The balance sheets of the retail banks 

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The balance sheets of the retail banks


An alternative perspective on the operations of retail banks can be obtained from an examination of the aggregate 'balance sheet' for the group. The summary totals for the retail banks as at 30 April 2002 are given in Table 1.l.


(i) Sterling assets

Sterling assets represent over 70% of total assets, and hence it is clear that they dominate the business of the retail banks. The components of those sterling assets are as follows.



Table 1. UK retail banks: summary balance sheet as at 30 April 2000
Assets £bn £bn
Cash & balances with Bank of England   4.7
Market loans   95.6
Secured money with discount houses 6.4  
Rest of UK banking sector 62.8  
Certificates of deposit held 17.0  
UK local authorities 0.3  
Overseas 9.2  
Bills   18.9
Treasury bills 7.9  
Eligible bank bills 10.6  
Other 0.4  
Claims under sale and repurchase agreements   9.3
Advances   307.6
UK private sector 303.6  
Others 4.0  
Investments   48.0
Foreign currency    
Market loans and advances   99.3
UK 38.4  
Overseas 60.9  
Bills   2.9
Investments   50.9
Claims under sale and repurchase agreements   8.1
Miscellaneous assets (in sterling and foreign currency)   32.6
Total assets   677.9
Liabilities £bn £bn
Notes issued   2.4
Sterling deposits (of which £203bn are sight deposits) 426.8
UK banking sector 51.8  
UK private sector 306.0  
UK public sector 5.1  
Overseas residents 26.5  
Certificates of deposit issued, etc. 37.4  
Liabilities under sale and repurchase agreements   7.9
Foreign currency    
Foreign currency deposits   146.6
UK 41.1  
Overseas residents 83.0  
Certificates of deposit issued, etc. 22.5  
Liabilities under sale and repurchase agreements   6.0
Miscellaneous liabilities (in sterling and foreign currency) 88.2
Total liabilities   677.9


Cash and balances with the Bank of England. Despite being the most vital asset for the day-to-day operations of the retail banks, the latter manage to keep the total very small. They do so because cash and balances at the Bank of England bring them no income. The balances with the Bank of England are partly operational balances used to meet commitments arising from payments-clearing operations, though they also include the cash ratio balances that all banks are required to hold with the Bank of England as part of the authori­ties' regulatory provisions. Only the operational balances are liquid assets.

Market loans. At £95.6bn, these represent about 14% of total assets and about 20% of sterling assets, and consequently represent a significant pro­portion of the retail banks' assets and activities. The 'market' aspect of these loans refers to the fact that they are wholesale loans that are usually made at market-related rates of interest and usually to other banking institutions. The majority of market loans are very liquid, i.e. they have only a short period to maturity, and hence represent an important means of holding inter­est-bearing assets that are also very liquid as an alternative to holding cash. They form the greater part, of the banks' liquid assets.

Bills. Bills total only £18.9bn, representing 2 % of total assets and 3.9% of sterling assets. As such, they now constitute only a fairly minor element of the retail banks' business, though their importance has been higher in the past. The largest element of these bills is 'eligible bank bills', so called because they are commercial bills that have been accep ted (underwritten) by banks which have eligibility status with the Bank of England. To achieve eligibility status, banks have to meet certain criteria set by the Bank of England, relat­ing to the quality of their acceptance business. The significance of eligible bank bills lies in the tact that they are eligible for re-discounting at the Bank of England. A bill that has been accepted by a bank which does not have eligibility status is a normal, non-eligible bank bill and will be included in this category of bills, along with Treasury bills and local authority bills. With a liquid secondary market in bills, these also represent liquid assets that yield an investment return.

Claims under sale and repurchase agreements. These are a new type of asset, introduced in the discount market on a formal basis to market members in 1993. In 1996, an 'open' repo (as these facilities are known) was introduced to the gilt-edged market. Banking statistics now show repo claims as a sepa­rate asset, with repo liabilities also being shown separately. These claims arise where the banks have bought assets (bills or gilts) in sterling from other parties, who must later complete the transactions by buying the assets from the banks with cash. The figures show claims at £9.3 billion and liabilities at £7.9 billion, so that the retail banks have net claims of £1.4 billion, which is small compared to the figure for wholesale banks.

