Tabl. 7 shows the balance sheet of the London clearing banks. Although more complex, it is not fundamentally different from the balance sheet of the goldsmith-banker shown in bl 6. We'll begin by discussing the asset side of the balance sheet.
bl. 7. Balance Sheet of London Clearing banks
| Assets | £b | Liabilities | £b |
| Sterling: Cash Bills & market loans Advances Securities Lending in other currencies Miscellaneous assets TOTAL ASSETS | 2,9 34,7 83,0 9,4 54,6 15,5 200,1 | Sterling: Sight deposits Time deposits CDs Deposits in other currencies Miscellaneous liabilities TOTAL LIABILITIES | 54,1 59,9 8,1 46,2 31,8 200,1 |
Cash assets are notes and coin in the banks' vaults. However, modem banks' cash assets also include their cash reserves deposited with the Bank of England. The Bank of England (usually known as the Bank) is the central bank or banker to the commercial banks.
Apart from cash, the other entries on the asset side of the balance sheet show money that has been lent out or used to purchase interest-earning assets. The second item, bills and market loans, shows short-term lending in liquid assets.
Liquidity refers to the speed and the certainty with which an asset can be converted back into money, whenever the asset-holders desire. Money itself is thus the most liquid asset of all.
The third item, advances, shows lending to households and firms. A firm that has borrowed to see it through a sticky period may not be able to repay whenever the bank demands. Thus, although advances represent the major share of clearing bank lending, they are not very liquid forms of bank lending. The fourth item, securities, shows bank purchases of interest-bearing long-term financial assets. These can be government bonds or industrial shares. Although these assets are traded daily on the stock exchange, so in principle these securities can be cashed in any time the bank wishes, their price fluctuates from day to day. Banks cannot be certain how much they will get when they sell out. Hence financial investment in securities is also illiquid.
The final two items on the asset side of the balance sheet show lending in foreign currencies and miscellaneous bank assets. Total assets of the London clearing banks were £200,1 billion. We now shall examine how the equivalent liabilities were made up.
Deposits are chiefly of two kinds: sight deposits and time deposits. Whereas sight deposits can be -withdrawn on sight whenever the depositor wishes, a minimum period of notification must be given before time deposits can be withdrawn. Sight deposits are the bank accounts against, which we write cheques, thereby running down our deposits without giving the bank any prior warning. Whereas most banks do not pay interest on sight deposits or cheque (checking) accounts, they can afford to pay interest on time deposits. Since they have notification of any withdrawals, they have plenty of time to sell off some of their high- interest investments or call in some of their high-interest loans in order to have the money to pay out deposits.
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Certificates of deposit (CDs) are an extreme form of time deposit where the bank borrows from the public for a specified period of time and knows exactly when the loan must be repaid. The final liability items in bl 7 show deposits in foreign currencies, miscellaneous liabilities, such as cheques, in the process of clearing.
VOCABULARY NOTES
a financial intermediary
to bring together ,
insurance companies
pension funds
the money stock ,
to issue deposits
the National Girobank .
trustee saving banks
London clearing banks ( )
a central clearing house
inter-bank accounts
Barclays ()
Lloyds ()
to credit
to debit
cheque recipient
cash assets
the Bank of England ,
interest-earning (syn. interest-bearing) assets ,
bills and market loans
short-term lending
liquid (ant. illiquid) assets
liquidity
advances
a sticky period
securities
interest-bearing long-term financial assets ,
government bonds
industrial shares
the stock exchange
miscellaneous bank assets
sight deposit ;
time deposit
to withdraw ()
to run down a deposit
cheque (checking) accounts ()
to sell off
call in high-interest loans ( )
certificates of deposit
miscellaneous liabilities ()
Assignments
I. Suggest the Russian equivalents
institution that brings lenders and borrowers together; crediting them with a deposit; with a government licence; as a means of payment; handling payments by cheque; a set of arrangements; adding up all the transactions; to balance inter-bank accounts; the net amount; to calculate the net flows between banks;
costs of making transactions; cash assets are notes and coin; to purchase interest-earning assets; bills and market loans; asset-holders; lending to households and firms; the major share of clearing bank lending; interest-bearing long-term financial assets; price fluctuates; a period of notification;
high-interest investments
II. Replace the parts in italics by synonyms
debited at the same time; interest-bearing assets; current assets; to support the firm f a difficult period of time; firms may not be able to repay when the bank demands; demand deposit; to draw money from a bank account
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III. Fill in the gaps with the words and expressions from the text
