Look through the following vocabulary notes which will help you understand the text and discuss the topic.

an account accounting a statement of account accounting equation to service accounts to debit an account to credit smth to an account an accountant a savings account	счет; Бр. англ. отчет бухгалтерский учет выписка о состоянии счета бухгалтерское тождество обслуживать счета дебетовать счет кредитовать счет бухгалтер сберегательный счет
to acquire, syn. to obtain	приобрести, получить
to manage management	управлять управление
assets asset management asset holdings income-earning assets	активы управление активами владения активами доходные активы
liabilities to issue liabilities liability management	обязательства выпускать обязательства управление обязательствами
a balance sheet	балансовый отчет
a deposit to deposit a depositor to maintain deposits a demand deposit, synonyms: a checkable deposit, a checking account a time deposit a transaction deposit   a nontransaction deposit   a certificate of deposit (CD)	вклад, депозит вносить, депонировать вкладчик держать вклады депозит до востребования син. чековый депозит, чековый счет, текущий счет срочный вклад/депозит трансакционный счет (текущий счет, краткосрочный депозит) нетранзакционный счет (срочный депозит) депозитный сертификат
a loan to issue a loan a commercial loan a real estate loan a consumer loan an interbank loan	ссуда, заем, кредит выдать ссуду коммерческая ссуда ссуда под залог недвижимости потребительский ссуда межбанковская ссуда
to denominate small denomination large denomination	деноминировать мелкого достоинства крупного достоинства
to borrow a borrower borrowing	взять в долг заемщик займы, долги, одалживаемые средства
a bank teller	кассир банка, служащий банка
a passbook	сберегательная книжка
to assess penalties	начислять штрафы
a check to present a check for payment to draw a check on an account to clear a check	чек представить чек к оплате   выставить чек на счет провести расчет по чеку
to bear a bearer a bearer instrument	нести предъявитель финансовый инструмент на предъявителя
NOW accounts (negotiable order of withdrawal)	нау-счет, текущий счет с выплатой процента и списанием по безналичным расчетам
MMDAs (money market deposit accounts)	депозитный счет по ставкам денежных рынков
payable on demand/at sight	подлежащий оплате по предъявлению
liquid liquidity liquidity management	ликвидный ликвидность управление ликвидностью
negotiable non-negotiable	обращаемый не обращаемый
a bank holding company	банковская холдинговая компания
a repurchase agreement	репо, договор о продаже с последующим выкупом по обусловленной цене
a foreign branch	зарубежный филиал
Bank Capital, syn. bank’s net worth, net assets, equity	капитал банка, чистая стоимость банка
a cushion	подушка безопасности
solvency, ant. insolvency	платежеспособность неплатежеспособность
in excess of	с превышением над
liquidation	ликвидация
the Fed (Federal Reserve System)	Федеральная резервная система США
vault cash	наличность в хранилище
a return on	доход/прибыль от
collection	инкассо, сбор причитающихся платежей
to correspond corresponding relationships a corresponding bank	корреспондировать корреспондентские отношения корреспондирующий банк
to mature maturity a fixed maturity a maturity date	подойти к сроку погашения срок погашения фиксированный срок погашения; дата погашения
to default a default default risk	отказаться выплатить долг отказ от выплаты долга риска не возврата долга/ссуды
option	опцион
swap	своп
financial futures	финансовые фьючерсы
financial derivatives	финансовые деривативы
to make a bet	сделать ставку
internal controls	система внутреннего контроля
regulators   bank regulation	регулирующие/контролирующие органы банковское регулирование
Barings Bank	Банк Бэрингс

 

Reading

The Bank Balance Sheet

To understand how banking works, we start by looking at the bank balance sheet, a list of the bank’s assets and liabilities. As the name implies, this list balances; that is, it has the characteristic that

 

total assets = total liabilities + capital.

A bank’s balance sheet is also a list of its sources of bank funds (liabilities) and uses to which the funds are put (assets). Banks obtain funds by borrowing and by issuing other liabilities such as deposits. They then use these funds to acquire assets such as securities and loans. Banks make profits by charging an interest rate on their asset holdings of securities and loans that is higher than the interest and other expenses on their liabilities. The balance sheet of all commercial banks at the beginning of 2007 appears in Table 1.

 

Table 1 Balance Sheet of All Commercial Banks (items as a percentage of the total, end of 2007)

 

ASSETS (Uses of Funds)*		LIABILITIES (Sources of Funds)
Reserves and cash items	3%	Checkable deposits	6%
Securities U.S. government and agency State and local government and other securities		Nontransaction deposits Small-denomination time deposits (less than $100,000+savings deposits) Large-denomination time deposits
Loans Commercial and industrial Real estate Consumer Interbank Other		Borrowings
Other assets (for example, physical capital)		Bank capital
Total		Total

*In order of decreasing liquidity

Liabilities

A bank acquires funds by issuing (selling) liabilities, such as deposits, which are the sources of funds the bank uses. The funds obtained from issuing liabilities are used to purchase income earning assets.

Checkable deposits Checkable deposits are bank accounts that allow the owner of the account to write checks to third parties. They include all accounts on which checks can be drawn: non-interest-bearing checking accounts (demand deposits), interest-bearing NOW (negotiable order of withdrawal) accounts, and money market deposit accounts (MMDAs). Checkable deposits and money market deposit accounts are payable on demand; that is, if a depositor shows up at the bank and requests payment by making a withdrawal, the bank must pay the depositor immediately. Similarly, if a person presents a check at the bank, it must pay the funds out immediately or credit them to that person’s account. The bank’s costs of maintaining checkable deposits include interest payments and the costs incurred in servicing these accounts – processing, preparing, and sending out monthly statements, providing efficient tellers, maintaining an impressive building and conveniently located branches, and advertising and marketing to entice customers to deposit their funds with a given bank.

