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From the exporter to the agent bank: The exporter will acknowledge the agent bank's letter, and send them the documents they asked for and their draft.
From the exporter to the importer: Delta Computers notify their customers in New Zealand that the consignment is on its way to them.
Questions:
1. When will the consignment arrive? 2. What has happened to the shipping documents? 3. How has the bank earned money on the transaction? 4. Who is the agent bank in this transaction? 5. What do the letters SS stand for? 6. What expressions are used to mean: arrive; sent; made out a b/e; notify?
From the importer's bank to the importer: The New Zealand Bank now advises NZ Business Machines that their account has been debited, and that the documents are ready for collection. When he has picked up the documents, Mr Tanner will be able to take delivery of his goods.
From the importer to the exporter: This letter, from the buyer (importer) in London to the seller (exporter) in Hong Kong, is the first step in our second example of a documentary credit transaction. Note that international Crafts ask for a certificate of origin, which they need since they intend to reexport the dinghies to France, which is an EEC country. Note also that they will use their bank's agents to verify the quality of the boats.
From the exporter to the importer:
Northern City Ltd., who are International Crafts' bankers, have now notified their agents in Hong Kong, Cooper & Deal, who have in turn advised Lee Boat Builders that the credit is available -Meanwhile Lee have cabled International Crafts confirming that they have accepted the order, and can deliver within six weeks. They follow this by sending this letter, advising shipment.
Questions:
1. When will the consignment arrive in London? 2. How have the dinghies been packed? 3. What documents were requiredbyInternational Crafts Ltd.? 4. What does '60 d/s' mean? 5. Who are Cooper & Deal, and what role do they play in the transaction? 6. What will the Northern City Bank advise International Crafts? 7. What restrictions do Lee Boat Builders put on their guarantee? 8. What must International Crafts do once they have received the consignment? 9. Which words in the letter correspond to the following: should arrive; small boats; boxes; pays for; send; warranty? Points to remember:
1. Merchant banks and commercial banks in the UK offer similar services, but commercial banks encourage private account holders to use their facilities, as well as commercial concerns. 2. Commercial bank facilities include current accounts, deposit accounts, credit cards, standing orders, loans, and overdrafts. 3. The two main methods used in settling overseas accounts - bills of exchange and documentary credits-involve banks at home and abroad. 4. Bills of exchange can be at sight, i.e. payable on presentation, or after sight, payable at a stipulated date in the future. The exporter can send the bill to the importer direct, or to his bank with the documents and will obtain either payment on presentation, or acceptance against the bill. The advantage of a bill is that the exporter can get money immediately if the bill is discounted, and the importer can obtain credit if the bill is not a sight draft. The disadvantage is that the bill can be cancelled, or not paid on the due date. 5. A confirmed irrevocable documentary credit cannot be cancelled (unlike a revocable credit), and the importer's bank and its agent can guarantee payment. The importer is protected by the bank checking documents and can get a certificate of quality to ensure that the goods are up to standard. The exporter is assured of payment, and, with discounting facilities, does not have to wait for his -money if the bank agrees that he can draw against the credit.
Words to remember:
UNIT IV
Text A Wholesale banks
The wholesale banks represent a diverse group of institutions within the UK financial system. They comprise three broad groups: - British merchant bank; - Other British banks; - Overseas banks, which in turn are divided into American, Japanese and “other overseas banks”.
