Essentials of banking

Banks are at the heart of each financial system. The origins of capitalism as we see it today lie in the operations of Italian merchanting and banking groups in the 13^th, 14^th and 15^th centuries. For a long time Florence was a major centre. Then the emphasis in banking moved to Genoa as gold and silver were flooding in from the New World. Later still, there was the rise of the two great rivals, the Dutch and British Empires and Amsterdam and London as rival financial centres. During 1700s-1800s there was the growth of industrialization and urbanization and as a result the spread of banking followed. And now banks are the one type of financial institution with which all people are bound to come into contact at some point in their lives.

In banking system there are different types of banks. The main are: Central bank, commercial banks, merchant, savings, cooperative, mortgage and giro banks.

Central banks have a lot of functions and responsibilities. They function as banks for the government and for other banks and implement monetary policy - either the government's, as in Britain, or their own, if they are as in Germany and the USA. They control the money supply, measured by different aggregates such as MO, Ml, M2, M3, etc. and fix the minimum interest rate. They act as lender of last resort to commercial banks with liquidity problems, issue coins and bank notes, influence (floating) exchange rates by intervening in foreign exchange market and supervise the banking system.

Commercial banks are banks in the classic business of taking deposits and lending money. There are retail banking and wholesale banking. Retail banking involves high street branches, dealing with the general public, shops and very small businesses. The use of cheques and cheque clearing is normally of crucial importance. We are talking here of high volume but low value. Wholesale banking involves low volume and high value. It covers dealings with other banks, the central bank, corporates, pension funds and other investment institutions. Cheques are not so important here, but electronic settlement and clearance is — sys­tems like CHIPS (Clearing House Interbank Payments) in New York and CHAPS (Clearing House Automated Payments) in the UK.

The main functions of commercial banks are to accept and hold deposit, to honour drafts - cheques and bills of exchange - drawn on them, and to grant advances in the form of loans and overdrafts. Banks also provide services such as keeping customers' accounts, obtaining and giving information, transferring funds for payments or investments, handling foreign currency transactions, issuing letters of credit, acting as trustees, executors and guarantors, looking after securities and other valuables, and, in foreign trade, collecting payments, discounting bills of exchange, and financing imports and exports.

Merchant bank is a classic UK term; Investment bank is the US equivalent and perhaps the more general and modern term. If the choice is bonds or equities, they will help the issuer to price them, will assist in selling them and, with other as­sociates, underwrite the issue, that is, they will buy the securities if the investors do not.

Savings Banks.What we have to distinguish here is the historical, traditional role of savings banks and their more modern role today. In the modern world they are looking more and more like ordinary commercial banks due to (a) growing mergers of previously autono­mous savings banks, (b) deregulation, removing restrictions on their activities and giving them powers to act like commercial banks. In spite of (a) and (b), what might still make them a little different is their ownership structure — usually they are «mutuals», that is, owned by the members.

Cooperative banks are owned by the members and maximum profit is not their main objective. They may aim, for example, to give low cost loans to their members.

A mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers. A mortgage bank is not regulated as a federal or state bank and does not take deposits from consumers or businesses.

In the first case, giro banks refer to money transfers by which an individual sends a giro slip to their bank instructing them to pay a sum of money to, say, the electricity or gas company. The second use is in the term Giro bank and the use of post offices to help those without a bank account pay their bills.

Its important to mention about some banking products.

There are two typical forms of banking accounts- current and deposit accounts. Current account is one which is used all the time for day-to-day transactions. No interest is paid on a current account. Banks make charges for handling these accounts unless an agreed minimum balance is kept in over an agreed period of time. Salary is paid directly into a low-interest current account, from which withdrawals can be maid by automatic cash dispensers with a cashcard. A client may pay regular, monthly bills by a standing order and then the bank pays them according to his instructions, and debits his account. Irregular bills can be paid by cheques. So a person may either use chequebooks or pay cash or pay bills at a post office with a paying-in slip.

Credit cards are useful for ordering things by post or on the telephone, and for travelling worldwide. People use them in shops and restaurants as well. If one spends more than he can pay when the bill comes a month later, it becomes a very expensive way of borrowing money because of high annual interest.

Deposit account is a bank account that earns interest and usually requires notice of withdrawal. It is one in which surplus funds from the current account and savings are held. Deposit account pays higher interest than the current one, but it has restrictions as to how and when a person can withdraw his money.

A client also can receive a mortgage. It is an agreement under which a person borrows money to buy property, especially a house, and the lender may take possession of the property if the borrower fails to repay the money. So one can take the loan obtained under such an agreement and then he will have to pay a regular payment of money borrowed.

One can arrange an overdraft with the bank, which means that person can occasionally withdraw more money than is actually in his account. Interest is calculated daily in this case.

Anybody can use the bank to buy foreign currency when go abroad. But one can also buy some travellers' cheques instead. It is a cheque in any of various denominations sold for use abroad by a bank.

Banks sell private pension plans, for when a person retires. They also offer investment advice about shares, bonds, unit trusts, mutual funds, and so on.

Date: 2016-03-03; view: 1097