Advances. At £307.6bn, representing 45% of total assets and over 63% of sterling assets, sterling advances clearly represent the most important ele­ment of retail banks' assets. Advances constitute the lending made predominantly to the UK private sector, either in the form of overdrafts or loans for fixed periods of lime. If the lending is for a fixed period of time, the original maturity may range from a few months to 10 years or more; in the case of mortgage loans, the original maturity is normally for 25 years. The arrangements for the interest rate charged on advances will be either floating (changing with the bank's base rate or the sterling London inter-bank offered rate - LIBOR), or fixed over the duration of the loan, or a hybrid of the two with rates fixed for a certain period of time. In addition, the interest rate charged will vary with the size of the sum borrowed, the creditworthiness of the borrower, the maturity of the loan, the arrangements for repayment, and so on.

Advances represent the least liquid element of the retail banks' financial assets but also represent the most important source of profit to a retail bank since, subject to competitive forces, the interest margin is greatest on these assets. In order for advances to be profitable, however, the banks need to control the costs of originating and administering the advances and to mini­mise losses through defaults. Given the lack of liquidity associated with advances, the importance of a substantial proportion of liquid assets - that is, cash, operational balances with the Bank of England, market loans and bills within the total sterling asset portfolio can be appreciated.

Investments. At £50.9bn. these represent only 7.5% of total assets and just over 10% of sterling assets. The bulk of these investments is accounted for by securities issued by, or guaranteed by, the British government. An important aspect of British government securities is that they are highly marketable and hence the underlying investment can be realised quickly. Their value changes, however, in the opposite direction to changes in interest rates.

(ii) Foreign currency assets

Table 1.1 shows (hat foreign currency assets constituted £16lbn and therefore about 24% of the total assets of the retail banks. The significance of these figures is that the retail banks are not just dealing in sterling at a retail level, but that almost 25% of their business involves foreign currencies.

The components of the foreign currency assets are very similar to those for sterling assets. A notable figure is the £99.3bn for market loans and advances to the overseas sector, demonstrating the point that not only is a substantial element of the business of the retail banks expressed in foreign currency, but furthermore a significant element of that is non-domestic in nature. In practice, around 75% of the 'market loans and advances' elements constitutes market loans, and therefore only 25% constitutes advances. Sale and pur­chase agreements are available in foreign currencies, so there is an entry for claims of £8.1bn.

(iii) Miscellaneous assets

This figure on the asset side of the balance sheet consists of items such as the retail banks' own branch premises and equipment and the value of cheques that have been credited to customers' accounts but which have not been presented for payment to other banks. Since it includes assets in both sterling and other currencies, it has been excluded from the calculation of the per­centages above.


(і) Sterling liabilities

Sterling liabilities represent £437bn, equivalent to 64.5% of total liabilities. This is slightly lower than the proportion of sterling assets in total assets, but account needs to be taken of the higher proportion of the 'miscellaneous' item on the liabilities side of the balance sheet than the asset side. Moreover, most of these 'miscellaneous liabilities' items will be the banks' sterling capi­tal and reserves.

Notes issued. These constitute £2.4bn and represent the notes that are issued by the Scottish and Northern Ireland banks, which are backed, pound for pound, by notes issued by the Bank of England.

Sterling deposits. These constituted £426.8bn, nearly 63% of total liabilities. Examination of the balance sheet in Table 1.1 reveals that 12%) of these deposits emanated from the UK banking sector, nearly 72% from the UK private sector (both individuals and businesses), 1.2% from the public sector and almost 6.1% from overseas residents. In addition, 8.8% of sterling depos­its were in the form of certificates of deposit and other short-term paper where (lie source, in terms of the previous classifications, is unknown. (Ster­ling certificates of deposit are negotiable bearer securities of fixed term (usually between 28 days and five years), carrying a fixed rate of interest and issued in denominations of £50,000 or more.)

