How and Why Banks Create Money When They Make Loans
All modern banks create money … one form or another. Exactly how does this occur?
First, we must remind ourselves what money is. Money is simply a medium … exchange—an object that is readily accepted … sellers in payment … the goods and services they offer. In most industrialized economies checks are still the principal means of paying … goods and services. In the United States, for example, checks account … more than four-fifths of the dollar value … all payments made annually … the economy.
When and how do banks create checkbook forms of money? It happens … two ways. First, when a customer is granted a loan, he or she will sign a promissory note and receive, … turn, a bank's demand deposit (checking account). The customer's promissory note is not money—it cannot be used to buy goods and services. But a bank's demand deposit is money and can readily be spent almost anywhere. Thus, … granting loans, banks create money simply … creating a spendable deposit … the name of the borrower.
Second, the entire system of banks also creates money as the deposits generated … lending flow … bank … bank. … law, each bank must set aside only a fractional reserve … each deposit received. Thus, every deposit received by a bank generates additional funds … and … the small required reserve that can be loaned … . As customers spend their loan money these funds flow … to other banks, giving them deposits to loan as well. Ultimately, a multiple amount of deposit money comes … existence … bank lending.
… each dollar loaned … a bank in the financial system, multiple deposits and multiple loans will be created eventually. The banking system's capacity to create money is one reason banks are regulated.
Read the above text once again and answer the following question: How and why do banks create money when they make loans?
Ex. 11. Open the brackets.
Globalization of Banking.
The rapid geographic expansion and consolidation of banking units (to reach) well beyond the boundaries of a single nation (to encompass) the entire globe. Today the largest banks in the world (to compete) with each other for business on every continent. In recent years Japanese banks, (to lead) by Dia-Ichi Kangyo Bank and Fuji Bank, (to grow) much faster than most of their competitors worldwide due to the strength of the Japanese economy. Huge banks (to headquarter) in France (led by Caisse Nationale de Credit Agricole), West Germany (paced by the Deutsche Bank), and Great Britain (led by National Westminster Bank) also (to become) heavyweight competitors in the global market for corporate and government loans. Deregulation (to help) all of these institutions (to compete) more effectively with U.S. banks. Moreover, these leading international banks (to score) sharp gains in global market shares, along with growing shares of the domestic U.S. market.
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1. What is meant by “globalization of banking”?
Ex.12. Carefully explain the meaning of the following terms.
Bank account; bank advance; bank bill; bank card; bank certificate; bank charges; bank draft; bank guarantee; bank holiday; bank loan; banknote; bank rate; bankable; banker’s cheque; banking.
Ex. 13. Give 2-3 sentences of your own, using each word given below, to show that you understand the difference in the shades of their meanings.
Defend, protect, secure, insure, ensure, guarantee.
Ex. 14. Join the halves. Translate the sentences into Russian.
1. Many savers lack the financial expertise
2. Banks are closely watched because
3. Cameras and guards patrol banks
4. Banks are regulated because they provide
5. Fed services are available on the same terms
6. Banks are a source of jobs and satisfying
7. Credit analyst and loan offices need professional training in
8. Branch managers must know how to manage and motivate people
9. Regulation acts as a safeguard against such losses
10. All banks charted by the Controller of the Currency are
11. Consumers also receive help in managing their property
12. Personal bankers must have excellent interpersonal skills
13. Discrimination in the granting of credit would represent a significant obstacle
a) by providing deposit insurance and by periodically examining bank policies.
b) individuals and institutions with loans which support consumption and investment spending.
c) to personal well-being and an improved standard of living.
d) to other depository institutions keeping reserve deposits at the Fed.
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e) and in-depth knowledge of the bank’s menu of services.
f) and in building an estate for retirement or other purposes.
g) and how to represent the bank well in the local community.
h) and depth of information to correctly evaluate the riskness of a bank.
i) of their power to create money in the form of readily spendable deposits.
j) designated member banks.
k) accounting, financial statement analysis, and business finance.
l) professional careers for millions of people.
m) lobbies to reduce the risk of loss due to theft.
