Part I. Application for credit

 

Banker:	Our discount committee is still discussing your application for credit. I wonder if you'd mind gi­ving us some more information about certain items shown on your balance sheet.
Customer:	Not at all.
B.:	Is the mortgage on your fixed assets being amor­tized?
C.:	Yes. We're making semi-annual payments on this obligation.
B.:	Your balance sheet show some indebtedness. Are any of your assets pledged as security?
C.:	No. That's just an open note.
B.:	Would your company be willing to pledge part of its current assets as collateral security to our loan?
C.:	We wouldn't object to that. Part of this money will be used to retire present debts and part to expand our operations. Then we can immedi­ately begin to liquidate this new liability.
B.:	I think we'd better prefer that arrangement.

 

Part II. Granting the Loan on an Open Note

 

Builder:	I received your notice that my note is due. I can pay it off now, but there is a piece of land right next to my property that I'd like to buy.
Banker:	I don't remember your situation exactly. Are your present holdings free of encumbrance?
Bu.:	My real estate is clear. But there's a chattel mort­gage on my construction equipment.
Ba.:	Has this land you want to buy been appraised?
Bu.:	Yes. It belongs to an estate and was appraised by order of the court. They estimated its value at $20,000.
Ba.:	Can it be bought for that figure!
Bu.:	I think so. I'd like to make them that offer. Would you consider giving us a trust deed to se­cure your present note plus the additional funds you'll need?
Ba.:	I might. But I'd thought that my net worth is high enough that I could borrow the amount on my open note.
Bu.:	Well, in that case, would your wife agree to be a co-signer?
Ba.:	I'm sure she would, because title to the property will be in both our names.
Bu.:	Well, it seems to me that you have enough equity in your property for us to make the loan on an open note.

 

Part I.

1. What is the customer applying for?

2. Has the banker decided whether to grant the credit yet or not?

3. What sort of information is the banker interested in?

4. How docs the banker want to secure the bank's credit?

5. How is the company going to use its current assets?

 

Part II.

1. Why is the builder asking for the extension of his note?

2. What is his present financial standing?

3. Has the land he wants to buy been appraised?

4. What sort of guarantee does the banker insist on to secure the funds the builder will need?

5. What made the builder think that he could borrow the amount on an open note?

6. Who will hold the title to the property purchased?

7. Why has the banker agreed to grant the loan on an open note?

 

XVI. After reading the text answer the questions which follow it:

 

Banks make their profits by lending the money which cus­tomers deposit with them to others who need it for personal or business reasons. Most people need more money than they have currently available at some time in their lives.

To be a borrower you must be a customer of the bank be­cause the money will be lent to you through a bank account. There arc two ways in which you may borrow. The first, and easy, is to spend more money than you have in your current account - to overdraw. The second, and the normal way of borrowing larger amounts or for a long period of lime is the loan.

If a manager permits an overdraft on current account he is likely to set a limit to the size of the overdraft and may stipu­late a dale by which the account is back in credit. Businesses whose payments and receipts arc often irregular will fre­quently need to use overdraft facilities and they are often granted to private customers as well particularly when the manager knows that regular payments arc made directly into the account.

If a loan is granted it will be a fixed sum immediately avail­able for a fixed period of time. The principal and the interest on it may all become due for payment at the end of that pe­riod but for personal loans it is common to arrange that the loan and interest arc repaid in equal regular installments over the period of the loan. A separate account is opened to record the repayments as they are made.

Whether you are seeking money for business or personal reasons there arc a number of things that the manager will want to know before he is prepared to grant your request. The obvious fact will be the amount that you seek and the arrangements for re-payment that you are able lo suggest. You need to tell him something about the purpose of the loan, a business loan is likely to help you make profits out of which the loan can be repaid with interest and he will wish to judge for himself whether or not this is likely. Personal loans usu­ally have to be repaid out of an income which will not get any bigger and the manager will be particularly anxious to ensure that you arc not being too optimistic. In deciding this he will the considerably assisted by his knowledge of you and his esti­mate of your character.

