Services typically offered by banks

UNIT 1

BANKING SERVICES

 

Text 1.

BANK

 

A bank is a business which provides financial services for profit. Traditional banking services include receiving deposits of money, lending money and processing transactions. Some banks (called banks of issue) issue banknotes as legal tender. Many banks offer auxiliary financial services to make additional profit; for example: selling insurance products, investment products or stock broking.

Currently in most jurisdictions the business of banking is regulated and banks require permission to trade. Authorization to trade is granted by bank regulatory authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide banking services without meeting the legal definition of a bank.

Banks have a long history, and have influenced economies and politics for centuries.

Traditionally, a bank generates profits from transaction fees on financial services and from the interest it charges for lending. In recent history, with historically low interest rates limiting banks' ability to earn money by lending deposited funds, much of a bank's income is provided by overdraft fees and riskier investments.

The name bank derives from the Italian word banco, desk, used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth.

1. Read the text above paying special attention to words and expressions in bold. Explain their meaning and translate them.

2. Do sight translation of the text above.

 

 

Text 2.

SERVICES TYPICALLY OFFERED BY BANKS

 

Although the basic type of services offered by a bank depends upon the type of bank and the country, services provided usually include:

· Taking deposits from their customers and issuing checking and savings accounts to individuals and businesses

· Extending loans to individuals and businesses

· Cashing cheques

· Facilitating money transactions such as wire transfers and cashiers checks

· Issuing credit cards, ATM cards, and debit cards

· Storing valuables, particularly in a safe deposit box

· Cashing and distributing bank rolls

Financial transactions can be performed through many different channels:

· Branch

· ATM

· Mail

· Telephone banking

· Online banking

1. Read the text above paying special attention to words and expressions in bold. Explain their meaning and translate them.

2. Find information and make a report on how online banking is performed.

3. Do sight translation of the information above.

Text 3.

TYPES OF BANKS

 

Banks' activities can be characterized as retail banking, dealing directly with individuals and small businesses, and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profit making.

In some jurisdictions retail and investment activities are, or have been, separated by law.

Central banks are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy. They act as lender of last resort in event of a crisis.

 

Types of retail banks

 

· Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.

· Community Banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners

· Community development banks: regulated banks that provide financial services and credit to underserved markets or populations.

· Postal savings banks: savings banks associated with national postal systems.

· Private banks: manage the assets of high net worth individuals.

· Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

· Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralised distribution network, providing local and regional outreach and by their socially responsible approach to business and society.

· Building societies and landesbanks: conduct retail banking.

· Ethical banks: banks that prioritize the transparency of all operations and make only social-responsible investments.

 

Types of investment banks

 

· Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such as mergers and acquisitions.

· Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike Venture capital firms, they tend not to invest in new companies.

 

Both combined

 

· Universal banks, more commonly known as a financial services company, engage in several of these activities. For example, First Bank (a very large bank) is involved in commercial and retail lending, and its subsidiaries in tax-havens offer offshore banking services to customers in other countries. Other large financial institutions are similarly diversified and engage in multiple activities. In Europe and Asia, big banks are very diversified groups that, among other services, also distribute insurance, hence the term bancassurance.

1. Read the text above and answer the questions:

A) What are the main types modern banks are subdivided into?

B) State the main functions of commercial, community, community development, postal savings, savings, private, offshore, ethical banks and building societies.

C) Outline the functions of investment banks. Give the difference between investment banks proper and merchant banks.

D) Explain what the term bancassurance means and translate it from English into Russian.

2. Translate all the terms in bold.

3. Write translator’s commentaries to the following words and expressions: Great Depression, landesbank, First Bank.

Text 4.

EUROPEAN BANKING –

The Brave New World

By Andrew Cowley

In the past most Europeans regarded their bank with the same affection that turkeys reserve for Christmas. But banks are being forced to change. New technology is allowing them to expand the services they offer and hence the way their customers use them.

The retail banks which line the central streets of all European cities are mostly housed in dull, forbidding buildings put up at the turn of the century to impress passers-by with the bank’s solidity and to protect the money inside, not to make customers feel welcome. In all the member states of the European Community, there was in effect a cartel of local banks, which all charged their customers the same high (and often unexplained) fees for looking after their money. The governments of member states regulated most things their banks did, in particular by setting the minimum interest rate at which they could lend money, and the most they could pay depositors. The managements of these banks tended to be introverted and intent on preserving the mystique that somehow banking was different from any other business, rather than on selling services. That was what European banks used to be like. Walk off the street into a bank in London or Bilbao today and as likely as not the massive changes that are taking place in European banking will hit you in the face. Instead of dour cashiers sitting behind high counters and bulletproof glass, a modern bank branch is likely to be open-plan, brightly lit and plastered with advertisements for all the products that banks now try so hard to sell. These products range far beyond conventional bank accounts to credit cards, insurance and even holidays.

