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The commercial banks, savings banks, savings and loan associations, mutual savings banks, credit unions, investment banksand so on are financial institutions.

A commercial bank is a privately owned profit-makingcorporation. It serves both individuals and businesses by offering checking and savings accounts, loans,and credit cards.It also deals in some brokerage, insurance, and financial advice.

The commercial bank is the most important source of short termloans for businesses. Sometimes the borrowers pledge collateralto back up the loan. Such loan is a secured loan.Companies with a good financial positionare given the prime rateof interest which is the lowest commercialinterest rate.

The commercial bank offers its customers accountsof two types: demand depositsand time deposits. A demand deposit makes the money in it availableto depositors immediately, while a time deposit requiresdepositors to leave their money with the bank for a stated periodof time. Most banks offer their customersvarious savings certificates, called certificates of deposit.Savers may put their money into thirty day, six month, or two and a half year certificates. The highest interest is paid to the customers who deposit their money for a longer period. Banking services are not freeand banks charge feesfor them. Many banks assess a service feeif an account balance falls beneath a particular minimum, such as $200. The keyelement of international finance and tradeis the correspondent banking relationship.Banks usually maintaina number of correspondent banking relationships. When two banks agree to be correspondents with each other,they exchange their signaturebooks. The signature book includessignatures requiredfor different transactions.To debitan account may require only one signature, and other transactions, such as letters of credit,may require two or more signatures. Correspondent banks provide various services and charge feesfor each service. The services may include clearingchecks, foreign exchange trading, confirmingand advisingletters of credit, checkingthe credit of local customers, purchasingand sellingsecurities, and safekeepingsecurities. Correspondent banks are agents in their respective local markets.

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There is a central bank for all states in the USA called the Federal ReserveSystem ("the Fed") which controls variousfinancial institutions. The government and member,banks jointly ownthe Fed. All national banks are members of the Fed. Most of the state banks do not jointhe system. Member banks have a rightto obtainfunds by borrowing from their districtreserve banks, to use various services which the system provides, to obtain financial advice and assistanceand to receivea dividendon stockthat the district bank owns.

The Fed controls the money supplyand preventsthe economy from crisis. Its most powerful toolin controlling the money supply is the reserve requirement. Itis the percentageof all deposits that a bank must keepon hand at the bank or on deposit with the Fed. If the Fed requires banks to keep 20 percent of all funds on deposit, then they can loan out the other 80 percent to individuals and companies.

The Fed also sellsand buys governmental securities (bonds).When it buys governmentsecurities, it increases the money supply by putting more money in circulation. When the Fed sells government securities, it decreasesthe money supply.

The Fed is "the banker's bank" because it lendsmoney to member banks. The interest that the Fed charges is called the discountrate. The discount rate is an effective monetary tool. The Fed usesit to "fine tune"the economy and to influencethe rate at which banks lend to their customers. The Fed also uses a set of creditcontrols. It establishesthe marginrequirements on credit purchases of stocks and bonds. The margin is the percentage that credit customers must pay in advance.

Besides its monetary functions, the Fed also clearschecks by movingthem from the bank where they were deposited to the bank on which they are drawn.The check travelselectronically from one bank to another throughthe Federal Reserve Bank.

The government also insures deposits in case ofbank failure. The Federal Deposit Insurance Corporation (FDIC) requires the banks to give customers information about their asset quality, capital and earning.This prevents customers from doing business with banks that are in trouble.

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Technological innovationsand increased competition in the faceof deregulationare changing the face of American banking. Banks and other financial institutions are using computer technology now. One of the innovations is the electronic funds transfer which transfers money from individuals to the bank, from bank to bank, and from city to city through an electronic system.

Large banks are installing automatic tellermachines outsidetheir buildings. A customer can get cash, make loan payments, or transfer money from one account to another at any time of the day or night. The key to the automatic teller machine is a debitcard which helps to make transfers directly to and from a customer's checking account.

Some large retailersare installing point-of-saleterminals which allowa retail customer to transfer funds from his bank account to the merchant'saccount.

Electronic funds transfer is making it easyfor commercial banks to acceptdeposits outside their home states. Groups of banks are setting up automatic teller machine networksfor the customers to use their debit cards to withdraw cash, transfer funds and check balances in other states.

Nowadays the banking industry is becoming less regulated. This process is stimulatingthe diversificationof banks, and service and pricecompetition. Financial supermarkets are appearing all overthe United States. These new financial institutions are handling all types of financial transactions.They are selling life insurance to their customers, buying and selling their homes and are lending them money in addition to the traditional services of stock and bond transactions.

The competition that resultsfrom deregulation is urgingthe banks to offer more and better services to their customers.

Some banks are trying to assigneach of their majorcustomers to a "personal banker".

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The simplest way of transferringfunds abroad is bymeans of airmail remittanceorder. For example, a local customer of I lie bank wants to send money to a relative in Japan. The local customer goes to his bank and says where and to whom to send I lie money. He also indicatesthe amount he wants to send, for example, $100. The bank preparesa letter to its correspondent bank in Japan which reads, "Advise and payUS dollars 100 to (name and address)". The letter also says that it is by order of its local customer (giving his name). Then it adds, "In reimbursement,we credityour account with us". (The bank credits the Japanese bank's due to account.)