Ex. 15. Match each job title on the left with the correct definition on the right.
| 1. tax inspector 2. tax consultant 3. bank manager 4. commodity trader 5. accountant 6. finance director 7. market analyst 8. financial advisor 9. insurance broker 10. stockbroker | a) The person who is responsible for an individual bank. b) Someone who advises people on how to manage their financial affairs. c) Someone who prepares an individual’s (or company’s) tax return. d) The person who is responsible for the financial side of running business. e) A government official who checks that you are paying enough tax. f) The person who finds you the best insurance policy at the best price. g) Someone who buys and sells stocks and shares for clients, and charges a commission. h) Someone who comments on business and share prices in a particular sector of the economy. i) Someone who buys and sells things in large quantities, especially food products such as tea, coffee, cereals, and other raw materials. |
Ex.16. Read the following text. Define the key-words of each paragraph. Put them down. Exchange the notes with your partner and retell the text using the key-words.
The Paris Club
Debt rescheduling is a form of debt reorganization in which debtors and creditors negotiate to defer payments of a principal and interest falling due in a specified interval for repayment on a new schedule. Some countries find it almost impossible to service their external debts. Recently. Rescheduling external debts has become a widely accepted practice. Debt rescheduling occurs at the Paris club for government and private debt owed to official creditors and at the London Club for debt owed to commercial creditors.
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The Paris Club is an informal forum where countries experiencing difficulties in paying their debts to governments and private institutions meet with their creditors to restructure these debts. The name might be quite misleading because in reality the Paris Club is not a club, nor is it a formal international organization. It has no offices, no secretariat, and above all, no charter. The Paris Club is an ad hoc institution with no legal status.
In part, the Paris Club’s confidentiality policy has prevented it from becoming known to a wider public. Creditors refrain from releasing any information pertaining to their assessment of a given debtor’s economic and financial situation or to the scope of debt relief granted. The onset of the international debt crisis in the early 1980s, however, brought public attention to the Paris Club and to its contribution to resolving the balance-of-payment disequilibria experienced by a growing number of developing countries and by some Central and Eastern European countries.
Over the years, the Paris Club has become a key instrument in implementing the international debt strategy. This strategy rests on two main pillars: internal reform and structural adjustment, supplemented by external financial assistance in the form of fresh money and debt relief. Despite the public’s recent discovery of the Paris Club, this forum has existed since 1956, when Argentina agreed to meet in Paris with official creditors to find a mutually acceptable basis for rescheduling payments due on officially supported export credits. In the late 1950’s and 1960’s, Brazil, Chile, and Turkey sought similar Paris Club reschedulings. Since 1980, 54 countries have rescheduled the total of 186 debt agreements.
Ex. 17. Put the paragraphs into logical order. Read the text and answer the questions.
Money Laundering
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One popular money-laundering practice is to make hundreds of small deposits to avoid having large deposits reported to law-enforcement agencies. Another alternative is to mix illegal deposits with legal ones, channeling illegally earned money through legitimate businesses that use banks for processing large amounts of legally earned deposits. A restaurant that does not accept credit cards, for example, deposits a large amount of cash each day in banks. These transfers can then serve as a cover for deposits of illicit funds.
The key to any money laundering scheme is to get the money into legitimate bank accounts without alerting law-enforcement officials to the money's illicit past. Once the money is in a legitimate account, it can be transferred around the world without interference from the authorities.
The currency of choice for most drug-related and other illegal transactions is the U.S. dollar. This partly explains why more than half of the U.S. greenbacks printed cannot be found anywhere in the American economy. Drug lords in the Far East, underground traders in Eastern Europe, and black market currency dealers in Latin America all make use of the U.S. dollar for their illegal activities.
The world’s criminals need to periodically recycle their "dirty money" so that it can be used in the economy at large without anyone knowing about its illegal past. A money laundering scheme is the process that turns large sums of illegally earned funds into "respectable" money. A drug dealer, for example, may end a day's work with a large amount of cash that needs to be deposited or otherwise spent. Since there is a limit to the number of luxury automobiles and condominiums a drug dealer can effectively use or buy without creating suspicion, illicit earnings need to be put into a bank, to be available for future use.