1. A financial intermediary is an institution that specializes in __.
2. A commercial bank __ money from the public, __ them with a deposit, which is __ of the bank.
3. As liabilities are used as __, and are part of __.
4. Commercial banks are __ with a government licence to __ and__.
5. The clearing banks are so named because they have __ for __.
6. A clearing system is a set of __ in which __ between banks are __.
7. Lloyds presents the cheque to Barclays, which will __ Lloyds' account at Barclays and __ your account at Barclays by __ amount.
8. Because you purchased goods from a supermarket using __, __ between the two banks is required.
9. Barclays then __ into its account at Lloyds where this person's account is __.
10. The clearing system calculates __ between the member clearing banks, thus representing another way society __ of making transactions.
11. Modem banks' __ include notes and coin in the banks' vaults and their __ deposited with __.
12. The other entries on the asset side of __ show money that has been __ or used to purchase __.
13. The second item, __, shows __.
14. Money itself is thus __ asset of all.
15. The third item, __, shows lending to ___.
16. Although advances represent __ of clearing bank lending, they are not __ of bank lending.
17. The fourth item, __, shows bank purchases of __, which can be __ or__.
18. Although these assets are traded daily on __, their price __ from day to day, hence financial investment in securities is also __.
19. Deposits are chiefly of two kinds: __ and __.
20. Whereas __ can be withdrawn __ whenever the depositor wishes, without giving the bank __, a minimum __ must be given before __ can be __.
21. Whereas most banks do not pay interest on __ or __, they can afford to pay interest on __.
22. Since they have notification of any withdrawals, they have plenty of time to sell of ___ or call in ___ in order to have the money to pay out deposits.
23. CDs are an __ form of __ where the bank borrows from the public for __ and knows exactly when ___.
IV. Increase your vocabulary
Prepositions
to borrow from, to purchase from
to bank with; to deposit with
to credit with; to lend to
to take in; to call in loans
to write a cheque against a deposit
to pay the cheque into account
an account at a bank
Make sentences of your own using these phrases.
V. Find in the text English equivalents/or the following
; ; ;
; ; ; ; ; ; ; ; ; (); ; ;
; ; ; ; ; ; ; ;
; - ; ; ; ; ( ); ;
; ; () ; ;
VI. Explain in English
the National Girobank; cash assets; cash reserves; interest-earning assets;
asset-holders; liquid assets; illiquid assets; sight deposits; time deposits
VII. Answer the questions
1. What's a financial intermediary? Name different financial intermediaries.
2. What's a deposit?
3. What's a bank liability? In what way are the bank liabilities part of the money stock?
4. What's a commercial bank?
5. What's a clearing bank?
6. What's a clearing system? How does it work? Draw a scheme showing how the system works.
7. What's the role of the Bank of England?
8. What do assets include? Dwell on each item.
9. What's liquidity? Why is money itself the most liquid asset? Why aren't advances very liquid forms of bank lending?
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10. What do liabilities include? Dwell on each item.
VIII. Translate into English using all the active possible
1. () , .
2. .
3. . . , , . , . , . , . , , . .
4. , . , . , . . . . , .
MONEY AND THE RETURN IT EARNS ( , )
Fundamental to all financial markets is the idea of earning a return on money. Money has to work for its owner. Here are some of the ways it can do so:
1. You deposit $1,000 with a bank, which pays you, say, 10 per cent a year interest. In other words, your $1,000 of capital earns you $100 a year, which is the return on your money. When you want your $1,000 back you get $1,000, plus any accumulated interest, not more or less. Provided your bank does not go bust, your $1,000 of capital is not at risk, except from inflation, which may reduce its purchasing power each year.