What the balance sheet does not identify is the maturity structure of these sterling deposits because this is market-sensitive information. In practice, around 50% of sterling deposits are in the form of sight deposits repayable on demand, with around 70% of these being interest-bearing. The time deposits have maturities that range from a few days up to several years, and are sourced on both a retail and a wholesale basis. In practice, however, a significant number of the time deposits are repayable on demand (albeit with an interest penalty), and a significant number also have only a short period to maturity. The overall picture facing the retail banks, therefore, is that their sterling liabilities are highly liquid, emphasising their dependence on the 'law of large numbers' to enable them to provide loans and other advances.

Liabilities under sale and repurchase agreements. These arise when a bank has sold assets (bills or gilts) in return for cash under the newly introduced 'repo' facilities described earlier. As part of the contracts, the banks have liabilities to repurchase these bills or gilts at some date in the near future. In this instance, the retail banks' liabilities are slightly less than their claims.

(ii) Foreign currency deposits

Foreign currency deposits originate primarily in the form of wholesale depos­its, with a high proportion, not surprisingly, coming from the overseas sector. Certificates of deposit are also issued in foreign currencies.

(iii) Miscellaneous liabilities

Constituting £75.6bn, this item represents 14.3% of total liabilities and includes credit balances received but not yet credited to customers' accounts, and standing orders and credit transfers debited to customers' accounts but not transferred to the payee. This miscellaneous liabilities item, however, also includes the important element of shareholders’ funds, the vast majority of which are denominated in sterling. Like any business, a bank needs capital backing for its business operations; in addition to the capital required for premises and equipment and for working capital, shareholders’ funds are required to cover the possibility of defaults on loans and capital losses on investments. The size of shareholders’ funds relative to total assets therefore represents the ability of a bank to absorb losses, and therefore its ability to repay depositors when it does incur losses. (Capital adequacy is covered in Unit 5.) Since it includes liabilities in both sterling and other currencies, the miscellaneous liabilities item has been excluded from the calculation of the percentages above.


1. What are eligible bank bills?

2. What is the significance of eligible bank bills for retail banks?

3. What is the significance of foreign currency assets for retail banks?

4. Describe the structure of a typical retail bank’s portfolio.

5. Distinguish between claims and liabilities under sale and repurchase agreements.



V. Translate the text in writing:


Savings banks and the National Giro


There are two major savings banks, the National Savings Bank which is operated by the Post Office on behalf of the Department for National Savings and the Trustee Savings Bank. Both banks provide deposit facilities for small savers and these are collected at 21 000 post offices (in the case of the NSB) and at 1 500 branches of the Trustees Saving Bank. The Trustees Savings Bank now provides a current account service (i.e. payments may be made by cheque); the National Savings Bank does not provide such a service, but the National Giro provides money transmission services. All of the assets of the National Saving Bank and greater part of the assets of the Trustees Savings Bank consist of government securities (i.e. loans to the government).

The National Giro is managed by the Post Office and commenced operations in 1968. Its aim is to provide a cheap, simple and quick money transmission service by making use of the existing network of post offices. All the records are kept, and the processing is carried out, at the computerised centre at Bootle. People holding giro accounts are provided with three basic services:

1. Transfers to other account holders. These are carried out by posting giro transfer forms to the computer centre. These transfers are free although there is a small charge for stationery.

2. Deposits. Deposits can be made in cash at any post office or by cheque. Deposits into one’s own account are free, but a charge is made when people pay into some other person’s account.

3. Payments. An account holder can draw cash through post offices or he can make payment to a non-account holder by means of a postal cheque. In each case, as long as the account is in credit, no charge is made for these services.

The giro system is not new, most western European countries have been running such systems for many years. In the UK the system started slowly and losses were made in the early years. It has since broadened its services to include deposit accounts, personal loans and limited overdraft facilities and cheque guarantee cards. It is now operating profitably and is widely used for local authority rent payments and for the payments of social security benefits.