Banks have been forced to change by several forces. First, and most powerful, has been deregulation. The introduction of the single European market at the beginning of this year means that a bank legally established in one member state of the European Union can now open branches and sell services in any other member state. That means French banks can offer Germans mortgages to buy a house; British banks are competing for Spanish savings; and an Italian bank can lend money to a Greek who wants to buy a car. The result of these changes is that European banking has become far more competitive, offering customers more choice and forcing banks to work harder.

The second force behind the rapid change in how European banks operate is technology. Until recently, retail banks’ main task was to shuffle bits of paper around. Most payments used to begin with the customer writing a cheque asking his bank to pay someone else however much money was written on the cheque. The recipient of the cheque would send it to his bank, which in turn would send it to the bank of the person who wrote the cheque. Once the latter bank had confirmed that the person who wrote the cheque had enough money in his account to cover the cheque, then that bank would send another piece of paper to the recipient’s bank transferring the money. The amount of paperwork this system of clearing cheques generated was horrendous and kept the majority of people employed by banks busy.

Modern telecommunications equipment and computers are rapidly making all of this paper-shuffling redundant. In the process, this new technology is allowing banks to expand the number of services they offer and hence the way their customers use them.

On the surface, at least, these changes are least obvious when it comes to the most basic thing most Europeans use a bank for – to have a current account. At its most basic, this is an account into which someone’s salary is paid, a convenient place to keep money safely and a means of paying bills (by writing a cheque).

 

Electronic alliances

 

Technology is, however, transforming how people use their current accounts. Automated teller machines (ATMs) are the most important innovation. When first introduced at the end of the 1970s, these were quite simple machines installed in the wall outside only a few bank branches. Once a customer had inserted a special card and tapped in a personal identification number, which is embedded in a magnetic strip on the back of each card, the machine would dispense cash and tell the customer how much money he or she had in their current account.

The second and third generation of ATMs are much more sophisticated. European banks have formed a web of electronic alliances. Through these the holder of an ATM card issued by, for example, Caisse d’Epargne, the fifth largest French bank with 32,500 of its own branches, can withdraw money from 22,000 ATMs spread across Europe. The most modern ATMs can provide most services that a current account holder would usually require: paying bills, transferring money to a savings account, ordering a statement to show every movement on the account for the past month, and so on. This level of sophistication means that many customers conduct their whole relationship with their bank through a machine installed in a shopping street and never have to go inside an actual bank branch.

The next technological development, which is only just beginning to take off in Europe, is banking by telephone. Europe’s biggest telephone bank is First Direct, which is owned by Midland Bank, one of the four so called high-street banks which dominate British retail banking. First Direct is run from a warehouse outside the British City of Leeds. It has a massive room full of telephone operators, who work in teams. The bank deliberately avoids hierarchy – its chief executive does not even have his own office, instead he sits at an open table in one corner of the main room. Customers can ring 24 hours a day and tell the bank to transfer money, pay bills, or borrow money. This system means the bank saves money, as it does not need to maintain a network of expensive branches, and for the customer it is far more convenient than having to trudge along to a conventional bank.

In the next stage of development the telephone will be replaced by a computer terminal installed in each customer’s house, from which he can access his bank’s computer directly. In France, 8 million homes have a Minitel terminal installed, on which most French banks already offer at least an elementary level of service.

Technology is transforming how Europeans use their current account. How they use banks for other services is changing as fast, but in different ways.

When they look for somewhere to put their savings, Europeans are becoming far more demanding. In the not too distant past, west-European savings banks behaved like Russia’s Sberbank, offering investors little choice and poor returns. At Caisse d’Epargne most savers until recently held “Type A” passbooks, from which all deposits were invested in low-cost public housing. In Germany by law the main aim of Landesbanks is not to make a profit, but to support public aims.

In the past savers were willing to put up with this approach because inflation kept interest rates – and hence the nominal returns on their deposits – high. Now that inflation in the European Union has been reduced to an average level of 2.3% a year, the interest rates offered by most savings banks for deposits are so low that savers are looking for alternatives, and there are plenty of these on offer.