2. You buy gold bullion to a value of $1,000 because you think the price of gold will rise. If the price of gold has risen by 20% after a year, you can sell your gold for $1,200. You have made a profit or a capital gain, of $200 on your capital outlay of $1,000. In other words you have a return of 20% on your money. If the price of gold fails to move, you've earned nothing because commodities like gold do not pay interest.
3. You use your $1,000 to buy securities that are traded on a stockmarket. Usually these will be government bonds (known as gilt-edged securities or gilts in the UK) or ordinary shares in a company. The former always provide an income; the latter normally do. Traditional gilt-edged securities pay a fixed rate of interest. Ordinary shares in companies normally pay a dividend from the profits the company earns. If the company's profits rise, the dividend is likely to be increased; but there is no guarantee that there will be a dividend at all. If the company makes losses, it may have to cease paying a dividend.
But when you buy securities that are traded on a stockmarket, the return on your $1,000 is not limited to the interest or dividends you receive. The prices of these securities will also rise and fall, and your original $1,000 investment accordingly becomes worth more or less. So you are taking the risk of capital gains or capital losses.
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Suppose you buy $1,000 worth of ordinary shares, which pay you a dividend of $40 a year. You are getting a return or dividend yield of 4% a year on your investment ($40 as a percentage of $1,000). If after a year the market value of your $1,000 of shares has risen to $1,100, you can sell them for a capital gain of $100 (or a 10% profit on your original outlay). Thus your overall return over a year consists of the $40 income and the $100 capital gain:
a total of $140 or a 14% overall return on your original $1,000 investment.
Investors are generally prepared to accept much lower initial yields on shares than on fixed-interest stocks because they expect the income to rise in the future. Most investors in ordinary shares are seeking capital gains at least as much as income. Note that if you are buying a security, you are taking the risk that the price may fall whether it is a government bond or a share. But with the government bond the income is at least guaranteed by the government. With the share there is a second layer of risk. the company may not earn sufficient profits to pay a dividend.
To summarize: money can be deposited to produce an income; it can be used to buy commodities or goods, which arc expected to rise in value; or it can be invested in stockmarket securities, which normally produce an income but show capital gains or losses as well. Of course, there are many variations on each of these items.
VOCABULARY NOTES
an accumulated interest
provided (syn. providing)
to go bust (syn. to go bankrupt)
a capital gain ( ; )
capital outlay
gilt-edged securities (gilts) ( ) (c. )
ordinary shares
a fixed rate of interest
pay a dividend
to cease
a capital loss ( )
a yield ( )
a dividend yield
overall return ,
a second layer of risk
a layer
Assignments
I. Suggest the Russian equivalents
the idea of earning a return on money; your $1,000 of capital earns you $100 a year; a profit or a capital gain of $200 on your capital outlay of $1,000;
commodities like gold do not pay interest; securities that are traded on a stockmarket; your overall return over a year; most investors in ordinary shares are seeking capital gains at least as much as income; there is a second layer of risk; the company may not earn sufficient profits to pay a dividend; so you are taking the risk of capital gains and capital losses
II. Replace the parts in italics by synonyms
in case your bank does not go bankrupt; securities that are bought and sold on a stockmarket; to earn profits enough to pay a dividend.
III. Fill in the gaps with the words and expressions from the text
1. Fundamental to all financial markets is the idea of.__.
2. Your $1,000 of__ earns you $100 a year, which is __ on your money.
3. When you want your $1,000 back you get __.
4. Provided your bank does not __, your $1,000 of capital is __.
5. You may buy __, but if the price of gold fails to move, you've earned __ because commodities like gold __.
6. Of all __ traded on a stockmarket __ always provide an income, __ normally do, and traditional __ pay __.
7. Ordinary shares in companies normally pay __ the company __.
8. When you buy securities that are traded on __, the return is not limited to __ or __ you receive.
9. If the market value of your shares has risen, your __ over a year consists of __ and __.
10. Investors are generally prepared to accept __ on shares than on __ stocks because they expect the income __.
11. Most investors in ordinary shares are seeking __ at least as much as __.
12. With the government bond the income is at least __.
13. If the company does not __, it may __ to pay __.
IV. Find in the text English equivalents for the following
; ; , ...; ; ; ; ; ; ; ; ; ; ; () (2 ); ( );
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V. Explain in English
a capital gain; a capital loss; a return; an overall return; a dividend yield; a fixed rate of interest.