The U.S. dollar, mainly twenty- and hundred-dollar bills, came into use as an underground currency because of its liquidity: it can be exchanged almost anywhere in the world without raising suspicion. Because of the size and stability of the U.S. economy, the U.S. dollar has become the preferred currency for most players in the underground economies of the world.
International bank transfers are just electronic messages, from one bank to another, that instruct banks to put money from one account into another. The sheer size of these international computerized transfers, often exceeding $1 trillion per day, makes them difficult to control. The illegal transfers disappear in a sea of legal ones.
1. What is the key to any money laundering?
2. What popular money-laundering practice is described in the text?
3. What is the currency of choice for most illegal transactions?
Ex. 18. Translate the following text into Russian.
Types of loans made by banks
Bank loans may be divided into seven broad categories of loans, delineated by their purposes.
1. Real estate loans, which are secured by real property – land, buildings, and another structures – and include short-term loans for the construction of buildings and land development and long-term loans to finance the purchase of farmland, family homes, apartments and other multifamily structures, commercial (nonfarm and nonresidential) structures, and foreign properties.
2. Financial institutions loans, which include both long- and short-term credit to banks, insurance companies, finance companies, and other financial institutions to help them meet their obligations to customers and to expand their services and operations.
3. Agricultural loans, extended to farm operations to assist in planting and harvesting crops and to support the feeding and care of livestock.
4. Commercial and industrial loans, granted to businesses to cover such expenses as purchasing inventories, paying taxes, meeting payrolls, and to cover other operating costs.
5. Loans to individuals, which include credit to finance the purchase of automobiles, mobile homes, home appliances, and other retail goods and loans to repair and modernize homes, cover the cost of vacations, medical care, and other personal expenses, either extended directly to individuals or indirectly through the purchase of consumer installment paper from retail dealers.
6. Miscellaneous loans, which include all those loans not classified above, including securities loans made to brokers, dealers, and other investors desiring to purchase stocks, bonds, and other securities.
7. Lease financing receivables, where the bank buys equipment or vehicles and leases them to its customers.
Of the loan categories shown, the largest in dollar volume is real estate loans, accounting for nearly one-third of total bank loans. These loans are made to both individuals and businesses in order to construct and purchase homes, apartments, office buildings, retail shops, and industrial structures. The next largest category is commercial and industrial loans (C&I), also representing close to one-third of the total. These loans include credit to purchase inventories of goods and raw materials, to cover operating expenses, and to finance new equipment. Next in importance are loans to individuals and families for living costs, medical expenses, automobile purchase, home appliances, vacations, education, and so on, accounting for about one-fifth of all loans made by federally insured U.S. commercial banks.
Ex.19. Give the English equivalents.
займы давались на ставке 6% годовых; банковские займы и депозиты; учреждения, занимающиеся обменом денег; финансовые посредники, подобные финансовым союзам; текущие расходы превышают текущие доходы; выпуск ценных бумаг; информация доступна всем по незначительной цене; достоинство акций; финансовые инструменты являются ликвидными; с минимальным риском для продавца; банк обладает знанием и опытом оценивать финансовые инструменты; вкладчики банка не имеют привилегии просматривать финансовые отчеты; анализировать финансовое состояние возможного заемщика; вернуть займ.
Ex.20. Translate into English.
1.Ссуды коммерческих банков служат для предпринимателей и фермеров источником краткосрочного оборотного капитала. 2. Кредитные союзы принимают вклады от своих «членов» -- обычно группы людей, работающих в одной компании. 3. Централизация и контроль служат необходимыми условиями эффективности банковской системы. 4. Федеральные резервные банки представляют собой «банки банков». 5.Они выполняют для депозитных учреждений те же функции, что депозитные учреждения для частных лиц. 6.Федеральная Резервная Система несет полную ответственность за регулирование денежного предложения. 7. В последнее время заметно усилилась интеграция мировых финансовых рынков. 8. Международный валютный фонд способствовал стабилизации курсов иностранных валют.