Sometimes people do not ask for enough money because they arc anxious about the burden of the repayments. The manager will be wise enough to try and ensure that you will have sufficient amount of money to do what you want to do. Finally he will consider whether or not you really will be able to repay and what kind of security you can offer against the possibility that you do not repay. In the case of a business the manager may well want to see well prepared, relevant docu­ments such as profit and loss accounts and balance sheets for the most recent years. He would also ask about the expected return from the use of the money and want to see some fig­ures upon which you have based your calculations. For a business good security might he one or more of the assets of the business whilst personal loans are often secured by such things as life insurance policies on which the bank is making regular payment for you or the deeds of your house.

 

1. What two kinds of borrowings are possible?

2. In what circumstances an overdraft on current account is permissible?

3. How are personal loans usually repaid?

4. Will you pay back more than you borrowed? What will the difference be?

5. What information will the manager require for a per­sonal loan?

6. What information will he require for a business loan?

7. What other things will he take into account?

8. What will he need from you to make the loan safer for him?

9. What does a businessman mean by his expected rate of return?

10. Why might this be important to the bank manager?

11. What kind of things might you offer as collateral for a personal loan?

 

XVII. Choose the right answer:

1. "application for loan" means:

a) granting loan,

b) asking to be granted loan,

c) refusal to grant loan;

2. "balance sheet" denotes:

a) total profit,

b) total revenues,

c) a document which shows the stale of a business at a particular moment;

3. "indebtedness" here means:

a) repayment,

b) owing thanks,

c) debt, borrowing;

4. "security" in this sense is:

a) bonds, share certificates and other titles to properly,

b) safely,

c) a guarantee of payment;

5. "principal" here means:

a) the most important information,

b) the amount of the original loan,

c) the chief item or person;

6. "my loan is due for repayment" means:

a) my loan has reached maturity,

b) my loan has been paid off,

c) my loan has been extended;

7. "holdings free of encumbrance" means:

a) holdings heavily in debt,

b) the encumbrance isn't very large,

c) properly or security clear of indebtedness;

8. "my net worth" means:

a) the value of one's holdings after all obligations have been paid,

b) any personal or movable possession,

c) net earnings;

9. "a co-signer" denotes:

a) a person who holds a deed to the property,

b) a person who signs a document with another person and shares the obligation,

c) a lawyer who prepares a trust deed;

10. "title to properly" is:

a) the record or proof of ownership of properly,

b) the name of the person who owns the property,

c) a word indicating a high financial rank;

I 1. "my expected return" means:

a) when I expect to come back,

b) the amount of money I expect to have to repay,

c) the income I expect to receive from doing business;

12. "deeds" arc:

a) actions,

b) documents showing how well my business is doing,

c) documents which prove that I own a particular piece of real property.

 

XVIII. Say what is true and what is false. Correct the false sentences:

 

1. When a bank's manager considers an application for a loan, he usually requires some information about the items shown on the applicant's balance sheet.

2. The manager is not concerned whether any of the applicant's assets have already been pledged as security.

3. The bank often asks the applicant to pledge part of his assets as collateral security to the bank's loan.

4. One cannot apply to a bank for an extension of a loan.

5. To grant a loan the bank must be sure that the applicant can repay it.

6. The bank will never wish to offer a larger loan than the applicant asks for.

 

XIX. Translate the following text into English:

 

Кредитні операції здійснюються у формі надання позичок під зобов'язання позичальників повернути кошти та сплатити проценти у вста­новлені строки. Це ключовий вид активних опе­рацій банків, вони забезпечують переважну час­тину доходів у багатьох банків. Позички банків — важливе джерело грошових коштів для бізнесо­вого і споживчого секторів економіки.

Разом з тим кредитні операції несуть в собі найбільшу загрозу для банків — ризик неповер­нення позичок. Тому банки при наданні кредитів повинні вживати заходів щодо запобігання кре­дитних ризиків: ретельно перевіряти здатність позичальника повернути позичку (його кредито­спроможність), вимагати забезпечення позички чи гарантії її повернення третьою особою (бан­ком, страховою компанією), створювати резервні фонди тощо.