An officerof the sending bank signsthe letter and collects a small service charge from the bank's customer.

A cableremittance order is identical,but it is more expensive. The advantage of a cable is its speed.

The third way to transfer money abroad is the foreign draft.The officer of the bank drawsit onthe foreign correspondent bank; he signs it and hands to the buyer.The buyer mails it to the payee;the buyer's bank airmails a memorandum of this transaction to the foreign bank.

In the past, financial management was not a major concernfor a business. A company used toestablish relations with a local bank. The bank handled the financing and the company took careof producing and selling.

Today only a few firms operate in this way. Usually businesses have their own financial managers who work with the banks. They negotiate termsof financial transactions, compare rates amongcompeting financial institutions. Financial management begins with the creationof a financial plan. The plan includes timingand amountof funds and the inflowand outflow of money.

The financial manager developsand controls the financial plan. He also forecasts the economic conditions, the company's revenues,expenses and profits.

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Management is based on scientific theories and today we can say that it is developing science.

But knowledge of theories and principles doesn’t provide practical results. It is to know how to apply this knowledge. Practical application of knowledge in the management area requires abilities or skills. Here is an example:

Depending of its size, an organization employ a number of specialized managers who are responsible for particular areas of management. A very large organization may employ many managers, each responsible for activities of one management area. In contrast, the owner of sole proprietorship may be the only manager in organization. He or she is responsible for all levels and areas of management.

What is important to an organization is not the number of managers it employs but the ability of these managers to achieve the organization’s goals, and this ability requires a great skill.

In other words, management is the process of coordinating the resources of an organization to achieve the primary organizational goals.

The financial manager's jobstarts and ends with the company's objectives.He reviews them and determinesthe funding they require. The financial manager compares the expenses involvedto the expectedrevenues. It helps him to predictcash flow. The available cash consists of beginning cash plus customer payments and funds from financing.

The financial manager plans a strategyto make the ending cash positive. If cash outflow exceeds cash inflow the company will run outof cash. The solutionis to reduceoutflows. The financial manager can trimexpenses or ask the customers to pay faster.

The financial manager also chooses financing techniques.One of them is short-term financing. Another is long term financing.

At the end of the fiscal year the financial manager reviews the company's financial status and plans the next year's financial strategy.

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The young businessman must find sources of money that will lastuntil revenue begins to exceed cash outflows. He must be creative in finding start-upfunding. New small businesses can start with the businessman's own assets. On top of that,start-up financing maycome from friends and relatives. The larger businesses can obtain funds from venture capital investors.

One of the personal assets the businessman canuse to raise funds for the business is his home. The value of the home that the owner has paid for is called the owner's equityin the home. By pledging this equity, the homeowner can obtain a second mortgage or a home equity loan.

A businessman can find another source of start-up financing by a life insurance policy.Many policies build up cash surrendervalue - the money that the policy holder can borrow at a low interest rate.

Those who need more funds can obtain a variablerate installment loan. It is a personal loan with an interest rate tied to the prime rate or some other index. When the index changes the rate changes in the same direction.

Some good sources of start-up funds are family members and friends. Many people can affordto lend at a low interest rate. The lender can share ownershipof the business or can become a partner or shareholderin a corporation.

In some cases new companies can obtain cash from venture capital firms. These financial intermediariesspecialize in funding ventures with good promiseand invest in businesses which generate high profits withinfive years. Initiallyventure capital firms invested in high-techindustries, but now other branchesenjoythis kind of financial aid, especially those working in the health-care field. The venture capital firms provide seed money to start a new company, funds to help the venture grow and gain the market and money to buy out a business.

TEXT 7

The banks' most important activity is the extensionof credit.

In order to provide a loan,a bank must have funds to lend! This comes from paid-in capital,earnings of previousyears borrowed funds and the bank's customers' deposits. The bank must always remember that the money he lends is not his bank's own money. It is money deposited by the bank's customers, whether in a demandor time account.This idea limitsthe risk that a commercial banker will take.

To evaluatethe risk, a banker must first obtaincertain basic information about the potentialborrower. The banker must learn how much money the borrower needs, the purposeand the term of the loan, and how the borrower will repay the loan. The banker evaluates the three C's of credit: character, capacity, and capital - the integrityof the borrower, his abilityto repay, and the soundnessof his financial position.

The integrity of the borrower is determinedby previous loans and by his standingwith other banks. Everywhere in the world banks exchange credit information with each other.

The borrower's ability to repay depends onthe purpose of the loan.

The financial position of the borrower is determined on the basis ofhis financial statement.This consistsofa detailed balance sheetand a profit and loss statement.The bank demands an audited financial statement covering the previous three years.

Letters of credit may be either revocableor irrevocable.