 

Diversification and change

A recent survey of 13 banks in five West European countries (Belgium, France, Luxemburg, Spain and Switzerland) found an average of only 14% of their customers have invested in shares. The proportion of Europeans who are choosing to invest their savings in the stockmarket, rather than leaving them on deposit with a bank, varies sharply from country to country, but in general is rising rapidly. Rather than buy shares in individual companies, most small investors buy a share in a mutual fund, which pools thousands of shares and bonds. (In theory, this diversification makes investment less risky than investing in a handful of shares.) At one end of the scale, in Italy, only 3% of households’ 2,500 trillion lire ($1,520 billion) in personal savings are invested in mutual funds. At the other end, in France, 22% of personal savings are invested in mutual funds.

Rather than lose all this money, which would probably otherwise have been put on deposit, banks are setting up their own mutual funds and trying to persuade their customers to invest in them. Thus many of advertisements and leaflets which clutter a modern bank branch are pushing mutual funds and other investment opportunities.

The same process is happening with insurance. Until recently, a European would have gone to several different companies to insure his life, his car and his house. Now banks are turning themselves into financial supermarkets, at which customers can buy all the financial services they can conceivably need, including insurance.

Again, the pace at which banks are moving into insurance varies from country to country. France is once more in the lead – banks sell 35% of the life insurance bought by French people each year. In Germany, banks sell only 5% of life insurance, but they are developing the business fast. Deutsche Bank, Germany’s largest bank, has bought Deutsche Herold, a medium-sized insurance company, and now has 15,000 people selling insurance. The money raised in this way is invested in mutual funds, also run by Deutsche Bank.

There are areas of finance, however, where great changes have not yet taken place. For example, the way small sums of money are transferred between banks in different countries is still prehistoric. A study by the European Commission found that the 200 million small transfers made each year take an average of six days (and as much as 30 days), and that banks charge an average of 14% of the sum transferred. Several consortia of European banks are working on ways to adapt the systems used to make large transfers for companies to the needs of retail customers.

For self-employed people with their own small business – a shop or a small farm, for example – their relationship with the manager of their local bank branch can still mean the difference between survival and bankruptcy. It is difficult and time consuming for centralized departments in charge of making loan decisions to tell which small business will be able to repay their loans on time. Usually the banks rely on the local knowledge of the managers of their branches, who in a small town would be expected to know whether a local businessman could be trusted or not.

There has also been little major change in the way most Europeans take what will probably be the biggest financial decision of their life – to buy a house. In Britain, where financial institutions are less restricted in what they can do than they are in the rest of Europe and where a higher proportion of people own rather than rent their house than in other European states, most people still turn to the traditional source of mortgages – a building society.

A building society (called also a bausparkasse in Germany or a thrift in America) exists solely to lend savers’ deposits to people who want to buy or build houses and flats. Typically in Britain a building society will lend the buyer of a house up to 90% of its cost. Thus, if a house costs £100,000, the buyer would pay a deposit of £10,000 and then pay the building society interest on £90,000 for 20-25 years, when the mortgage must be repaid. In Britain, the rate of interest paid usually varies with inflation; in France and Germany it is usually fixed at the time the mortgage is taken out and does not change.

For many people mortgage payments can consume almost as much of their income as tax does. The size and long duration of this commitment means that most Europeans are conservative and choose a tried and trusted method of raising a mortgage.

Banks also use traditional methods to attract their most valued customers – the rich. Most European banks offer an array of special services to people with cash and liquid investments above a certain level – usually at least $500,000. These private banks, as they are called, will do everything a client could require, from making all his investment decisions to paying bills. Coutts&Co., one of the more venerable private banks in Britain and banker to the Queen, prides itself on the lengths to which it will go to satisfy a customer’s every whim – it has even supplied a crew to sail a customer’s yacht from New York to London. At its modern head office in London, all of Coutt’s senior staff still wear tail coats and preserve the manners of an earlier age. Its customers pay handsomely for this service, but then most of them are too rich to notice.

1. Read the text and answer the questions:

A) What are the main trends in the European banking development nowadays?

B) What was the system of clearing cheques like in the past? How is it carried out now?

C) How do automated teller machines work?

D) What are the 2^nd and 3^rd generations of the ATMs like?

E) What other technological innovations are currently taking place in banking?

F) What are the main tendencies in the way people save their money in Europe?

G) What is happening in the sphere of the European insurance market?

H) What is a building society? What are its functions? What is the American counterpart of a building society?

I) What methods do banks use to attract wealthy people?