VI. Reproduce the main idea of the text:


The Bankers’ Clearing House


The procedure for making payments by cheque creates problems when the person making the payment keeps his account in a different bank from that which holds the account of the person receiving the payment. The final settlement of the debt will require a movement of funds from one bank to another. In any one day there will be many thousands of such inter-bank transactions to be carried out; many of them offset each other. There will be a large number of cheques draw on accounts in Bank A payable to accounts in Bank B, but there will also be many cheques requiring a transfer of funds in the opposite direction.

Each separate bank in a multi-bank system will find itself in this kind of situation at the end of the day. It is an obvious solution for each bank to pay (or receive) the net amount owing after the banks have totalled their claims against each other. This is the function of the Bankers’ Clearing House. Cheques drawn on one bank but payable to another are sent to the clearing house where the mutual claims are offset and the banks merely settle the outstanding amounts. These payments from one bank to another are carried out by means of cheques drawn on the bankers’ deposits at the Bank of England. It is important to note, however, that when one bank makes a payment to another bank, one bank loses cash and the other gains cash. The reason for this, of course, is that the deposits at the central bank are part of the banks’ cash reserves.


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


Retail deposit-taking business; regional subsidiary clearing banks; cheque clearing system; electronic funds transfer system; current accounts; interest-bearing sight deposits; saving deposits; time deposits; negotiable certificates of deposit; personal customer; mortgage loans; credit card finance; professional business loans; syndicated loans; leasing; back ring; thrift institutions; public sector debt; personal credit facilities; business loans; full-fledged retail banks; cashing facilities; money remittance service; saving deposit business; real bill doctrine; accounts receivable; short-term loans.


VIII. Find in the text the terms which match the following explanations:


1. Середньо і довгостроковий банківський кредит під забезпечення (від 2 до 10 років).

2. Тип банківського рахунку, який дає право виписувати чеки (до запитання, безпроцентні).

3. Банк, включений до міжбанківської системи розрахунків і який є членом Лондонської клірингової палати і комітету клірингових банкірів.

4. Державний банк Великобританії, створений у 1968 р. для організації ефективної системи переказів через поштові відділення.

5. Ощадні установи, які становлять загальнонаціональну систему кредитних установ, яка за широтою функцій та масштабами операцій конкурує з комерційними банками.

6. Гроші покладені на певний час на ощадний рахунок.

7. Депозитний сертифікат (до запитання чи за наказом вкладника), який має вільний обіг на фондовому ринку.

8. Ощадний депозит, який може вилучатися за допомогою чеків.

9. Депозит, який може бути вилученим тільки після певного періоду або після попереднього повідомлення.

10. Система переказу коштів електронною поштою.

11. Банківська позика (без забезпечення), основна сума і проценти з якої виплачуються рівними внесками протягом обумовленого строку; видається на основі аналізу кредитоспроможності клієнта.

12. Фінансування кредитними картками.

13. Кредит, наданий двома чи більше банками, один з яких є менеджером.

14. Позичка під нерухомість.

15. Позичка надана професіональним/спеціалізованим діловим підприємствам.

16. Кредит за поточним рахунком або конкурентний кредит (одержання кредиту через виписування чека або платіжного доручення на суму, що не перевищує залишок грошей на рахунку).


IX. Scan the text. Translate it into Ukrainian. Don’t use the dictionary:


Also included in the retail banks is the Bank of England Banking Department. Why? The Bank of England has two major depart­ments, the Issue Department and the Banking Department. The Issue Department is responsible for issuance of bank notes. As such, it is treated as part of the government for national accounting purposes. The Banking Department is the banker to government, to banks, as well as to a small number of certain individuals. To serve as the banker to the government, it maintains banking accounts for the Exchequer, Paymaster General, and other government departments. It makes short-term funds available to the government in exchange for government securities. Such funding needs often arise, as government payments and receipts are not perfectly syn­chronized. Just like individuals maintaining their accounts with banks to settle their payments, London Clearing House member banks maintain their clearing balances with the Banking Department to settle payments of their own as well as on behalf of other nonmember banks. In addition, the Banking Department receives or supplies bank notes, depending on the demand for till money by banks. If the Department needs more bank notes than it has in stock, it in a sense buys them from the Issue Department in exchange for government securities. In addition, the Banking Department also serves a small number of private customers who have maintained their accounts dating from prenationalization days and Bank of England staff members. Thus, the business of the Banking Department resembles that of any retail bank except that customers are substantially different. The Department is a member of the London Bankers' Clearing House.

