Ex. 16. Scan the foreign financial newspapers available to you and look for articles about banking in Russia and the role of the Central Bank. Present the information in class and comment on it.

READING PRA CTICE

Ex. 17. a) Read the article quickly to find the answer to the following question: Why are serious banking problems inevitable in transition economies?

b) Reread the article more carefully and underline the parts where conditions for avoiding banking problems in transition economies are mentioned.

 

The number of countries experiencing significant banking problems has increased substantially in recent years. It should be stressed that the problems are hitting industrial and developing countries alike.

The problems arose from weaknesses and distortions in the banking systems and above all from the failure of the central banks to successfully fulfil their principal function of maintaining economic stability through a credible and responsible monetary policy.

Serious banking problems were almost inevitable in transition economies, because uncontrolled and unsupervised growth in commercial bank lending quickly unmasked hidden problems which brought about crises in many of the former centrally-planned economies.

Although the experiences of different countries differ according to each country's circumstances, the following general conclusions with regard to transition economies can be made:

• One of the most important conditions for avoiding serious banking crises is the pursuit of stable macroeconomic policies, which must be priority number one in transition economies.

• The transition process implies a dramatic change in the role and instruments of monetary policy. One cannot deny the fact that by the end of 1994, most countries in transition had shifted, to varying degrees, to market-oriented (indirect) instruments of monetary policy. For example, as a result of reforms in the monetary, exchange and banking areas, the CIS countries have achieved a market-based determination of interest rates.

• Competition in the banking system is important. Entry of foreign banks may offer a means to foster competition, but proliferation of banks is not necessarily a good thing in all countries. Some new banks may be weak and poorly managed. Systematic bank insolvencies have typically been a combination of poor lending decisions, inadequate licensing and supervision procedures. It is very costly and counterproductive to keep unhealthy banks alive. The lender-of-last-resort function involves net injections of liquidity into the economy and thus has a monetary impact that conflicts with the chief objective of monetary policy, that of maintaining stability and low inflation.

• Given the small size of the domestic monetary sector, the banking sector is highly sensitive to even minor changes in capital flows. Rapid and uncontrolled increases in banking assets should be discouraged. In some countries the cost of sterilizing capital inflows remains an issue.

Words you may need:

experience v испытывать, знать по опыту

hit v поражать, ударять

alike adv подобно, одинаково; в равной мере

credible adj заслуживающий доверия

responsible adj ответственный

inevitable adj неизбежный

unmask v (зд.) вскрывать

hidden adj скрытый

pursuit of stable macroeconomic policies проведение стабильной макроэкономической политики

one cannot deny нельзя отрицать

foster v поощрять, благоприятствовать

proliferation n распространение

insolvency n неплатежеспособность

licensing n лицензирование

conflict v входить в противоречие

sensitive adj восприимчивый, чувствительный

capital flows n финансовые потоки

sterilizing n стерилизация (предотвращение негативного воздействия притока капитала)

Ex. 18. a) Read the article to find the characteristics of a country's economic system that are taken into account when an exchange rate policy is determined.

b) Reread the article and find the options for an exchange rate policy different countries have these days. Say what they imply.

Exchange Rate Policy

 

Exchange rate policy involves choosing an exchange rate system and determining the particular rate at which foreign exchange transactions will take place. A country's exchange rate policy affects the overall level of domestic prices and its relative price structure in domestic currency terms between goods which are traded internationally (tradables) and goods which are produced for the domestic market (non-tradables or home goods).

A country's economic structure and its institutional characteristics are important considerations in determining exchange rate policy.

The following characteristics are usually taken into account:

• reliance on primary commodity production and exports (minerals and agricultural crops);

• dependence on essential imports (capital equipment);

• use of direct investment and official and private lending;

• development of financial markets, availability of experienced personnel, foreign exchange dealers in particular.

Countries have quite a number of options for exchange rate policy:

A. Peg to a single currency.

By pegging the value of a currency to that of a single currency the country facilitates its trade with the country whose currency is used as the peg. Besides, capital flows related to investment may be positively affected by the stability of the exchange rate. Moreover, pegging to a stable currency, like the US dollar, enhances the confidence in the pegging country's currency.

B. Peg to a basket of currencies.

An alternative approach is to peg the currency to a weighted average of several currency values or a basket of currencies. It helps to avoid large swings in its exchange rate with respect to several trading partners' currencies and enables countries to avoid some import price fluctuations. There are several disadvantages, however, of a basket peg. They are connected with technical difficulties of implementing a peg which would in general change on a daily basis vis-a-vis all of the industrial countries. The pegging country may lose attractiveness to foreign investors because there might be more uncertainty about the future value of the country's currency, reflecting the possibility that a basket peg was more open to manipulation, particularly if details of the composition of the basket were not publicized.

