Introduction to Banking and Financial Markets

A commercial bank borrows money from the public, crediting them with deposit. The deposit is a liability of the bank. It is the money owed to depositors. In turn the bank lends money to firms, households, governments wishing to borrow.

Commercial banks are financial intermediaries with a government license to make loans and issue deposits, including deposits against which cheques can be written.

Major important banks in most countries are included in the clearing system in which debts between banks are settled by adding up all the transactions in a given period and paying only the net amounts needed to balance inter-bank accounts.

The balance sheet of a bank includes assets and liabilities. We begin by discussing the asset side of the balance sheet.

Cash assets are notes and coins kept in their vaults and deposited with the Central Bank. The balance sheet also shows money lent out or used to purchase short-term interest-earning assets such as loans and bills. Bills are financial assets to be repurchased by the original borrower within a year or less. Loans refer to lending to households and firms and are to be repaid by a certain date. Loans appear to be the major share of bank lending. Securities show bank purchases of interest bearing long-term financial assets are traded daily on the Stock Exchange, this securities seem to be easy to cash whenever the bank wishes, though there price fluctuates from day to day.

We now examine the liability side of the balance sheet which includes mainly deposits. The two most important kinds of deposits are sure to be sight deposits and time deposits. Sight deposits can be withdrawn on sight whenever the depositor wishes. These are the accounts against which we write cheques, thus withdrawing money without giving the bank any warning. Therefore, most banks do not pay interest on sight deposits, or chequing accounts.

Before the time deposit can be withdrawn, a minimum period of notification must be given within which banks can sell off some of their high-interest securities or call in some of their high-interest loans in order to have the money to pay out depositors. Therefore, banks usually pay interest on time deposits. Apart of deposits banks usually have some other liabilities as, for instance, deposits in foreign currency, cheques in the process of clearance and others.

2. Use the following word and word combinations in the proper form:

(to owe, liability, to undertake, therefore(2), interest(2), to settle debts, chequing account, securities, net, bill, to handle transactions)

1. The purpose of money is to make it possible for firms and individuals… … ….

2. Facing an unstoppable rise in unemployment in the early 1980s, many European economists simply accepted it as structural and … it could not be influenced by policy-makers.

3. Employers obtain their … profits only after they have paid all expenses: …, wages, rents, and others.

4. The household sector of American economy holds about one-third of the nation’s … … money, which makes up nearly 80 percent of the total amount of money.

5. Most … are bought for an amount less than their face value and the difference between the two makes up the ….

6. The clearing house system is a centralized mechanism for ….. between banks, sellers of commodities and financial ….

7. A … is something a business or an individual … to another business or individual.

8. A woman may work hard at home, but she receives no wages for this work. It is not … labour in terms of economics.

9. If there exists a stock market, transactions can … over the telephone.

3. Translate the following sentences from English into Ukrainian using the active vocabulary of the text Introduction to banking and financial markets.