The retail banks as a group had total assets of £426.1 billion as of December 2000, 33.1 percent of the total assets of the British banking industry. The major sources of funds for the retail banks were deposits taken from the nonbank UK private sector such as households and firms, comprising about 51 percent of total sources of funds. On the assets side, the retail banks as a group contributed about 55 percent of the total assets for advances to the UK private sector.

In lending, the retail banks have been guided by the real bills doctrine, which argues that, in trust of public money, clearing banks should lend only short-term loans based on real bills. These loans have the characteristics of being short term, productive, and self-liquidating in nature. That is, money - is loaned to borrowers to enable them to purchase inventories; then, inven­tories are sold on credit terms (thus creating accounts receivable); when payment is made, accounts receivable are retired into cash which is now ready for use for the loan repayment.

By and large following this doctrine, clearing banks, when faced with nontraditional business opportunities such as term loan lending or loan syndications in the 1960s and 1970s, opted to conduct such business through their subsidiaries. In this way, the clearing banks would be insulated from new unfamiliar risks. However, when a number of secondary banks, many of which were subsidiaries of clearing banks, got into financial difficulties in the early 1970s, it proved to be unwise to insulate in such a way. As a consequence, clearing banks started entering nontraditional markets more directly.


X. Join the halves.


1) The retail banks, as their name suggests, … 2) Such services traditionally… 3) In recent years, banks have been actively peeking to increase business and other services have been introduced… 4) The larger banks either own or have established links with security traders and also … 5) Retail banking is nowadays contrasted with wholesale banking … 6) A large part of such business is … 7) The distinction between retail and wholesale banking is conceptual rather than the legal … 8) Other banks specialize largely or entirely … 9) Barclays, Lloyds, Midland and National Westminster are the main retail banks of England and Wales; Bank of Scotland, Clydesdale Bank and Royal Bank of Scotland are the main retail banks in Scotland, although … 10)A subset of the retail banks, comprising the main English and Scottish banks, owns the Cheque and Credit Clearing Company which … 11)Each bank presents for payment cheques that it has received from clients and … 12)Banks may also present cheques for payment on behalf of other banks … 13)There is a separate electronic clearing system for direct debits, standing orders etc., … 14)A third clearing company deals with all high-value same-day clearings which include electronic credit transfers from across the country and high-value cheques (over £100,000) drawn on and … 15)The participants here are again the main English and Scottish banks plus a few other banks actively … 16)Banks involved in the clearing of payments are known as clearing banks and … a) settle debts between themselves by pay­ments in or out of accounts at the Bank of England. b) where the participants include a slightly wider range of banks as well as three large building societies. c) receives for payment cheques drawn by its clients and paid into other banks. d) paid into certain bank branches within the City of London. e) in wholesale banking. f) involved in City of London money markets. g) who do not participate directly in the clearing and for whom they act as agents. h) and most of the banks classified as retail banks are, in reality, mixed banks which undertake both types of banking. i) notably automated teller machines, eurocheques (cheques which may be written in foreign currencies), long-term mortgage lending, and opportunities for mutual investment in securi­ties through bank-managed unit trusts. j) offer facilities for buying and selling securities. k) cover the taking of deposits at sight and at notice, the provision of chequebooks and the clearing of cheques, the making of loans, sale and purchase of foreign currency and travellers' cheques, dealing with international remittances, safe-deposit facilities, financial advice and maybe insurance broking. l) operates the daily clearing of cheques. m) the last named also has a number of branches in England and Wales; and Allied Irish Banks, Bank of Ireland, Northern Bank and Ulster Bank are the main retail banks in both Northern Ireland and in the Republic of Ireland. n) are banks which offer retail banking services to business and personal clients, both small and large, through a network of branches. o) which involves dealing in large sums of money (typically one million pounds and over) in both sterling and foreign currencies. p) undertaken in organized short-term financial markets in international centres such as London, New York, Tokyo and Paris.