За користування наданими в позичку кош­тами банки стягують з позичальників плату у ви­гляді процента, який є важливим джерелом дохо­дів банків.

Залежно від тривалості обороту коштів, сформованих позичальником за участю банківсь­ких позичок, та від окупності прокредитованих банками проектів, банківські кредити поділяють­ся на короткострокові (до 1 -го року), середньо- та довгострокові (відповідно до 3-х та більше 3-х років). Зі строком кредиту тісно пов'язаний ри­зик його неповернення — чим довший строк, тим вищий ризик. Тому по середньо- та довго­строкових кредитах банки встановлюють більш високі процентні ставки ніж по короткострових. Але й цей захід не завжди захищає банки. В умо­вах інфляції, коли ймовірність ризиків істотно підвищується, банки взагалі перестають надавати спочатку довгострокові, а потім і средньострокові кредити.

 

XX. Role-play

Three different groups of inexperienced young business people in a small town require capital for their businesses. They all apply to the local branch of Megabank.

The three groups of would-be borrowers must develop financial arguments that they think will convince the bankers. The group preparing the role of the bankers has to think of questions about the viability of the future businesses: will they be successful, and why? Or why might they not be successful?

 

The roles are:

1. A junior manager (and assistants) at the bank, responsible for new local small businesses. To lend or not to lend, that is the question.

2. A group of young people who want to open a small specialist shop selling CDs of black music — jazz, soul, funk, reggae, rap, house, and any new trends.

3. A group of young people who want to buy an existing take-away pizza business (the lease on the premises, the kitchens, the delivery scooters, and so on). The business is profitable, and well-known in the town, with loyal customers. The new owners can keep the same telephone number, and either keep or change the name.

4. A group of students who already operate a part-time computing consultancy service, advising small businesses on what hardware and software to buy, and how to set up an Internet home page. They want to borrow money to buy more computers for themselves, on which to try out elaborate new software programs.

 

Text B

 

The discount houses

 

Discount houses are a very special group of banks. They comprise seven institutions which are unique to the UK financial system, and they fulfill three significant functions.

- Their activities are crucial to the Bank of England's monetary policy op­erations.

- They have an important function in permitting the retail banks, in par­ticular, to adjust their liquidity positions and to smooth flows of funds between banks as a consequence of their payments-clearing operations.

- They are instrumental in providing a mechanism for short-term financ­ing of companies.

Their title of 'discount houses' stems from the fact that they were originally established to purchase bills of exchange at a discount to their maturity value, thereby providing the vendor with immediate funds whilst earning for the house an effective capital gain (yield) upon the asset's maturity.

The essence of the operations of the discount houses is that they attract short-term wholesale deposits and then use these to make short-term loans and to buy assets with short periods to maturity. The funds used to purchase the short-dated assets are borrowed, mainly, from the UK retail banks. Profits are earned by borrowing money at a lower interest rat' than that earned on the assets purchased. This activity would appear to be very straightforward and of low risk, except that the funds they borrow are extremely short-term: the overwhelming majority of these funds are either 'at call' (meaning that the lender can demand them back without notice) or are on an overnight basis. If the lenders find themselves short of cash for whatever reason, they will call in. or not renew, loans to the discount houses, and in so doing are able to adjust their liquidity position quickly and easily. The discount houses then find themselves short of funds and have to pay higher rates in order to maintain their deposit bases - perhaps rates higher than they are earning on their purchases of short-dated assets, so that losses are being incurred. As a consequence, the ability to forecast accurately cash shortages or surpluses within the banking system, and future levels of short-term interest rates, is crucial to the profitability of these institutions.