British merchant banks
The group of wholesale banks called the British merchant banks comprises around 40 institutions, with assets totalling £ 44.8bn in April 2000. Historically, a major element of their business lay in the 'acceptance' of bills of exchange. This involves the bank in guaranteeing payment of the bill upon maturity to whoever is then holding the bill. The bank receives a fee for fulfilling this underwriting role. and hence acceptances are an early example of a bank providing non-intermediary services. Such acceptances feature on the balance sheets of the accepting bank only as a footnote - contingent liabilities offset by contingent (possible) claims against the drawers if the bills. Once a bill is accepted by a reputable bank it becomes much more marketable, and as a consequence the merchant banks facilitate the use of bills as a significant source of short-term corporate finance. The risk involved in accepting bills of exchange is that the debtor may default when the bill matures. As a consequence, the key to running a profitable acceptance activity was being able to evaluate accurately the default risk associated with bills, and to do this the merchant banks had to acquire considerable information and expertise. Subsequently, they found they could use tills information and expertise in other areas, and as a result the British merchant banks have progressively diversified away from acceptances as the main element of their business. The majority now offer a wide range of banking services to corporate customers so that in addition to taking in deposits and making loans on a wholesale basis and the acceptance activity, the merchant banks as a group now offer: - Management and underwriting of capital issues by companies: - Management consultancy services, especially with regard to financial aspects; - Advice on mergers and takeovers: - Fund management services for pension funds, insurance companies, unit and investment trusts; - Trading in foreign exchange markets: - Trading in the bullion (gold and silver) markets; - Trading in the eurocurrency markets: - Trading in the derivatives markets. Like the retail banks, the British merchant banks have also suffered from increased competition within their spheres of activity. Many have perceived themselves to be too small to withstand this competition, especially from institutions abroad, as their activities become increasingly international in character. In addition, the ability to participate in the capital markets has become increasingly attractive to the retail banks. This has meant that many of the merchant banks have become part of larger banking groups, either UK-based or overseas. For other merchant banks the consequence has been a rethinking of their strategy and the basis of future competition, which has led to some of the smaller banks competing on the basis of expertise within specialist market niches. The larger ones are tending to be known as investment banks, derived from their trading in investments. Other British banks
This group comprises around 150 different institutions, with assets totalling £ 62bn in April 2000. Given the size of the group, it is not surprising that it constitutes a rather disparate range of institutions. Having said that, a significant proportion of the group's activities are overseas, stemming from the fact that many of these banks originated when the UK was a major colonial power and banks were needed to service the needs of companies and individuals with dealings in the colonies. This need has declined, but banking services are still required within the former colonies and the status of London as a major financial centre has meant that it has been appropriate for these banks to retain their base in Britain. Other banks in this group include wholesale banks that provide corporate banking services on a regional basis or that specialise in services to particular industries, and former finance houses that have taken on full banking status. Overseas banks
The overseas banks represent the largest group of banks within the UK Financial system, totalling around 350. Their dominance in numbers is matched by their assets, totalling almost £ 100bn, (about 10 times the size of the British wholesale banks) as at 30 April 2000. They have exhibited very rapid growth since the early 1970s, in terms of both assets and numbers. The overseas banks came to London originally to meet the business requirements of firms in their own countries. While they still perform that function. they are now important participants within the eurocurrency markets, and as such facilitate tlie taking-up of deposits from a wide range of sources and the financing of a wide range of different projects, with their activities no longer particularly related to their home countries. London's status as the major centre of eurocurrency market activity has facilitated this development and made it necessary for a bank of any size, wherever it is based in the world, to have a London office. In addition to these wholesale banking activities, many overseas banks have moved into other areas of activity. This has in some cases included retail financial services, and in other cases has, as a consequence of the deregulation of the capital markets, included market-making and stockbroking activities. Some of the overseas banks have become major investment banks.
I. Key terms
II. Answer the following questions: 1. What is an 'acceptance'? 2. List the main areas of activity currently undertaken by British merchant banks. 3. Why have many British merchant banks felt it necessary to reappraise their strategy in recent years? 4. What types of activities are undertaken by 'other British banks'? 5. How important are overseas banks within the UK Financial system? 6. Examine the main types of activities undertaken by the overseas banks in the UK. III. Find in the text the following words and word combinations and translate the sentences in which they are used:
underwriting role; acceptance; short-term corporate finance; bill of exchange; non-intermediary service; upon maturity; contingent liability; reputable bank; default risk; management consultancy services; foreign exchange market; eurocurrency market; derivatives market; unit and investment trusts; capital markets; specialist market niches; regional basis; market making activities; stockbroking activities; disparate range of institutions; mergers; takeovers.
IV. Fill in the blanks:
investment; service; supported; alliances; raised; assets; development; engagement; longer-term; directions; corporate; proportion; accepting; certificates; merchants; banking; creditworthiness; borrowers; underwriting; thrust; adjunct to; finance; management; advantage; medium-term; activities Many British merchant banks originated as _____ in the nineteenth century, developing banking services as an _____ their merchanting business. Since the main _____ of their banking services was the business of _____ bills, they acquired the name "accepting houses." Their knowledge about their trading areas gave them a distinctive _____ in evaluating the _____ of potential _____ abroad in the early days. With diversification in business over the years, today they deal primarily with the _____ sector and engage in wholesale _____. Their primary sources of funds are time deposits and _____ of deposit (CDs), whereas on the _____ side they mainly concentrate on _____ lending. Unlike commercial banks, early on they were engaged in _____ financing such as _____ financing. For example, for the development of the Americas, British colonies, and other developing territories, which were _____ by some £3.6 billion between 1870 and 1913, about 40 percent of loans were _____ by London accepting houses. Reflecting their heavy _____ in international banking, their foreign-currency-denominated assets are about 30 percent of total assets, twice as large as the _____ for retail banks. Nonetheless, their major contribution to corporate _____ comes from their _____ banking activities, _____ not only sterling securities but also Eurocurrency bonds and equity. For the last few decades, they have diversified their _____ in a number of _____ including investment fund _____, merger and acquisition _____, factoring, leasing, as well as the formation of _____ with stockbroking and stockjobbing firms.