XI. Translate the text in writing:


The Bankers' Clearing House


The procedure for making payments by cheque creates problems when the person making the payment keeps his account in a different bank from that which holds the account of the person receiving the pay­ment. The final settlement of the debt will require a movement.of funds from one bank to another. In any one day there will be many thousands of such inter-bank transactions to be earned out; many of them will offset each other. There will be a large number of cheques drawn on accounts in Bank A payable to accounts in think 15, bin there will also be many cheques requiring a transfer of funds in the opposite direction.

Each separate bank in a multi-bank system will find itself in this kind of situation at the end of the day. It is an obvious solution for each bank to pay (or receive) the net amount owing after the banks have totalled their, claims against each other. This is the function of the Hankers' Clearing House. Cheques drawn on one bank but payable to another are sent to the clearing house where the mutual claims are offset and the banks merely settle the outstanding amounts. These payments from one bank to another are carried out by means of cheques drawn on the bankers' deposits at the Bank of England. It is important to note, however, that when one bank makes a payment to another bank, one bank loses cash and the other gains cash. The reason for this, of course, is that the deposits at the central bank arc part of the banks' cash reserves.


XII. Read and translate the following text:

Easy money


Andrew Buxton, chair­man of Barclays, ought to have looked a troubled man as he presented his bank's annual results last week. In the last year, Barclays had lost a chief executive, dropped £205m on rash trading in the bond markets, another £153m on bad loans to Russian customers, and had let its operating costs run out of control.

Yet Barclays somehow managed to make profits of £1.9bn.

In the same year, Lloyds TSB reported a 14 per cent increase in its pre-tax profits to £3.29bn, equivalent to an after-tax return on shareholders' equity of 33 per cent. And other British banks made similar profits.

So where do these profits come from? And why have they not been lost to the competition from other institutions?

The first part of the answer lies in the condition of the UK econo­my at large. In principle, bank profits are built for the most part on the volumes of loans they make and the deposits they collect; the margins between the interest rates for these two sides of their balance sheet gives them their profits (or losses). But in a mature market such as the UK, it is hard for a very large hank to expand loan and deposit volumes much beyond the level of the economy as a whole, and even harder to widen net Interest margins.

The biggest factor in bank prof­its has therefore been the level of bad debts. In 1992, when banks' accounts showed the worst of the effects of the last UK recession, the seven principal banks set aside £6.45bn of bad debt provisions between them. Last year, the total for the same group is estimated to have been around £2.6bn.

The other side of British banks' profitability reflects an interplay between technology-based effi­ciency gains and customer inertia.

Banks have become more effi­cient over the past decade, strip­ping out costs as new computer systems and telecommunications networks have enabled them to set up industrial-scale processing plants for tasks that used to be handled by clerks in the back of each branch.

Branches are expensive to run, and the network has been whittled down from a peak of 21,800 branches in 1985 to around 15,000 today. Each branch, too, has fewer staff.

One of the most frequent com­plaints is the disappearance of the human touch in the bank branch. Yet customers have reaped most of the benefits of the banks' efficien­cy gains - cash dispensed at the touch of a button by machines, instant account balances, trans­fers and even loans available over the telephone.

However, British banks remain years behind their French rivals in electronic banking. Nor is the UK's money transmission system the most consumer-friendly in the world. Customers in New Zealand and Canada get deposits credited instantaneously, while in the UK they must wait days.

Competition in financial services has been steadily increasing since the 1980s. Yet the British consumer is more likely to swap a wife (or husband) than a bank. With such undemanding cus­tomers, leading banks could have years of fat profits ahead of them.



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