Nontransaction deposits Nontransaction deposits are the primary source of bank funds (59% of bank liabilities in Table 1). Owners cannot write checks on nontransaction deposits, but the interest rates paid on these deposits are usually higher than those on checkable deposits. There are two basic types of nontransaction deposits: savings accounts and time deposits (also called certificates of deposit, or CDs). In savings accounts, to which funds can be added or from which funds can be withdrawn at any time, transactions and interest payments are recorded in a monthly statement or in a passbook held by the owner of the account. Time deposits have a fixed maturity length, ranging from several months to over five years, and assess substantial penalties for early withdrawal. Small-denomination time deposits (deposits of less than 100,0000) are less liquid for the depositor than passbook savings, earn higher interest rates, and are more costly source of funds for the banks. Large-denomination time deposits (CDs) are available in denominations of $100,000 or more and are typically bought by corporations or other banks. CDs are negotiable; like bonds, they can be resold in a secondary market before they mature. For this reason, negotiable CDs are held by corporations, money market mutual funds, and other financial institutions as alternative assets to Treasury bills and other short-term bonds.

Borrowings Banks also obtain funds by borrowing from the Federal Reserve System, other banks, and corporations. Other sources of borrowed funds are loans made to banks by their parent companies (bank holding companies), loan arrangements with corporations (such as repurchase agreements), and borrowings in Eurodollars in foreign banks or foreign branches of U.S. banks.

Bank Capital The final category on the liabilities side of the balance sheet is bank capital, the bank’s net worth, which equals the difference between total assets and liabilities. Bank capital is a cushion against a drop in the value of its assets, which could force the bank into insolvency (having liabilities in excess of assets, meaning that the bank can be forced into liquidation).

Assets

A bank uses the funds that it has acquired by issuing liabilities to purchase income-earning assets. Bank assets are thus naturally referred to as uses of funds, and the interest payments earned on the them are what enable banks to make profits.

Reserves All banks hold some of the funds they acquire as deposits in an account at the Fed. Reserves are these deposits plus currency that is held by banks (called vault cash because it is stored in bank vaults overnight).

Cash Items in Process of Collection Checks are classified as cash items in process of collection, and they are assets for the bank because they are claims on another bank for funds that will be paid within a few days.

Deposits at Other Banks Many small banks hold deposits in larger banks in exchange for a variety of services, including check collection, foreign exchange transactions, and help with securities purchases. This is an aspect of a system called correspondent banking.

Securities A bank’s holdings of securities are an important income-earning asset. Securities are made up entirely of debt instruments for commercial banks, because banks are not allowed to hold stock. These can be classified into three categories: U.S. government and agency securities, state and local government securities, and other securities. The first are the most liquid because they can be easily traded and converted into cash with low transaction costs.

Loans Banks make their profits primarily by issuing loans. Loans are typically less liquid than other assets, because they cannot be turned into cash until the loan matures. Loans also have a higher probability of default than other assets. Because of the lack of liquidity and higher default risk, the bank earns its highest return on loans. The largest categories of loans for commercial banks are commercial and industrial loans made to businesses, and real estate loans. Commercial banks also make consumer loans and lend to each other. The bulk of these interbank loans are overnight loans lent in the federal funds market. The major difference in the balance sheets of the various depositary institutions is primarily in the type of loan in which they specialize. Savings and loans and mutual savings banks, for example, specialize in residential mortgages, while credit unions tend to make consumer loans.

Other Assets The physical capital (bank buildings, computers, and other equipment) owned by banks is included in this category.

 

Comprehension

6.4.1 Answer the questions using the active vocabulary.

1. What is the bank’s balance sheet?

2. How does the list of the bank’s assets and liabilities balance?

3. Which side of the balance sheet shows the sources of funds?

4. Which side of the balance sheet shows the uses of funds?

5. How do banks obtain funds?

6. How do banks use funds?

7. What do you think makes the profit of the bank?

8. What are the main items on the balance sheet which show its liabilities?

9. What are the main items on the balance sheet which show its assets?

10. Why do you think Bank Capital is shown on the liabilities side of the balance sheet?

11. What are checkable deposits?

12. What is the difference between demand deposits, NOW accounts, and money market deposit accounts? (Use the glossary of unit 6 to give the appropriate answer.) Are they all payable on demand?

13. What is a check? (Use the glossary of unit 6 to give the appropriate answer.)

14. What are the bank’s costs of maintaining checkable deposits?

15. Why do you think nontransaction deposits are the primary source of bank funds?

16. What are the two basic types of nontransaction deposits?

17. What is the difference between savings accounts and time deposits?

18. Why do you think they (savings accounts and time deposits) are called nontransacion deposits?

19. Why do you think time deposits assess substantial penalties for early withdrawal?

20. What does the term ‘negotiable’ mean?

21. For what reason are negotiable CDs held by corporations, money market mutual funds, and other financial institutions as alternative assets to Treasury bills and other short-term bonds?

22. Where can the bank borrow from?

23. What is the Bank Capital a cushion against?

24. What is the bank insolvency?

25. Can we say that deposits at other banks and cash items in process of collection can be collectively referred to as cash items?

26. What is correspondent banking?

27. Why do banks hold securities? What are the bank’s holdings of securities made up of?

28. Why do banks prefer to hold the most liquid securities?

29. Why do you think banks are not allowed to hold stocks?

30. What is the primary source of the bank’s profit?

31. Why are loans typically less liquid than other assets?

32. What is meant by the term ‘default’?

33. What are the reasons for the bank’s earning the highest rate of return on loans?

34. What kinds of loans do you know?

35. What makes the major difference in the balance sheets of the various depositary institutions?