What do you know about the banking system of the UK?

Does it differ from that of other European countries?

 

Text A

Banking sector

The banking sector in the United Kingdom is unique in its size, breadth and diversity. The UK, and not just London, is home to a large domestic banking industry and a large international industry.

However, classification of financial institutions is becoming progressively more difficult as the distinctions between them are being blurred, due primarily to changes in the regulatory framework and to competitive forces within the industry. Nevertheless, some classification is necessary for expository purposes, and there is a need to look at each group of financial institutions in turn, in order to attain a better understanding of their activities and their place within the financial system. In doing so, however, always bear in mind the extent to which financial institutions are increasingly offering a range of financial services which were traditionally offered by separate institutions.

Retail and wholesale activities of financial institutions

Before looking at each of the groups of financial institutions in more detail, we must first ask the question: what is the difference between the retail and wholesale activities of financial institutions?

The major distinction between retail and wholesale activities undertaken by financial institutions is in the size of transactions involved. Retail activities are concerned with deposits and loans that are of relatively low value, and wholesale activities are concerned with high-value deposits and loans. While no hard distinction between retail and wholesale is possible, a transaction of less than £1000,000 would usually be regarded as a retail transaction.

The distinction between retail and wholesale activities also relates to the type of customer involved. Predominantly, retail activities of banks will involve taking in deposits from and making loans to personal customers and small businesses. Notwithstanding this, note that very large organisations will often also need to make use of the retail financial services offered by banks. For example, if an organisation has a number of retail outlets, it will make use of local branches of banks in order to deposit cash and cheques.

A third aspect of the distinction between the retail and wholesale activities of financial institutions relates to the distribution system for the services provided.

Usually, the provision of retail activities has involved branch networks – best typified by the retail banks and by building societies. Although this is the usual format, note that developments in the technology, in particular, are enabling many retail financial services to be provided without a branch network, while some institutions – such as unit trusts – have never operated a branch network. Thus, telephone banking has been developed, while some building societies have launched ‘postal accounts’. Nowadays, retail financial services are widely available on the internet.

A consequence of retail activities involving transactions of relatively low value is the volume of such transactions will generally be very high. The banks, and increasingly the building societies, are as a consequence partly involved in money transmission facilities (such as cheque book accounts, electronic funds transfer and so on) to enable the transfer of funds from one individual or business to another to take place.

Wholesale activities, being concerned with high-value transactions, typically involve customers that are larger businesses or else other financial institutions. Since these high-value transactions will be of limited volume, a branch network to support such activities is unnecessary. Due to the high level of competition found in wholesale markets and due to the lower total costs arising to be gained from dealing with limited numbers of high value transmissions, the interest rates on wholesale transactions will generally be market-related rates and will usually be at a much finer margin in comparison to retail transactions.

Although the distinction between retail and wholesale activities is a useful one, remember that the distinction is in relation to activities rather than institutions. Many financial institutions will be engaged in both wholesale and retail activities. The retail banks, for example, are heavily engaged in wholesale activities, both in terms of obtaining funds and in lending. The larger building societies typically obtain a proportion of their funds from wholesale sources. The basis of classifications is therefore in terms of an institution’s dominant activity, rather than on its exclusive activity.

 

 

Ex.1. Find in the text the following word combinations and translate the sentences in which they are used:

 

High-value deposits, retail transactions, retail outlets, branch network, distribution system, telephone banking, postal account, low-value transactions, limited volume, money transmission facilities, high-value transactions, lower total costs, cheque-book accounts, electronic funds transfer, wholesale transactions, market related rates, finer margin, dominant activity, exclusive activity, retail financial services.

 

Ex.2. Find English equivalents to the word combinations given below:

 

Поштовий рахунок, засоби переказу грошей, електронний переказ грошей, операції з великими сумами грошей, менша маржа, зменшені загальні витрати, обмежений обсяг, банківські послуги по телефону, окремі покупці, основна діяльність, додаткова діяльність, чековий рахунок, невеликі торгівельні заклади, операції з невеликими сумами грошей, загальноринкові процентні ставки, великі суми депозитів.

 

Ex.3. Understanding details

Mark the sentences T (true) or F (false) according to the information in the text. Find and read out the part of the text, which gives the correct information.