J) What are the high-street banks?

2. Write out the equivalents to the following Russian words and expressions: перебирать бумажки; туристические путевки; получить ипотечный кредит; надежный испытанный метод; индивидуальный предприниматель; занимать лидирующие позиции; в среднем только 14%; вклад в банке; стойка (барьер); кассир; головной офис; банк, клиентом которого является королева; консорциум; номинальный доход; в не столь далеком прошлом; темп; выписка о движении средств по счету; кредит; зайдите с улицы; вкладчик; чек; бумажная работа.

3. Explain the meaning of the following words and expressions: deregu-

lation; building society; mutual fund; liquid investment; passbook.

4. Provide information on the proper names you come across in the text.

5. Translate the text in writing.

6. Translate the following sentences using words and expressions from the text:

A) В былые времена большинство европейцев относились к своим банкам с той же симпатией, с какой индюшки относятся к Рождеству.

B) Правительства государств ЕС регулировали большинство операций, которые осуществляли их банки, в частности путем определения минимальной ставки процента по кредитам и максимальной ставки процента по вкладам.

C) Во всех городах Европы банки, как правило, размещались в унылых, уродливых зданиях. Их воздвигали в начале века, чтобы они впечатляли прохожих своей солидностью и неприступностью, а отнюдь не гостеприимным видом.

D) Попробуйте войти сегодня в один из банков – в Лондоне или Бильбао, и вас скорее сего потрясет масштаб перемен.

E) В результате европейское банковское дело становится все более конкурентным, у клиентов появляется больше выбора, а банкам приходится работать в более напряженном режиме.

F) До недавнего времени главной задачей коммерческих банков была «перетасовка» листков бумаги.

G) Современные системы телекоммуникаций делают всю эту бумажную волокиту ненужной.

H) Новые технологии позволяют банкам расширить сферу своих услуг и, соответственно, видоизменять сферу использования этих услуг клиентами.

I) Как только клиент вставляет в банкомат специальную карточку и набирает номер, записанный магнитным кодом на оборотной стороне каждой карточки, банкомат выдает ему наличные деньги, и извещает клиента о том, сколько денег осталось на его текущем счете.

J) Решая куда вкладывать свои сбережения, европейцы становятся более разборчивыми и требовательными.

K) Число европейцев, которые предпочитают вкладывать свои сбережения в фонды, а не просто класть их на депозит, сильно отличается от страны к стране, но в целом продолжает быстро расти.

7. Learn the words and expressions in bold by heart.

 

UNIT 2

CENTRAL BANKS

Text 1.

WHO NEEDS MONEY?

Financial markets, primed to expect a rise in American interest rates, await the Federal Reserve’s next announcement. In the not-too-distant future, however, its actions may cease to count

According to many Wall Street analysts, when the Fed shortly raises interest rates by the expected quarter or half of a percentage point, nothing much will change: the economy will carry on growing, profits will carry on increasing and the stockmarket will carry on surging regardless. As one such analyst put it this week, when investors expect annual stockmarket returns well into double figures, why should a barely perceptible rise in price of money alter their behaviour?

It is a good question. So long as the stockmarket and the economy at large are driven by boundless confidence, small changes in the price of money may have little direct effect. Of course, if the Fed set out to terrify the markets – raising interest rates, say, by two full points – it might burst the Wall Street bubble and bring the economy to a sickening halt. But even then the downturn would not be caused by dearer money itself so much as by the shock of bad unforeseen news.

On the face of it, this is odd. Apart from knowing in advance about its own decisions, the Fed knows little or nothing about the economy that is not public information. The Fed’s influence on the economy ought therefore to be confined to the direct effects of interest-rate changes, effects that are already small and seem likely to get smaller. Yet the Fed’s influence goes beyond this. Its indirect power to move the markets, and hence the economy, is great – despite being, as it were, a confidence-trick.

Maybe the direct effects, albeit small, are enough to give the Fed a fulcrum against which to apply its indirect leverage. This raises an intriguing question. What happens if the direct effects of changes in the Fed’s interest rates are zero?

This is an imaginable state of affairs, as a recent paper* by Benjamin Friedman of Harvard University points out. Traditional models put bank deposits and/or bank lending at the center of the financial system. The Fed exerts influence because it is the monopoly supplier of the reserves that back the supply of bank money. By reducing the supply of reserves, it can cause the supply of bank money to fall – and market interest rates to rise. So goes the theory.