It could conceivably be the case that funds are unavailable to the discount houses at almost any interest rate and under these circumstances their sol­vency is threatened. This possibility is, however, covered by a unique characteristic of the discount houses: the right to borrow funds directly from the Bank of England (in practice, it is the sale - 'rediscounting' - of suitable assets to the Bank of England). The rate at which the Bank of England acts as a lender of last resort to the discount houses is. however, a rate of the Bank of England’s choos­ing and it is this characteristic of the relationship between the discount houses and the Bank that is the basis of the Bank's ability to influence short-term interest rates throughout the whole of the financial system.

The primary activity of the discount houses remains essentially straightforward, however: it is the purchase of short-dated assets by means of borrowed funds. The aggregate balance sheet of the discount houses is correspondingly straightforward: the asset side is dominated by holdings of commercial bills arid. in particular, sterling certificates of deposit (CDs). The liability side of the balance sheet is dominated by very short-term borrowing in sterling from UK banks and, to a much lesser extent, other financial institutions.

The discount houses are collectively responsible for holding very large quan­tities of commercial bills and sterling CDs, and are responsible for the maintenance of a liquid secondary market in them. Through the purchase of commercial bills, they allow holders of these bills to realise their funds prior to maturity. As a consequence, the discount houses are important providers of short-term finance to the commercial sector.

Like all groups of financial institutions, the environment within which the discount houses operate has been changing. Although the Bank of England acknowledges the importance of the discount houses to the financial system in general and the operation of government monetary policy in particular, it has been prepared to allow, and indeed has encouraged, a higher level of competition within the discount market. In 1981 the Bank sought to main­tain the privileged position of tile discount houses by requiring banks with eligibility status (that is, those banks who were responsible for underwriting – accepting - bills eligible for rediscounting at the Bank of England) to maintain amounts of funds with the discount houses that constituted a certain proportion of their short-term sterling deposit liabilities. This arrangement was phased out during the late 1980s, so that the discount houses no longer had a secure supply of funds and had to compete more openly for them. At the same time, the 'Big Bang' reforms of the Stock Exchange in 1986 allowed more participants into the gilt-edged market, causing a higher level of com­petition for the discount houses in the area of short-dated gilts. Since the mid-1980s the Bank of England has additionally been prepared to deal di­rectly with institutions other than the discount houses. This has been in the form of sale and repurchase agreements (termed Repo agreements) with in­dividual banks and building societies, which has enabled these institutions to manage their liquidity positions by means of direct dealing with the Bank of England rather than at one remove via the discount houses. Since January 1996 these Repo transactions have been shown gross, i.e. both assets and liabilities, in UK banking statistics.

In 1988 the Bank of England published its intention to extend its dealing relationships beyond what at the time constituted the eight discount houses and made clear that it would be prepared to establish dealing relationships with any suitable institution. This move resulted in two additional institu­tions establishing dealing relationships with the Bank, although only one of these took on full discount house status. However, subsequently two discount houses withdrew from the market.

Taken together, these developments represent a substantial shift away from the houses' protected position of the past and hence raise questions regarding their future development. While the majority of the institutions have hitherto been prepared to remain involved with the discount market, a number of them have been busy diversifying their activities to reduce their dependence on the discount market. They have, for example, become involved in leasing, in futures business and in the insurance market.

 

 

I. Key terms:

 

Discount	- скидка, знижка - reduction in the face value of a financial claim, such as a Bill of Echange or Treasury Bill, by the amount of money represented by the interest due on the claim during the remainder of its maturity. The reduction involved is the discount. It also denotes the action of selling a claim at a discount, i.e. to discount;
Lenser of last resort	- кредитор останньої інстанції - an institution, normally a central bank, that stands ready to lend to the commercial banking system, when the latter is in overall shortage of funds. (The latter position will arise when extra large payments out of the banking system, such as seasonal tax payments (e.g. periodic corporation tax payments by companies), reduce the banking system’s holdings below the reserves. The central bank will, in such cases, lend at short term to the banking system until such time as funds return through normal depositors.)
Commercial bill	- комерційний акредитив - any bill other than a Treasury bill. Commercial bills are bank bills or trade bills – Bills of Exchange are devided into these categories.
Eligible bill	- першокласний комерційний вексель, акцептований першокласним банком - a bank bill issued by a bank on the eligible list which may be rediscounted at the Bank of England.
Big Bang	- “Біг-бенг” - the term used to encapsulate the changes culminating on 27 October with abandonment of the commission agreementbetween members of the London Stock Exchange and of strict segregation of jobbers and brokers.
Gilts, gilt-edged securities	- золотообрізні цінні папери - fixed interest UK government securities traded on the London Stock Exchange. They are called gilt-edged because it is certain that interest will be paid and that they will be redeemed (where appropriate) on the due date.
Standby credit	- резервний (гарантійний кредит) - credit guaranteed in a note issurance facility or European facility.
Short-dated securities	- которкострокові цінні папери - gilts, bonds, bills of Echange or other securities that have a stated date for redemption (repayment) of their nominal value.