1. Classification of financial institution is difficult because too many types of them operate in the British banking market.

2. The major distinction between retail and wholesale financial institution is only in the type of customers they serve.

3. All retail banks have a wide network of branches.

4. Most banks are involved in different forms of money transfers.

5. The number of transactions made by wholesale banks is generally less than that made by retail financial institutions.

6. Wholesale banks usually charge more for their services.

7. Exclusive activities of financial institutions aren’t usually used as a basis for their classification.

 

Ex.4. Answer the following questions:

1. In relation to size of transactions and types of activities, what are the differences between retail and wholesale activities undertaken by financial institutions?

2. Are there any other aspects of distinction between retail and wholesale activities? Characterize them.

3. What is the normal form of distribution channel for retail financial services?

4. What are the consequences of retail activities involving transactions of relatively low value?

5. For what reason may wholesale banking activities operate on narrower margins than retail banking activities?

6. Why is the basis of classification in terms of an institution’s dominant activity rather than on its exclusive activity?

 

Ex.5. All the words below can be combined with bank or banking in a two-word partnership, e.g. off-shore banking (офф-шорний банківський бізнес, який знаходиться за кордоном). Add the word bank or banking either before or after each of the words below. Demonstrate the meaning of these word combitations in the sentences of your own.

 

1. ………… account …………	10. ………… merchant …………
2. ………… balance ………….	11. ………… note ………………
3. ………… central …………..	12. ………… off-shore …………
4. ………… clerk …………….	13. ………… retail ……………..
5. ………… commercial ……..	14. ………… robbery …………..
6. ………… deposit ………….	15. ………… savings …………..
7. ………… holiday ………….	16. ………… statement ………...
8. ………… investment ………	17. ………… system …………...
9. ………… manager …………	18. ………… wholesale ………..

 

Ex.6. Whether commercial or public, government or private - there are numerous types of banks, each serving its own specific role. Read the text, compete the following chart and report your findings to the class.

TYPE OF BANK	SERVICE PROVIDED	CUSTOMERS

 

There are several types of banks in the world, and each has a specific role and function - as well as a domain - in which they operate. In broad strokes, banks may be divided into several groups on the basis of their activities and these include investment banks, retail, private, business, and also corporate banks. Many of the larger banks have multiple divisions covering some or all of these categories.

Retail banks deal directly with consumers and small business owners. They focus on mass market products such as current and savings accounts, mortgages and other loans, and credit cards. By contrast, private banks normally provide wealth management services to high net worth families and individuals.

Business banks provide services to businesses and other organizations that are medium sized, whereas the clients of corporate banks are usually major business entities.

Lastly, investment banks provide services related to financial markets, such as mergers and acquisitions.

Another way in which banks may be categorised is on the basis of their ownership. They might either be privately held or publicly owned banks.

Privately owned banks are motivated by profit in their business operations. Publicly owned banks are held by the state governments of the individual countries and they serve as a nation’s centralized bank, as well as an economic backbone for that particular country. They are also known as central banks.

Publicly owned banks, which are controlled by the government, have numerous responsibilities pertaining to the banking sector of the country, such as administering various activities for the commercial banks of that country. They also determine the rates of interest offered by banks doing business in that country, as well as playing a major role in maintaining liquidity in the banking sector.

There are several types of notable retail banks. These include the offshore, community and savings banks, as well as the community development banks, building societies, postal savings banks, ethical banks, etc.

Offshore banks operate in areas of reduced taxes, as compared to the country in which the investor lives in. This is why most offshore banks are private banks.

Community banks are monetary organizations operated on a local basis, while community development banks cater to the populations, or markets, that have typically not been served properly.

Postal savings banks are basically savings banks that operate in conjunction with the national postal systems of that country.

Building societies where traditionally mutually owned by their customers. They provide a full range of retail banking services, but with a particular focus on mortgages.

Ethical banks do their business based on their own code of conduct. They only accept investments that they perceive to be useful from a social and environmental point of view.

There are two types of investment banks - the investment banks that perform underwriting activities, and the merchant banks, a traditional form of banking, that performs trade-financing activities.