Commercial banks and investment banks

There are two other types of banks: commercial banks and investment banks – or merchant banks as they are called in Great Britain. Commercial banks deal mainly with individual customers, for instance, private citizens, small businesses, and such like. They receive and hold deposits, lend money, exchange foreign currencies, advise their customers how to invest their money, and manage the customers’ accounts (for instance, pay or invest money according to the customers’ wishes). Commercial banks make their profit from the difference between the interest that they pay to people who deposit money and the interest they charge to people who borrow money. This difference is called a margin.

Investment banks deal mainly with rich corporate clients (companies or large firms) or rich individual clients. They aim not so much at lending money but at raising funds for industry (their corporate clients) in different financial markets. Therefore, investment banks act mainly as intermediaries for their customers. They do not themselves make loans, but make their profits from fees paid for their services. Merchant banks in Britain do the same, but they have greater authority because they also offer loans themselves. They finance international trade, deal with mergers, and issue government bonds.

In recent times the difference between commercial and investment banks has been slowly disappearing as the so-called “financial supermarkets” replace them. These are a combination of a commercial bank, an investment bank, and an insurance company, offering the full range of financial services.

Whether depositing or borrowing money, a customer is most interested in the bank’s interest rate. The minimum interest rate within a certain country is usually determined by the central bank, and the interest rates offered by other banks sometimes fluctuate slightly from time to time, and are publicly advertised by any bank. They are always either higher than or equal to the minimum interest rate fixed for that country.

2.Comprehension check.

a)Working in pairs, answer the questions.

· What role does the Central Bank play in the economy of a country?

· What functions does the Central Bank perform?

· When does inflation happen?

· In what way can the Central Bank stop inflation?

· What services does a commercial bank provide to its clients?

· Whom do the investment banks deal with?

b)Which of the three summarizes below reflects the content of the text more accurately? What is wrong with the other two summaries? Identify the mistakes in them.

· There are three types of banks: central banks, commercial and investment banks (merchant banks in Great Britain). Commercial banks deal mainly with individual customers: they receive and hold their deposits, lend money, manage their customers’ accounts, etc. Their profits are made from fees charged to their customers for the bank’s services. Investment banks deal with corporate clients and raise funds for their clients’ projects. Their profits are also made from fees paid to them. Now all commercial and investment banks have merged into “financial supermarkets”. Every bank determines its own interest rate that is advertised to the public.

· There are three types of banks: central banks, commercial and investment banks (the latter called merchant banks in Great Britain). Commercial banks deal mainly with individual customers: they receive and hold their deposits, lend money, manage their customers’ accounts, etc. Their profits are mostly determined by the difference in the interest they pay to people who deposited their money with the bank and the interest they charge to those who borrow money. Investment banks principally deal with rich corporate and individual clients and raise funds for their projects. Their profits are from fees paid to them for their services. Now the difference between commercial and investment banks is slowly disappearing because “financial supermarkets” have appeared, combining the services of commercial banks, investment banks, and insurance companies. Every bank fixes its own rate of interest on the basis of the minimum interest rate determined by the bank of the country.

· There are three types of banks: central banks, commercial and investment banks (the latter called merchant banks in Great Britain). Commercial banks deal with both individual and corporate customers: they receive and hold their deposits, lend money, manage customers’ accounts, and raise funds for them. Their profits are determined mostly by interest charged to people who borrow money from them. Investment banks only deal with corporate clients and raise funds for their clients’ projects. Their profits are from fees they charge for their services. The difference between commercial and investment banks is slowly disappearing because “financial supermarkets” have appeared. They combine the full range of services offered by the two types of banks as well as by insurance companies. The minimum rate of interest offered by banks is determined by the central bank of the country, but other banks may fix their own interest rates at levels that may be higher or lower than those determined by the central bank.

c)Find words or word combinations in the text that mean the following:

a) when one company unites with another company and they make a single company;

b) a combination of a commercial bank, an investment bank, and an insurance company offering different financial services;

c) a client of a bank that is a whole company or a large firm;

d) money put in a bank;

e) percentage of money paid by a bank to people who deposited their money with it; percentage of the loan paid to the bank by people who borrows money from the bank;

f) to get money for some project (usually through an intermediary);

g) money charged by a bank for its services;

h) the money that is used in various countries;

i) a document issues by a government indicating that the money was borrowed and the government promises to give it back with interest to the holder of the document.

Discussion

Work in pairs.

Discuss which functions of the commercial banks do you think are most important for private and business customers? Why?

Pre-listening tasks

1.The words and word combinations in A are in the text you will hear. Use your dictionary if necessary and match each of them with a definition in B.

2.Work in small groups.