But bank money already matters much less than it used to. For instance, consumers nowadays routinely pay for goods and services not with cash or cheques drawn on their bank accounts but with credit cards, including cards not issued by banks. Meanwhile, other innovations have attacked the demand for bank credit. Non-bank intermediaries – pension funds, insurers and mutual funds – have greatly increased their share of the American credit market. These institutions do not hold balances with the Fed; for them, its monopoly over reserves is already irrelevant.

Furthermore, the advantage that banks traditionally enjoyed over non-banks in judging borrower’s creditworthiness has been eroded by information technology: products such as home mortgages have become automated and commoditised. Even when banks initiate loans, the resulting assets can be turned into a security and sold. More than half of all American home mortgages are now held by securities-market investors; smaller but fast-growing proportions of consumer credit, trade credit and ordinary commercial loans are also being securitized. Again, these loans create no demand for reserves at the central bank.

In judging the significance of all this, it is best not to get carried away. For instance, the development of non-bank money in the form of non-bank credit cards does not entirely displace the Fed. Not yet, anyway. Final settlemen t of credit-card balances is still carried out through banks: the demand for bank money (and hence reserves) has been reduced rather than eliminated. However, Mr Friedman argues that the trend can go further. The crucial question is whether sellers will one day be willing to accept balances with non-banks, rather than only with banks, in final settlement. This is at least conceivable, as advances in information processing and encryption further erode the banks’ special position.

If it happens, incidentally, this is what “e-money” will mean. There will be no need for new units of account with silly names: for reasons of convenience, e-money will be denominated in dollars (or yen or euros). What matters about e-money is that in principle it need not be bank money in any sense. To use an old-fashioned term, it could take the form of purely private monies, entirely unsupported by reserves at the Fed. If the process went all the way, and the lines between banks, non-bank financial institutions and other sorts of enterprise blurred into invisibility, the Fed would indeed be left with no direct way to move the economy. And perhaps its indirect influence would then disappear as well: the chairman’s view on the cost of credit would have as much sway as his view on the Dow Jones Industrial Average.

Would this matter? Maybe less than you might suppose. The Fed would lose its power to use interest rates to soften the business cycle. But during the current expansion it has chosen by and large not to use this power: emphasizing uncertainties about the “new economy”, the Fed has tended to follow markets rather than lead them. (Mr Greenspan has no truck with the old maxim that a central banker’s job is to take away the punch-bowl just as the party gets going.)

The Fed’s ability to act as a lender of last resort would be missed, but the government could take on that job. And if banks fade away, that might be to the good. Banks are inherently fragile and systematically hazardous. Finance based less on deposits and more on securities might be less accident-prone. What about the risk of ever-expanding credit and persistently high inflation? Don’t worry too much. These were unknown before the 20^th century – that is, before powerful central banks were invented.

 

*”The Future of Monetary Policy” International Finance, November 1999.

 

1. Read the text and find information on the following: the Fed, Wall Street, bank reserves, Dow Jones Industrial Average, business cycle, expansion.

2. Provide information on the central bank’s functions.

3. Translate the words and expressions in bold.

4. Translate the text.

5. Learn the words and expressions in bold by heart.

6. Read the text and provide information on the proper names that you come across.

 

 

Text 2.

By Jeannine Aversa

Associated Press writer

 

WASHINGTON – Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economy should grow modestly this year and the inflation should continue to wane, reasons enough for the central bank to keep interest rates steady for the time being.

Still, Bernanke wasn’t prepared to declare victory over inflation just yet and thus didn’t close the door on the possibility of further interest rate increases down the road. Even with recent improvements in “core” or underlying inflation, the situation remains “somewhat elevated,” he said.

Delivering the Fed’s first economic report for 2007 to Capitol Hill, Bernanke offered a mostly unbeat assessment of the economy’s outlook. Besides improvements on the inflation front, the Fed chief also cited some signs of stabilization in the ailing housing market.

“Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes,” the Fed chief told the Senate Banking Committee.

Currently, interest rates are at a level that is “likely to foster sustainable economic growth and a gradual ebbing of core inflation,” he added.

The Fed has held a key interest rate steady at 5.25 percent since August. Before that, the central bank had steadily boosted rates for two years, the longest stretch of increases ever, to fend off inflation.

Many economists predict the Fed will leave rates alone for much of this year and said the Fed chief’s testimony would support that approach.

 

Hedging his bets

Even with his mostly positive assessment, Bernanke was careful to hedge his bets and pointed out risks that could upset the generally good economic outlook.

A predominant one is that inflation might flare up, which is why the Fed is still keeping open the option of another rate increase.