C. Independent floating.

Independent floating means that an exchange rate of any currency is free to float to any level which supply and demand may determine.

Independent floating potentially provides a mechanism for an efficient foreign exchange market.

Most industrial countries and some developing countries have adopted floating or flexible exchange rate systems, because countries have found it expedient for both economic and political reasons to adopt a more flexible system.

Based on: Macroeconomic Adjustment:

Policy Instruments and Issues

IMF Institute, 1992

Words you may need:

 

peg n привязка

basket of currencies корзина валют

alternative approach альтернативный подход

weighted average взвешенное среднее значение

swing n колебание

vis-a-vis prep пo отношению к

independent floating свободный плавающий курс

expedient adj целесообразный

Eх. 19. a) Read the text that follows and find the parts explaining: the aim of reforms of the banking systems in the countries mentioned in the article; the causes of bank insolvencies.

b) Reread the article again and sum up the conclusions of the meeting described in it.

Central Banking Reforms Advance in Baltic and CIS Countries

 

On May 13-14, 1996, the IMF arranged the ninth coordinating meeting on central banking technical assistance to the Baltics and the Commonwealth of Independent States central banks. The meeting was held at the Bank for International Settlements in Basel.

Reforms in the monetary, exchange, and banking areas in the Baltic and the CIS countries have sought to achieve a market-based determination of interest rates and exchange rates, to control banking system liquidity through indirect instruments, and generally to foster the use of markets for central banking operations. Implementation of market-based arrangements for monetary control has required careful coordination of reforms to foster money and foreign exchange markets and to strengthen key functions of central banking, including critical actions in the payment system, accounting, and bank supervision. Reforms have been designed to bring about macroeconomic stabilization as well.

The participants of the meeting stressed that in most countries, following the introduction of new laws, the central bank has de jure independence from political authorities. It has the authority to formulate and implement monetary policy and to implement foreign exchange policy. Most countries have liberalized deposit and lending rates and rely mainly on indirect instruments, although the use of market-based instruments is limited.

Interest rate and exchange rate management is typically governed by a ceiling on net domestic assets of the central bank and a floor on net international reserves. Many countries in the regions have developed money, securities, and foreign exchange markets.

Monetary management is exercised, primarily, through reserve requirements, refinance facilities, and intervention in the foreign exchange market and, to a limited extent, through auctions of treasury bills and central bank papers.

Direct central bank credit to the government, although decreasing, remains an important source of reserve money creation in some countries. Public debt management is based on treasury-bill auctions, which are being developed in most countries; secondary market activity typically remains limited.

Foreign exchange operations and the management of the exchange rate are in most cases conducted through an interbank auction arrangement, although dealing outside the auctions is increasingly prevalent.

In the payment system, central banks provide most clearing and settlement services and have streamlined operations to meet user needs.

Participants agreed that the causes of bank insolvencies had typically been a combination of poor lending decisions, inadequate licensing and supervision procedures, and structural changes in the public enterprise sector.

Participants at the May meeting recognized the dramatic advances made by most central banks in the region in introducing market-based instruments of monetary and exchange management and in fostering money and exchange markets. They stressed, however, that most countries have new work ahead of them in restructuring their banking systems.

Words you may need:

Bank for International Settlements Банк международных расчетов

de jure де-юре

central bank papers векселя центрального банка

prevalent adj (широко) распространенный

settlement services услуги по расчетным операциям

streamline v совершенствовать, модернизировать

Ex. 20. a) Read the text quickly for the main points.

 

Money is as hard to measure and define as it is to control. Money is graded according to its LIQUIDITY – notes and coins being completely liquid, whereas some kinds of bank deposits become spendable only after notice to withdraw them has expired.

In Britain:

 

• M1 is notes and coins in circulation, plus sterling sight deposits (that is, those withdrawable without notice) held by the private sector.

• Sterling М3 (М3) is Ml plus sterling time deposits (those requiring notice of withdrawal) of the British private sector, plus all sterling deposits of the British public sector. To get M3, add the foreign currency deposits of all British residents.

• PSL2, short for private sector liquidity, is notes and coins in circulation; all sterling deposits (that is, including time deposits and certificates of deposit); other money market instruments (for example, treasury bills, bank bills and local authority debt held by the non-bank private sector); building societies' share and deposit accounts, and some national savings securities.

