum number of points that can be scored is 9 points, and the maximum score is 20.

Based on this, you can determine the level of potential risk:

-0-12 points (0-60 %) — high level of risk. The client is not of any interest to the Bank. Such a client must be refused credit;

-13 — 16 points (65 — 80 %) — the average level of risk. You can skip this client for further verification;

-17-20 points (85-100 %) — minimal risk. For such a client, you can consider the details of the lending process.

The next stage of selecting a borrower is the assessment of its creditworthiness. The essence of this assessment in Russian banks is to check the indicators of financial and economic activity of the enterprise. This is an integral and important part that does not make sense to give up. In accordance with the developed system, indicators of financial and economic activity are evaluated using a point system.

The research can be carried out in the following areas:

-indicators of financial stability;

— indicators of solvency.

-business activity indicators.

After assessing the creditworthiness of the borrower, you should proceed to the assessment of the loan collateral. Usually, this stage of the lending process is implemented at the stage of issuing a loan. But you can disagree with this. After all, the absence of property that can act as collateral for a loan can serve as a reason for refusing to provide credit funds.

In accordance with the foreign system of detailed assessment of a potential borrower, it is necessary to conduct a preliminary assessment of assets that can serve as collateral for the loan. According to the practice of Russian banks, collateral assessment is carried out immediately after the assessment of the company’s creditworthiness.

Based on the results of the collected information about the financial condition of the borrower and his moral and ethical qualities, as well as the analysis of secured property, the borrower is assigned one of three groups of creditworthiness: high, medium or low. All parameters that are taken into account are assumed to be equal to 100 %. The group is assigned depending on the percentage of deviations (table 2).

Parameters of creditworthiness groups

If the analysis of the loan application and the financial condition of the borrower is positive, the issue of granting a loan may be submitted to a meeting of the Bank’s Credit Committee. In this case, the Credit Committee must submit a set of documents, which usually include: an application, a loan memorandum, and a certificate of possible conditions for granting a loan. If the Credit Committee has resolved the issue positively, the bank notifies the potential borrower of the decision and the terms of the loan. Then there is the process of preparing credit documentation, signing a loan agreement and issuing a loan. The loan is issued by the administrator, who can act as the credit division. The administrator opens a loan account for the borrower, deposits money to it, and writes off credit funds according to the purpose of the loan.

Next, the monitoring stage comes into force, during which the current monitoring of the borrower’s condition is performed using the periodic application of the «red signals» system, the borrower’s significance is periodically determined, and the use of reserve funds is monitored when detecting overdue loan debt. For the loan issued, its use (in the case of a target loan) and repayment (periodic interest payments in accordance with the schedule, if such are provided, and repayment of the principal amount of the loan), the availability and condition of collateral, for maintaining compliance with the terms of the loan fixed in the loan and other agreements, market conditions, etc., for changing the financial condition of the borrower in order to timely respond to negative changes in its position, which may affect the ability of the borrower to repay the loan, we need adequate control in the form of monitoring throughout the entire loan term. The ultimate goal of this control is to ensure that the loan is returned to the bank within the established period and in full, together with accrued interest.

The credit division and other services of the bank (accounting, legal and economic security services, collateral services, if any) participate in the process of such control.

The most important part of the monitoring process is constant monitoring of the financial situation of the borrower-a legal entity (small business). Such control may consist of periodic analysis of the company’s financial statements, as well as regular meetings with clients. In organizational terms, the procedure may look like this. The credit division submits a document with its conclusions and proposals to the authorized body of the bank for consideration if there have been significant negative changes in the financial position of the borrower. Based on this document, and depending on the severity of the changes, a decision is made on the actions to be taken in order to maintain the probability of loan repayment at an acceptable level.

A bank that cares about its reputation and strives to maintain good relations with the client will try to do everything possible to help the borrower out of this situation. This can be an increase in collateral for the loan, obtaining additional guarantees, or a requirement to repay the loan in part, and so on.

When organizing the process of lending to small businesses, banks take into account their characteristic features as subjects of credit relations.

First of all, this applies to the content side of all stages of the credit process, the methodology for analyzing the creditworthiness of borrowers. A certain difference can be seen in the nature of credit products, as well as in the terms of their provision.

If there are still so-called «problem loans», then at this stage of lending, there are three main ways to work with such loans. The first method is to collect credit debts on the bank’s own. This can be done by a credit division, the economic security service, or a specially created bank’s own service for dealing with such loans.

The second method is the transfer of credit debts for collection to a specialized collection agency, or there is also a method that involves the sale of debts

There is also the possibility of combining these methods in different «proportions». For example, at first the bank works with problem loans independently, and then transfers the remaining part to the collection agency.

Thus, the lending process used in a particular bank testifies to the commercial bank’s client orientation in the market, its ability to accept and distribute credit risks, and, ultimately, forms the availability (or unavailability) of its credit products for various economic entities.