It will “be some time before we can be confident that underlying inflation is moderating as anticipated,” Bernanke said. If inflation doesn’t wane as the Fed expects, policymakers are “prepared to take action,” Bernanke said.

On the other hand, there is the risk that a deeper than expected residential real-estate bust could yet unfold, which could hurt overall economic growth, the Fed chairman said.

If that were to happen, the Fed in theory might be inclined to lower rates to help bolster the economy.

Bernanke, however, did not specifically mention the possibility of a rate cut.

A former college professor, Bernanke marked his first anniversary at the Fed on Feb. 1. President Bush tapped him to succeed longtime Chairman Alan Greenspan, who rose to iconic status in his 18-plus years at the helm of the Fed.

Bernanke said that bolstering education and helping workers acquire new skills should help the situation.

On trade, Bernanke said he is not happy with the United States’ record-high deficits but suggested erecting protectionist barriers would do more harm than good.

1. Read the text and translate the words and expressions in bold.

2. Do sight translation of the text.

 

Text 3. BORN FREE

1. Do critical analysis of the following text translation. Underline mistakes in meaning, expression and style in the target text and offer your own translation variants.

BORN FREE   Politicians and commentators nowadays agree that central-bank independence is a good thing. Recent studies raise doubts These are testing times for the new European Central bank (ECB). Designed to be the most independent monetary authority in the world, it already faces intense pressure from European (especially German) politicians, who are trying to persuade it to cut interest rates. The case for this is strong. Wim Duisenberg, the bank’s boss, might even be willing to act on it – but for the danger of being seen to cave in, barely two months after his new bank took the euro’s monetary reins. An independent central bank, the argument goes, must guard its “credibility” jealously. If the markets suspect that the bank is not truly independent, long-run inflation and the cost of controlling it will both be higher. No question, this is a plausible theory. Politicians are ever tempted to exploit the short-term trade-off between inflation and unemployment, even though the long-term consequence of easing policy in this way (most economists insist) is the unemployment rate you started with and higher inflation as well. Therefore, give control of monetary policy to an independent central bank. Its promise to keep inflation down (unlike any such promise a government might make) will be believed. Not only will inflation be lower, but the output costs of getting it down will be smaller too. The theory has empirical backing: many studies show that countries with independent central banks are better at keeping inflation low. The mixture of theory and evidence has been influential. The Economist, for instance, has long been convinced. And, more important, so have most governments - witness moves in many countries (including Britain) to make their central banks more independent, not to mention the Maastricht design of the ECB itself. What was it Keynes said about “practical men” and “defunct economists”? Having changed the way monetary policy is conducted all over the world, the academic consensus on central-bank independence is wobbling. There are two problems. One is that the supposed correlation between central-bank independence and low inflation is being questioned. The other is that, even if the correlation turns out to be correct, the story about credibility cannot be the reason why. At best, the theory and its (now contested) facts no longer tie up. First, the “facts”. James Forder of Balliol College, Oxford, has drawn attention to defects in the most influential series of papers on the correlation between independence and low inflation. This series starts 20 years ago with a definition of “independence” suggested by Michael Parkin (now at the University of Western Ontario); it includes along the way articles by Alberto Alesina (of Harvard), cited in the Economist and many other places; and it concludes with the pro-EMU manifesto, “One Market, One Money”, published in 1992 by Michael Emerson, at that time the top economist at the European Commission. Mr Forder points to blunders and obscurities; he shows that the definition of independence fluctuates from paper to paper, generally in ways that bolster the supposed correlation; and when he reworks the data the correlation disappears altogether. For now, the issue is unresolved. Part of the trouble is that it is genuinely difficult to define “independence” objectively: it tends to be in the eye of the beholder, and beholders are liable to be influenced by what they know about inflation in the country concerned. At the same time, though, a variety of other, unconnected, studies do also find the sought-after correlation. It may turn out to be true after all – but Mr Forder has certainly cast doubt on the point. What then of the underlying rationale? Here, the findings seem clearer: the orthodox story, which says that (a) independence increases credibility and (b) credibility reduces the cost of getting inflation down, is wrong. To begin with, independence does not seem to increase credibility. If it did, you would expect to see greater rigidity in the setting of nominal wages – reflecting the fact that the bank’s promise to keep inflation low had been believed. Likewise, you would also expect to see greater rigidity in the setting of nominal prices. According to research on 17 OECD countries, using data from 1950 to 1989, by Adam Posen of the Institute for International Economics, you see neither. Moreover, turning from (a) by itself to (a) and (b) taken together, independence not merely fails to reduce the cost of disinflation; it actually seems to increase it. On average, getting inflation down takes as long and calls for a bigger “sacrifice” of output and jobs in countries with relatively independent central banks. As before, the problem may lie in getting the definition of independence right. But suppose, for now, that central-bank independence is correlated with low inflation and that credibility is not the reason why. The question would then be: how does independence come to have this inflation-reducing effect? There are several possibilities. One is correlation without causation: perhaps independence and low inflation are jointly the result of some third factor, such as society’s willingness to tolerate high inflation. Or the causation could be genuine, after all. Perhaps central bankers are more far-sighted than politicians – or (whisper it softly) less concerned about unemployment. Independence might then lead to lower inflation, even if central bankers’ promises were no better believed than those of politicians. Further research, as they say, is required. Meanwhile, the central bank designed to be the most independent in the world goes about its business.