V. Rearrange the following sentences to make up a coherent and logical text about other British banks. The first sentence is given to help you: Other British banks (ISO) Included in this group are subsidiaries of the clearing banks specializing in international, merchant, and wholesale banking. Funds are used for medium-term loans, installment loans, mortgage loans, international loans, etc., depending on their specialized field. In addition, among the offshore banking institutions in the Isle of Man and the Channel Islands (such as Jersey and Guernsey), those British institutions which opted to submit their returns to the Bank of England are included. They acted as efficient allocators of financial resources between different geographical locations and functioned as central banks of British colonies in the past. Also included are finance houses, now authorized as banks, and British overseas banks such as Standard Chartered Bank. Despite the large number of banks, their market share in the banking industry is relatively small, only 4.4 percent. British overseas banks are those which have their head offices in London but their branches located outside the UK, mainly in the UK's old colonies. Subsidiaries of the clearing banks and finance houses depend heavily on interbank and CD markets for their funding needs.
VI. Prepare a brief summary of the text:
In Bank of England statistics, the domestically-owned banks which are not retail banks are divided into two groups: British merchant banks and other British banks. The former group is comprised of large and often old-established institutions that, as well as providing banking services for a limited range of companies and wealthy individuals, act as advisers on corporate finance; in particular they tend to be involved with mergers and acquisitions. It includes well-known names such as Rothschilds, Warburgs and Barings. The banking business of the British merchant banks is composed largely of wholesale banking-dealing with large corporate clients and operating in the short-term money markets. Their retail business is small and only a minority of such banks have offices in mainland Britain outside London. It can be seen that approximately one-third of deposits are in currencies other than sterling. Nearly 20% of all deposits originate abroad and over 30% of all deposits are derived from the interbank markets. Correspondingly, on the assets side of the balance-sheet, much lending is through the various money markets. Large sums are lent on the domestic interbank market and a large amount is lent abroad, much of it to banks abroad. Direct advances to non-bank customers represent a smaller proportion of total assets than in the case of the retail banks. Eligible liabilities are relatively low. Merchant banks also undertake a number of other financial activities. They act as issuing houses; that is to say, they act for companies wishing offer shares to the public and make all arrangements necessary including drawing up the prospectus, receiving applications for shares and making the initial allotment. They also act as fund managers and manage the investments of wealthy individuals, companies, pension funds, etc. Many run unit trusts, and a number are prominent as financial advisers, notably in the field of corporate mergers and takeovers. The category of "other British banks" comprises a large number of banks of varying origins. Some are specialized subsidiaries of other financial institutions, some have more the characteristics of a charitable trust but are obliged to register as banks in order to be able to accept deposits. But for many the main business is that of a finance house: raising money in the wholesale markets and lending to industry, for the purchase of capital equipment, and to persons, for the purchase of consumer durables. Many of these banks are relatively small. Foreign Banks Most have only the one office in or near the City of London. A small number of North American and Western European banks have had a London office since before World War II, in some cases since the nineteenth century, but for the most part these foreign banks are comparative newcomers. Most arrived during the 1960s and 1970s. Table 1. Foreign Banks: Abridged Balance Sheet. 30 September 1991 (£m)
VII. Translate the text in writing: The bill of exchange The bill of exchange is an important means of financing trade credit. It is a kind of post-dated cheque; that is, a cheque made out as payment for goods received but payable at some future date, usually 3 months after the date on which it is signed. It is used in the finance of domestic and international trade. It works something like this: when a trader sells goods he draws up a bill of exchange and sends it to the buyer. The bill is in the form of a promise to pay and specifies the sum of money owed and the due time for payment. It. bears a stamp, which makes it legally acceptable. The purchaser of the goods duly signs the bill and returns it to the seller who now has a legal acknowledgement of the buyer's indebtedness. Bills of exchange normally mature in 3 months so that the purchaser of the goods has been granted 3 months' credit.
The merchant banks
Many merchant banks' date back to the nineteenth century when they were simply merchant houses trading in various parts of the world. Some of these houses grew in reputation and turned to the finance of trade as a specialised business. While the finance of international trade remains an important function of merchant banks other functions have tended to become rather more important. The main activities of the merchant banks are summarised below. Acceptance business. The principal merchant banks are members of the acceptance Houses Committee and their work consists of accepting (i.e. guaranteeing) certain promises to pay issued by merchants engaged in home and overseas trade. In other words they are providing a form of trade credit. Financial advice to companies. Their best-known activity is the handling of mergers and take-overs. Merchant banks advise and act for the parties concerned, but they will also advise on any aspect of a company's financial affairs. Share issues. Merchant banks act as Issuing Houses. As well as advising on the method of raising funds they will usually carry out all the work involved in floating a new issue. Investment managers. In addition to their advisory role, merchant banks will take over the active management of investments on behalf of other institutions and they also operate a number of investment and unit trusts. Wholesale banking. These banks operate extensively in the Eurocurrency market, and in wholesale banking (dealings in very large deposits for periods of one year or more).