The United States uses three measures:

 

• M1 is defined as currency in circulation, travellers' cheques, demand deposits of the private sector at commercial banks, automatically withdrawable deposit accounts at banks and thrift institutions, credit union share draft accounts, and demand deposits at mutual savings banks.

• M2 is Ml plus savings and small-denomination time deposits, overnight deposits at commercial banks, overnight Eurodollars held by American residents (other than at Caribbean branches of Fed member banks) and balances of accounts with money market funds.

• M3 is M2 plus large denomination time deposits, companies term repurchase agreements at commercial banks and savings and loan associations, and money markets funds held by institutions.

Based on: The Pocket Economist

Words you may need:

measure v измерять

grade v (зд.) группировать, классифицировать

spendable adj могущий быть истраченным

notice to withdraw (the deposit) уведомление о снятии вклада

sterling sight deposit вклад до востребования в фунтах стерлингов

PSL-private sector liquidity ликвидность частного сектора Великобритании (широкий показатель денежной массы в обращении)

certificate of deposit депозитный сертификат

building society строительное общество

travellers' cheques дорожные чеки

share draft account чековый паевой счет

mutual savings bank взаимно-сберегательный банк

overnight Eurodollars суточные евродоллары

money market fund взаимный фонд денежного рынка

repurchase agreement (REPO) соглашение о продаже и обратной покупке (РЕПО)

savings and loan association ссудо-сберегательная ассоциация

b) Reread the text more carefully to complete the sentences below:

 

1. Money is graded....

2. Notes and coins....

3. Ml is....

4. Private sector liquidity is notes and coins in circulation plus....

5. Sterling M3 is M1 plus....

6. In the United States Ml includes....

7. M2 is M1 plus....

8. M3 is M2 plus....

UNIT 5.BANKING SYSTEM

A. TEXT

COMMERCIAL BANKS

 

By definition, banks are institutions which accept money from people for safe keeping, lending it out to others, but particularly creating money by lending their credit, i.e. by making loans and advances to customers. Banks make money work at all levels in industry and commerce.

Thus, commercial (or in the UK clearing) banks are providers of payment services and they act as financial intermediaries. They offer a variety of services such as deposit and current accounts tailored to fit particular savers' preferences¹ and they lend the funds they receive on a variety of terms which satisfy the needs of a range of borrowers.

By pooling risks, by studying the experience of many individuals and by acquiring the expertise to assess the prospect of profit and loss inherent in lending, banks are able to provide their savers with a combination of interest, ease of repayment and protection against loss that are better than these savers could obtain by lending directly to the ultimate borrowers. Banks mediate between these borrowers and savers to achieve a profit. In this intermediation process costs are incurred which must be met out of the bank's margin between the borrowing and lending interest rates.² Banks are able to achieve these margins through economies of scale. But the margin is always under pressure from the basic costs of the business and from competition. They make their profit by paying a lower rate of interest for the money they lend.

Later, other activities were added to the original function of the banks. A modern joint-stock bank is expected to supply³ the following services: to accept deposits; to provide cheque facilities;⁴ to collect and pay cheques, bills and dividends; to grant loans to customers and arrange for overdraft facilities; to discount bills; to open letters of credit; to issue travellers' cheques; to transact foreign exchange business;⁵ to provide safe-deposit strong-room facilities for clients' valuables; to transact stock and share business ⁶ on behalf of their clients and hold securities in safe custody.

Banks write "insurance" type contracts⁷ with depositors and borrowers. Thus, personal, corporate and bank depositors are assured that their deposits can be redeemed at full value.

Retail banking involves business with individuals and small businesses. Wholesale banking involves business primarily with other large banks, as well as some business with governments and very large multinational companies.

The more recent development in banking is the merging of investment and commercial banking. Investment banking involves information intermediation and underwriting roles.

In addition, offshore banking, which is part of a country's banking business that is denominated in foreign currencies and transacted between foreigners, is developing too.

Since banks must always be able to meet demands for withdrawals, either immediately or at short notice, they keep a certain percentage of their deposits in actual cash with the Central Bank. This so called Cash Ratio is carefully guarded by banks through their credit policy. Bankers are cautious men and, besides organizing the first line of defence – maintaining the Cash Ratio, they guard carefully another percentage, which is the liquidity ratio, or near money i.e. cash, money at call and Treasury Bills, in their assets.

B. DIALOGUE