Discuss the necessity of opening a bank account. Which one would you prefer to open (a savings account or a checking account)? Why? Would you try to open both types of accounts? Why?

Listening

T³ The dialogues you are going to hear demonstrate various services of a bank. Listen to them and answer the questions.

1) What kind of bank is discussed in dialogue a?

2) What account will the customer be advised to open in dialogue b?

3) What is the purpose of the customer’s visit to the bank in the dialogue c?

4) Does the customer (in dialogue c) already have an account with that bank?

Role-play

Work in pairs.

1.Listen to a dialogue a again and reproduce it, changing it so that it would be clear that a commercial bank is being discussed.

2.Listen to dialogue b again and reproduce it, changing it so that the customer is advised to open a checking account.

3.Listen to dialogue c again and reproduce it, changing the purpose of the loan (for instance, to request money to buy a house). Choose a purpose for which you, personally, would like to get a loan.

Reading

1.Read text 28 using your dictionary to help with new words.

TEXT 28

BANK CREDIT

Another function of the commercial banks is to provide credit, in the form of:

Overdrafts, where the customer can take out more money than he has in his account up to a certain limit agreed with the bank. He has to pay the money back whenever requested by the bank, and he also has to pay a relatively high rate of interest whenever he is overdrawn. For this reason, an overdraft is not the best option for long-term borrowing.

Banks make a profit by lending out money that has been deposited with them. People borrow money from banks for personal reasons (for instance, buying a house) or for business reasons (as starting a business). Only customers of the bank can get a loan from it because the bank has developed confidence in them as a sound financial investment. When granted, the loan is transferred to the customer’s account. A loan is a fixed amount of money that is at the customer’s disposal for a definite period of time. By the end of that time the money should be paid back.

A loan is cheaper if a large amount of money has to be borrowed over a longer period. The borrower must pay back the principal (the sum of money loaned) plus the interest on it. For business loans, the principal and the interest are due by the end of the term of the loan. Personal loans are more commonly paid back in equal parts (installments) during the full period of the loan.

When somebody applies for a loan, the bank always requests information regarding the purpose of the loan, the amount of money requested, as well as how and when the person or organization plans to pay back the principal and the interest. Since a business loan will be repaid from profits received in the business, the bank will try to estimate whether such profits are realistic or not. Personal loans are repaid out of personal income, so the bank will estimate whether the person’s income is sufficient to make the requested payment.

Some kind of security (usually personal property) will be required for personal loans. For business loans, some assets of the organization applying for a loan will act as security.

Besides these precautions, the bank will estimate whether the sum of money requested is adequate to achieve the purpose of the loan. Banks sometimes prefer to lend more money in order to make sure the project will work and so ensure repayment of the principal and the interest owed them. On the other hand, customers may request less money than they really need because they wish to make repayment easier. But lack of funds may lead to failure of the project, which the bank does not want.

Credit cards such as Visa or American Express are used to buy goods without needing to pay for them immediately. The customer receives a monthly statement and can either pay the entire amount in full (in which case no interest has to be paid) or in monthly installments (plus a fixed rate of interest).

2.Comprehension check.

Are the following statements true or false? Correct the false ones.

a) Money borrowed from banks for personal or business reasons.

b) Anyone can borrow money from a bank.

c) Bank loans are given to borrowers in cash from hand to hand.

d) Bank loans may be paid back whenever a borrower wants.

e) Both the principal and the interest of a loan must be repaid.

f) Security is seldom required when you borrow money from a bank.

g) Banks try to lend less money than borrowers request.

3.On the basis of what you have read make an oral summary of the text, using no more than 6 sentences.

Writing

Give your written statements. What kind of credit did each of these bank customers ask for?

1) Mr. and Mrs. Garrington sold their old house and bought a new one. However, as the new house was much larger and more expensive, they needed credit to pay the difference.

2) Jenny is a student whose income only just meets her expenses. In the winter months her heating and electricity bills are higher, and without credit she wouldn’t always be able to pay them.

3) Adam wants to buy a car, but only has enough savings to buy an old one. He would rather make use of his bank’s credit facilities to buy a newer model which hopefully wouldn’t need repairing so often.

4) Mrs. Brown has her own company. She travels a lot on business and likes to make use of her bank’s credit facilities to spread her expenses over a longer period.

5) Mr. Price has to pay the rent for his apartment on the first day of every month. However, he only receives his salary on the third day of the month. Without his bank’s credit facilities, he wouldn’t always be able to pay the rent.

Unit 9

Texts

For

Self-study

1.1. Read text 1 and be ready to define:

a) what a business entity is;

b) three main types and forms of business organizations.

TEXT 1

Date: 2015-12-24; view: 1460