VIII. Read and retell the following text.
Foreign banks The number of foreign banks in London has expanded rapidly in recent years and there are now more than 300 of them. United States and Japanese banks are the most numerous. One reason why banks establish foreign networks is to meet the requirements of their customers’ international operations and this is particularly important in these days of large multinational companies. There has also been a large increase in the practice of raising loans abroad by governments, nationalised industries, and large joint stock companies. Large sums of money now move from one international financial centre to another seeking either, higher interest rates or greater security against the loss in real value which occurs when a currency depreciates against other currencies. Foreign banks play an important part in the London Money Market. It was during these decades that a new international banking system was developing. This system, often referred to as the eurodollar market or, more accurately, the euro-currency markets, proved a magnet to banks worldwide. All large banks, as well as many medium-sized ones, sought to become involved. And while the euro-currency markets were truly international, with active dealing in many centres in Western Europe and elsewhere. London was, and still remains, the single most important centre. So it was to London that most foreign banks went, when they decided to compete for a share of the new international banking business, although, naturally, the larger banks also established offices in other important centres of the market as well. For present purposes it is sufficient to note that virtually all of the foreign banks have as their main business wholesale banking in foreign currencies, and that much of this business is conducted with companies, persons and banks outside the UK. Having come to London primarily to do international banking, many of the foreign banks have, nonetheless, been ready to compete for domestic business as well. In a small number of cases, foreign banks have opened offices in provincial centres, such as Birmingham or Manchester.
IX. After reading the following dialogue translate the passages concerning recent changes and the range of services provided by the bank:
X. Study the divisions of the bank and their areas of responsibilities:
XI. Look at the terms in the left-hand column. Match each one with its correct definition in the right-hand column:
XII. Scan the following text in about 100 words. Give the proper title to the text:
Banks provide a wide variety or services to companies, and a company operating internationally is likely to use several banks around the world to meet its various needs. Banks keep in touch with these customers by telephone and perhaps with regular meetings, to maintain the relationship and to market new services. Most companies use banks at one time or another to finance their operations. As with any other type of loan, hanks charge interest on corporate loans. Interest rates for loans in Britain, for example, can be charged in one of three ways: - at a margin above the bank's base rare. Each bank decides its own base rate, and then charges the company a rare of interest which is related to this. A big customer with a very good reputation may be charged the bank's base rate plus 0.5%, for example, while a smaller company might be charged the base rate plus 3%; - at a margin above LIBOR, the margin again depending on the bank's assessment of the corporate customer. - at a fixed rate of interest for the period of the loan. The first two ways are variable and are adjusted periodically to reflect movements in interest rates on the market. They may also lie negotiable. The third may be dangerous for the bank when market rates are erratic. A company involved in a business where income and expenditure are subject to constant changes needs a variable borrowing facility. This is met most simply by an overdraft facility. The company opens an account with the bank, and an overdraft with a specified limit is grained on the account. A standby letter of credit is a commitment under which a bank agrees to provide funds to a customer where, unlike most other forms of documentary credits, no goods are involved. The standby letter of credit is a flexible form of lending and can cover a variety of situations, in which procedures are reduced to a statement of the documents to be received before payment is made to the third party-Many companies make a profit not only from the goods or services which they sell, but also from the money that they have. Cash managers utilize funds at their disposal, buying and selling shares, treasury bills and so on, to generate profit in the form of investment income. Rather than move valuable foreign shares and securities around the world by post, a company will deposit them for safe keeping with a bank in the foreign country. A company in Sweden which buys shares on the American marker, for example, will use the custodian services of a US bank. Banks naturally charge tees and/or commissions for custodian services.
XIII. Read the following information:
Work in pairs, one person representing Bank B and the other representing Company C. If you represent Bank B, look at the following instructions.
Bank B: You have some news for your customer: your bank’s base rate is being increased by 1/2%. Your margins in general are about right – you could afford to decrease them a little, but not only too much.
If you represent Company C, look at the following instructions.
Company C: Your company is becoming very cost conscious. You have been through Bank B’s charges with your boss, and he wants you to reduce them overall by at least 10%. See what you can do.
Negotiate in accordance with your instructions.
What factors are important for the financial success of a bank operating internationally? Look through the list of factors below and when you have decided on their relative order of importance, write the number of your choice in column A. Number 1 should show the factor which you consider most important and number 10 the least. You will be told how to fill in column B.
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