SPEAK AND WRITE
1. What different kinds of services do banks offer to the public?
2. From observation, draw up a list of ways in which people express higher value for time than for money.
3. Is your attitude towards money different from that of your parents? How? Why?
4. What are the key areas or functions of banks that are subject to regulation? Do you think all of these facets of banking should be regulated? Defend your answer.
5.What are the goals of international banking regulation?
6.What do you know of the activities of the Central Bank of the Republic of Belarus? 7.Comment on the following: “A banker is a man who lends you umbrella when the weather is fair, and takes it away from you when it rains.”
8. Money is more convenient means of exchange, but barter still exists. Why?
9. Find the information about the development of banking industries in England, Germany, France, your country and prepare a 10-15 minute report.
10.“Money is a resource because a person who has money can put it to productive use. The same is true of a nation’s money.” Do you agree?
11.If you possess a large sum of money, what are the pros and cons of the following: -putting it into a sock; - buying a lottery ticket; - taking it to (local) Las Vegas; - putting it in a bank; - buying gold; buying a picture by Van Gogh; - investing in property; - buying shares?
12.What financial barriers might confront people who live in different societies with different monetary systems and who wish to trade with one another? Would it be advantageous if the entire world used a common currency? What do you think are some of the reasons we do not have a world currency?
13.Summarize the information of the unit to be ready to speak on “Money”. The first step to be done is to write the plan of your future report.
14.Choose any question (problem, topic) relating to Banking and make a 10-12 minute report in class. Refer to different additional sources to make your report instructive, interesting and informative.
UNIT 7
FINANCE
What the government gives it must first take
away.
J.S.Coleman
Your Vocabulary
Finance
- management of money
- capital involved in a project
- loan of money for a particular purpose
- money resources of a state, company or person
Finance house (company)
–organization providing finance for hire-purchase agreements.
Financial accountant
– accountant whose primary responsibility is the management of the finances of an organization and the preparation of its annual accounts.
Financial adviser
– a person who offers financial advice to someone else, especially one who advises on investment.
-- organization, usually a merchant bank, which advises the board of a company during a take-over.
Financial capital
– the liquid as opposed to physical assets of a company.
Financial futures
– futures contract in currencies or interest rates.
Financial institution
– an organization that collects funds from individuals, other organizations or government agencies and invest these funds or lends them on to borrowers.
Financial instrument
– formal financial document.
Financial intermediary
– bank, building, society, finance house, insurance, company, investment trust etc. that holds funds borrowed from lenders in order to make loans to borrowers.
-- person or organization that sells insurance but is not directly employed by an insurance company.
Financial year
– any year connected with finance, e.g. a company’s accounting period or a year for which budgets are made up.
-- specific period relating to corporation tax.
Financial ratio
– ratios between particular groups of the assets or liabilities of an enterprise and corresponding totals of assets or liabilities; or between assets and liabilities and flows like turnover or revenue.
Financier
– person who uses his one money to finance a business deal or venture or who makes arrangements for such a deal.
You’ve studied the definitions taken from a dictionary. Refer to some other sources to find more information about the concepts mentioned above.
Ex. 1. Think of the nouns that are most commonly used with these verbs. Give your own sentences with the combinations of words.
to generate, to adopt, to utilize, to perform, to involve, to seek, to provide, to facilitate.
Ex. 2. Give Russian equivalents to the following.
Grant loans, accept deposits, facilitate securities transfers, raising corporate funds, obtain funds, dividend policies, merger and acquisition activities, leasing, the realm of the capital budget, the cash budget, security trading, portfolio managers, stocks, bonds, stock and index options, warrants, financial futures, bank teller, financial analyst, a loan officer, depository institution, mortgage servicing specialist, insurance company, accounts payable staff, treasurer, brokerage house, investment counselor.
Ex. 3. Match the word with its definition.
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