ИЗНАЧАЛЬНО НЕЗАВИСИМЫЙ В настоящее время политики и комментаторы согласны с точкой зрения, что независимость центральных банков это стоящая вещь. Но последние исследования упрочили подозрения. Сегодня Европейский Центробанк проходит испытательный срок. Несмотря на то, что он был изначально запланирован как самый независимый монетарный орган в мире, он все же испытывает на себе значительное давление со стороны европейских политиков (особенно немецких), пытающихся заставить его понизить процентные ставки. И этому есть веские доказательства. Директор банка, Вим Дуизенберг, возможно и хотел действовать в соответствии с ним, но спустя 2 месяца, из боязни показаться неудачником, его новый банк принял евро как основную валюту. Независимый Центробанк должен бдительно контролировать свою «надежность». В том случае, если рынки заподозрят банк в частичной независимости, будут увеличены длительная инфляция и расходы на ее контролирование. Нет сомнений, что эта теория наиболее вероятна. Политики склоняются использовать кратковременный компромисс между инфляцией и безработицей. Но даже тогда долгосрочным последствием политики смягчения (как утверждает большинство специалистов) станет прежний уровень безработицы и высокий уровень инфляции. Следовательно, необходимо предоставить независимому Центробанку контроль над монетарной политикой. Его обещаниям обеспечить низкий уровень инфляции (в отличие от любых обязательств правительства) проявляется доверие. Не только уровень инфляции будет снижен, но также и издержки производства на его осуществление. Эта теория сопровождается опытными данными: многочисленные исследования показали, что в странах с независимыми Центробанками уровень инфляции сохраняется на низком уровне. Соединение теории и практики имеет большое значение. Например, газету «Экономист» долго убеждали в том, что большинство правительств способствует перемещению доказательств во многих странах (в том числе и Великобританию) добиваясь тем самым большей независимости Центробанка, не заостряя внимание на Маастрихтский план Европейского Центробанка. Что сказал бы Кейнс о «практичных людях» и о «вымерших экономистах»? Изменив метод воздействия монетарной политики в мире, на научном консенсусе, посвященному независимости Центробанка, была проявлена нерешительность. Существуют 2 проблемы. Во-первых, ставится под сомнения предполагаемая взаимосвязь независимости Центробанка и низкого уровня инфляции. И, во-вторых, даже если взаимосвязь и окажется правдивой разговор о надежности не может быть обоснованной причиной. В лучшем случае, теория и ее (оспариваемые) аргументы не связаны. Во-первых, аргументы. Джеймс Фордер из Balliol College из Оксфорда обращает внимание на недостатки большинства значительных работ, посвященных взаимосвязи независимости и низкого уровня инфляции. Началом настоящего исследования послужило определение термина «независимость», предложенного Майклом Паркином (работающего в настоящее время в университете Западного Онтарио) 20 лет назад, туда также включены работы Альберто Алесина (из Гарварда), на которые ссылается «Экономист» и многие другие. Исследование заканчивается манифестом за европейскую денежную единицу «Единый рынок, единая валюта», изданного в 1992 году Майклом Эмерсоном, ведущим экономистом Европейского комитета. Мистер Фордер отмечает грубые ошибки и неизвестность. Он доказывает, что определение независимости изменяется в каждом издании, в основном поддерживая предполагаемые взаимосвязи. В то время, когда он все переделывал, исчезли данные взаимосвязи. На сегодняшний день вопрос остается открытым. Частично проблема заключается в том, что действительно трудно определить «независимость». Это зависит от наблюдателей, а они в свою очередь подвержены влиянию своих знаний об инфляции в стране. В то же время, разнообразие остальных не связанных между собой учений проявляют модные взаимосвязи. Помимо всего прочего это может оказаться правдой. Но Мистер Фордер все-таки сомневается в этом. А что же насчет основного логического обоснования? Заключения не оставляют сомнений: очень популярной общепринятая история о том, что (а) независимость повышает надежность, а (б) надежность уменьшает расходы на уменьшение уровня инфляции. В действительности же независимость не повышает надежность. А если и повышает, то вы вправе ожидать значительной неизменяемости номинальной заработной платы, отражая тот факт, что обещаниям банка снизить уровень инфляции доверяют. Таким же образом, вы в праве ожидать значительную жесткость номинальных цен. Но и в исследовании 17 стран Организации экономического сотрудничества и развития Адама Посена, основанных на данных с 1950 по 1989 годы, вы ничего не найдете. Более того, принимая во внимание не только (а), но и (б) независимость не уменьшает затраты на деинфляцию, а наоборот повышает их. В среднем, процесс снижения уровня инфляции продолжается длительное время и приносит еще большую продукционную «жертву», а также осуществляется в странах с относительно независимыми Центробанками. Как и прежде, суть проблемы находится в определении прав независимости. Предположим, что на сегодняшний день независимость Центробанков связана с низким уровнем инфляции и их надежность не является обоснованной причиной. Вопрос состоит в следующем: как независимость сможет понизить уровень инфляции? Существует несколько способов. Во-первых, это взаимосвязь с причинной обусловленностью: возможно независимость и низкий уровень инфляции являются причиной такого третьего фактора, как готовность общества перенести высокий уровень инфляции. Или же причинная обусловленность может стать истинной. Возможно, банкиры более предусмотрительны, чем политики, или же менее обеспокоены проблемой безработицы. Независимость может привести к снижению уровня инфляции, даже если обещаниям банкиров доверяют не более чем обещаниям политиков. По их мнению необходимы дальнейшие исследования. Между тем тот факт, что Центробанк был изначально запланирован как самый независимый в мире, не соответствует действительности.