The revocable letter of credit carries a riskto the seller. It may be amendedor cancelled at any moment without priornotice to the beneficiary.The irrevocable letter of credit can neitherbe amended norcancelled without agreement of all parties.

A letter of credit may be utilizedonly by the named beneficiary. Sometimes, though, the importer wants to make the letter of credit transferabl e to another person or company. The bank then prepares a transferable letter of credit addressed to the beneficiary "and/or transferee".

The revolvingletter of credit is used when a series of identicaltransactions is made over a fixedperiod of time.

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The seasonalfinancial needs of a company may be coveredby short term sources of funds. The company must pay them off withinone year. Businesses spend these funds on salaries and for emergencies. The most popular outside sources of short term funds are tradecredit, loans, factors,sales finance companies, and government sources.

About 85 percent of all US business transactions involve some form of trade credit. When a business orders goods and services, it doesn't normally pay for them. The supplier provides them with an invoicerequesting payment within a settledtime period, say thirty days. During this time the buyer uses goods and services without paying for them.

A company can use the trade credit as a source of savings. A typical trade arrangementis 2/10, net 30. If a buyer pays within 10 days instead of 30, he gets a 2 percent discount. The savings a buyer obtains can be used as a source of short term funds.

Commercial banks lend money to their customers by direct loans or by setting up lines of credit.

A line of credit is the amount a customer can borrow without making a new request, simply by notifying the bank. If the business doesn't pledge collateral when it borrows, the loan is an unsecured loan.Only customers with an excellent credit rating can get an unsecured loan. They usually repay it within a year's time. When a company wants to borrow a large amount of money it pledges collateral to back up the loan. Such a loan is a securedone.

Sometimes a company might sell its accounts receivableto a special financial broker: a factoring company, a factor. The factor immediately pays the firm cash, usually 50 to 80 percent of the value of the accounts receivable. When customers make the payments on their accounts, the money goes directly to the factor.

Some big firms obtain funds by selling commercial paper.

Because commercial paper has no collateral behindit, only firms with a good financial reputation can sell it. In special cases, a business may obtain short term funds from the federal government.

TEXT 9

When a business needs funds to construct a new assembly lineor to do extensiveresearch and development which may not begin to bring in revenues for several years, short term financing wouldn't work. In this case, business will need long term sources of funds.

Firms may meet long term needs by increasing the company's debt either by getting loans or by selling bonds.

A long term loan is a loan that has a maturityof from one to ten years. Within this period of time the firm pays interest on the debt. Sometimes the lender protectsits financial position by requiring that the company obtain the lender's permission before taking on any additional long term debt. If the loan is particularlyrisky, the lender may even require the firm to limit or eliminatedividends to stockholders.

If the firm wants to be free of lender's restrictions,it may issuebonds. These are long term debts with a maturity date of 20 to 30 years in the future. Governments issue government bonds. Corporations issue corporate bonds which may be secured or unsecured. If a company wants to sell bonds it can offer some collateral. It is difficult, if not impossible, to find investors who are willing to buy bonds which are not backed up by collateral. Only huge corporations such as AT&T can successfully issue unsecured bonds, which are called debentures.

Most bonds carry a face valueof $1000 and pay a predeterminedinterest rate (the couponrate). The company pays this interest regularly according tothe indenture agreementwhich specifiesthe terms of a bond issue.

The company may retirebonds before they mature if the indenture agreement contains a call provision. In this case the firm pays the bondholders a redemptionpremium.

Another flexiblefeature in some agreements is the conversion privilege.It allows bondholders to convert their investment into a stated number of shares of common stock. If the price of the company's common stock is going up, the investors can profit from conversion. Convertibility makes the bond issue more attractive to potentialinvestors.

TEXT 10

When a bank decides to make the loan, it must first selectan interest rate, which is the price for renting the money to the borrower. In computingthe interest the interest rate, the banker must consider the cost of the money to his bank. This includes the average interest rate the bank is paying its depositors, the bank's operating costs,and the normal returnthat the bank expects.The bank must be ableto cover possible loan losses and provide dividends to the bank's shareholders.

If the loan is a term loan, the risk is greater and must be compensatedfor in a higher interest rate. For normal commercial loans the maximum term is usually five years.

If the borrower is foreign, the risk may be greater, and therefore the bank expects extrainterest.

The bank must determine the most appropriate credit instrumentto use. A promissory noteis most usual. Generally the bank wants partialpayments at least semi-annually,but; promissory note can also be payable "on demand".

Commercial banks extend credit by offering advances,discounting accounts receivable,and allowing overdrafts(not usually done in the United States). The credit officer also decides whether to make an unsecured loan or a secured loan (secured by collateral assigned to the bank, such as securities or preciousmetals), or whether the unsecured loan should be guaranteed.

The banker makes an offer to the customer, who may or may not agree to all of the terms and conditions. After the bank and the borrower reachan agreement, the banker arranges for the borrower to sign the necessary documents and then disburses the funds to him.

For large loans, banks often form a syndicate, a consortium of banks, each of which disburses a portion of the loan. Usually, one bank puts the deal together - this is called the "lead bank".

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