VI. Answer the questions
1. What are the ways of earning a return on money?
2. What are gilt-edged securities? Who issues them? Why are they considered to be of the highest class?
3. In what cases does the investor take the risk of capital gains? Capital losses?.
4. Which way of earning a return do you consider the safest and most profitable other things being equal?
VII. Translate into English using all the active possible
1. .
2. - , , .
3. .
4. , . , , , , , , .
5. , $100. $10, 10%, 100- 10 . 100 , () , 10 . , .
6. 20 , (10%), , . , ( ) .
INTEREST RATES AND BOND PRICES ( )
The change in interest rates has important implications for the stockmarket prices of bonds, which pay a fixed rate of interest: fixed-interest securities, of which the traditional gilt-edged securities issued by the government arc the most familiar though companies also issue fixed-interest bonds. It works like this.
Gilt-edged securities are a form of IOU (I owe you) or promissory note issued by the government when it needs to borrow money. The government undertakes to pay so much a year in interest to the people who put up the money and who get the IOU in exchange. Normally the government agrees to redeem the stock at some date in the future, but to illustrate the interest rate mechanism it is easiest initially to take an irredeemable or undated stock, which does not have to be repaid.
The original investors who lend the money to the government do not have to hold on to the lOUs. They can sell them to other investors, who then become entitled to receive the interest from the government. Suppose the government needs to borrow money at a time when investors would expect an 11% yield on a gilt-edged security. It oners $11 a year interest for every $100 it borrows. The investor is prepared to pay $100 for the right to receive $11 a year interest, because this represents an 11% return on his outlay.
Then suppose that interest rates rise to a point where an investor would expect a 12,5% return if he bought a gilt-edged security. He will no longer pay $100 for the right to $11 a year in income. He will only be prepared to pay a price that gives him a 12,5% return on his outlay. The "right" price in this case is $88, because if he pays only $88 to receive $11 a year in income, he is getting a 12,5% return on his investment. So in the stockmarket the price of the gilt-edged security that pays $11 a year interest will have to fall to $88 before investors are prepared to buy it. The original investor who paid $100 thus sees the value of his investment fall because of the rise in interest rates. Conversely, the value of his investment would have risen if interest rates had fallen.
To summarize: If interest rates on securities go down, bond prices or prices for securities go up, and vise versa.
VOCABULARY NOTES
a promissory note
to put up the money
to redeem ( )
irredeemable stock
undated stock
to hold on (to smth) -, -
vise versa
Assignments
I. Suggest the Russian equivalents
pay a fixed rate of interest: fixed-interest securities; IOU; become entitled to receive the interest; the original investor.
II. Replace the parts in italics by synonyms
has important implications; undertakes to pay; people who put up the money; agrees to redeem the stock; become entitled to receive the interest
III. Fill in the gaps with the words and expressions from the text
1. The change in __ has important implications for the stockmarket prices of bonds, which __.
2. Of fixed-interest securities the traditional __ issued by __ arc the most familiar though companies also issue __.
3. When the government needs to borrow money, it issues __ as a form of __ and undertakes to pay so much a year in interest to the people who __ and who get the IOU __.
4. When the government __ securities, it normally agrees __ the stock at some date in the future.
5. The original investors can sell their __ to other __, who then become __ from the government.
6. The investor __ to pay $100 for the right to receive __, because this represents an 11% __ on his __.
7. If __ rates rise, the __ investor sees __ fall.
8. __, the value of his investment __ if interest rates had fallen.
9. If interest rates on securities __, bond prices or prices for securities __, and __.
IV. Find in the text English equivalents for the following ; ( ); , (2 )
V. Explain in English
promissory note; IOU; fixed-interest securities; irredeemable (undated) stock
VI. Answer the questions
1. What does the government do when it needs to borrow money?
2. What are the implications of the change in interest rates for the stockmarket prices of bonds? Explain how it works.
VII. Translate into English using all the active possible
1. , , , .
2. , .
3. 500000 , .
4. , , .
THE MONEY SUPPLY AND THE DEMAND FOR MONEY ( )