 

II. Answer the following questions:

 

1. State the broad functions of the discount houses.

2. What types of deposits dominate discount houses' liabilities portfolios?

3. What is the major risk faced by discount houses in their intermediation activities?

4. What special facility is available to the discount houses which helps them to be able to meet substantial demands for withdrawals of funds at very short notice?

5. What are the most important assets held by the discount houses?

6. In what way do the discount houses provide short-term funds for the commercial sector?

7. Examine the main events which have put pressure on discount houses' opera­tions in recent years.

8. How have discount houses tended to react to the pressures which they have faced in recent years?

 

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

 

Monetary policy operations; flow of funds; payment-clearing operations; maturity value; assets maturity; short-term wholesale deposits; short-dated assets; earned on the assets purchased; overwhelming majority; “at call”; on an overnight basis; short of cash; liquidity position; deposit bases; cash shortages or surpluses; solvency; rediscounting; a lender of last resort; borrowed funds; the aggregate balance sheet; sterling certificates of deposits; short-term borrowings; commercial bills; a liquid secondary market; eligibility status; bills eligible; “Big Bang” reforms; gilt-edged market; repurchase agreement; gross; establish dealings relationships.

 

IV. For each of the following words you should provide a word with the same or similar meaning and a word, which is opposite in meaning:

 

Word	Synonym	Opposite
shortage (noun)
purchase (verb)
value (verb)
profit (noun)
earn (verb)
deposit (verb)
straightforward (adjective)
short-date (adjective)
lend (verb)
assets (noun)
extend (verb)
demand (noun)
reduce (verb)
loan (noun)
competition (noun)
long-term interest rates (adjective)

 

V. Join the halves.

 

1) The sterling money market or discount market involves … 2) The market plays a central role … 3) Discount houses borrow money, mainly from banks but also from other sources, and… 4) The funds they borrow are almost wholly short term, either overnight or at call (i.e. can be recalled without notice) and … 5) The discount houses provide the banks with a convenient form of liquidity … 6) Banks finding themselves with tempor­arily surplus funds … 7) Banks with a shortage of funds … 8) Deposits with discount houses earn a competitive rate of interest and, … 9) The discount market's role in providing liquidity does not end here, for … 10)The role of market-maker is an important one: for financial assets to be negotiable (i.e. readily tradeable), … 11)Assets that are not negotiable are not liquid: and efficient financial markets need liquid assets in order … 12)The discount houses' willingness to buy and sell bills and CDs ensures their negotiability and …

a) as they are fully secured, any risk is slight. b) so makes them that much more useful as liquid assets, both for banks and for other market participants. c) the discount houses also act as market-makers in Treasury bills, local authority bills, commercial bills and CDs. d) can add to their deposits with the discount market. e) there have to be dealers who stand ready to buy and sell on a regular basis. f) that market participants can quickly respond to changes in cash flow by buying or selling assets. g) are secured against the financial assets they hold. h) a number of dis­count houses, other traders in bills, a large number of banks and the Bank of England. i) which can be added to, or sub­tracted from, on a day-to-day basis. j) can call back monies already lent to the marker. k) within the monetary system. l) invest in short-term financial assets, notably bills and certifi­cates of deposit.