 

UNIT 3

FINANCIAL STATEMENT

1. Read the following information and translate expressions in bold.

Financial statements (or financial reports) are formal records of a business' financial activities. These statements provide an overview of a business' profitability and financial condition in both short and long term. There are four basic financial statements:

1. Balance Sheet - also referred to as statement of financial condition, reports on a company's assets, liabilities and net equity as of a given point in time.

2. Income Statement - also referred to as Profit or loss statement, reports on a company's results of operations over a period of time.

3. Cash Flow Statement - reports on a company's cash flow activities, particularly its operating, investing and financing activities.

4. Statement of Retained Earnings - explains the changes in a company's retained earnings over the reporting period.

Because these statements are often complex, an extensive set of Notes to the Financial Statements and management discussion and analysis is usually included.

Financial statements are used by a diverse group of parties, both inside and outside a business. Generally, these users are:

1. Internal Users: are owners, managers, employees and other parties who are directly connected with a company.

· Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis are then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's report to its stockholders, as it form part of its Annual Report.

· Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.

2. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for a diverse number of reasons.

· Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analysis is often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions.

· Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

· Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

· Media and the general public are also interested in financial statements for a variety of reasons.

 

2. Answer the following questions:

A) What are the basic financial statements?

B) What’s the purpose of the financial statement?

C) Why is the financial report of a company of some interest to the media?

D) What are other entities interested in financial reports?

3. Do sight translation of the information above.

4. Read the information below.

 

Balance sheet

 

In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a "fiscal year." It is known as a balance sheet because it reflects an accounting identity: the components of the balance sheet must (by definition) be equal, or in balance; in the most basic formulation, assets must equal liabilities, or assets must equal debt plus equity.

A balance sheet is often described as a "snapshot" of the company's financial condition on a given date. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time, instead of a period of time.

A simple business operating entirely in cash could measure its profits by simply withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, real businesses are not paid immediately; they build up inventories of goods to sell and they acquire buildings and equipment. In other words: businesses have assets and so they could not, even if they wanted to, immediately turn these into cash at the end of each period. Real businesses also owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

A modern balance sheet usually has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the 'net assets' or the 'net worth' of the company.

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual.

 

Balance sheet structure

 

The following balance sheet structure is just an example. It does not show all possible kinds of assets, equity and liabilities, but it shows the most usual ones. Because it shows Goodwill it could be a consolidated balance sheet.