UNIT I
FINANCIAL SECTOR
Warm up
1. What organizations make up the financial sector?
2. Can you name some of the largest Russian banks?
3. Which of the services the banks typically offer did you personally use?
Section A
Reading 1
Financial Services Industry
National economy of any country is made up of different industries and business sectors. For the most developed countries the industry of financial services, also known as the finance and insurance industry, is one of the leading ones. Companies, providing financial services, are key players on the money, the currency, the stock, and the futures and derivatives markets. They perform a wide range of operations, such as investing, lending, insurance, securities trading and securities issuance. Financial sector includes such organizations as banks, investment funds, insurance companies, brokerage houses, real estate agencies, accounting and auditing firms, involved in the creation, storage, utilization, management, and manipulation of money.
The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market capitalization. 7% of all employees in the UK belong to the financial services sector. In the USA the proportion of finance industry in all corporate income has been on the rise for many decades. Presently this sector creates 7.5% of the GDP and represents about one fifth of the market capitalization of top 500 American companies. Finance industry in the United States comprises over half of total non-farm business profits.
However this industry is not the largest one in terms of revenue or the number of employees. Individuals often start small businesses that offer personal investment services. The industry is also slow growing and extremely fragmented. Numerous smaller banks and investment companies thrive in it side by side with major Wall Street firms, such as Merrill Lynch, Goldman Sachs and Citigroup.
Discussion
Answer the following questions:
1. Can you name a few markets dominated by financial services companies?
2. What is the share of the group of financial services companies in equity market?
3. What kind of operations do financial services companies perform?
4. Name a few organizations belonging to the financial sector involved in the storage, utilization and management of money.
Reading 2
Types of Banks
There are different types of banking institutions operating in different countries. However, all of them have common features, and the most important of them is making profits by attracting deposits and using the collected money to extend credits at higher interest rates. The bankers consider deposits to be their liabilities and loans are viewed as assets.
Banking organizations can be structured into the following categories:
Commercial or retail banks. Such banks mainly keep checking accounts of their clients, issue credit and debit cards, sell insurance and other financial products, deal in foreign exchange, offer consulting services on tax and investments and provide other basic banking services.
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Investment or merchant banks. Their activities are focused on making profits by helping businesses and other organizations to seek relatively long-term funds and issue shares and bonds. They give advice on mergers and acquisitions, participate in management buy-outs.
Savings banks. Resembling retail banks in the offered services, they cater to the needs of small savers.
Building societies. Their aim is to take deposits and extend long-term loans (mortgages) to homebuyers. These societies offer mortgages and demand-deposit accounts and are often backed by insurance companies. The owners of such organizations are their members.
Universal banks. This category represents a banking system in which banks offer a wide variety of financial services, both commercial and investment. The services may include credit, loans, deposits, asset management, investment advisory services, payment processing, securities transactions, underwriting and financial analysis.
Discussion
Answer the following questions:
1. What banks are most suitable for the needs of retail clients?
2. How do commercial banks typically make money?
3. What are the functions of building societies?
4. What services do universal banks provide?
5. What kind of banks work with small savers?
Reading 3
Commercial Banks
Commercial banks are the most common financial institutions, usually called banks. Typically they handle the banking needs of large and small businesses. However, they can function as retail banks as well, working directly with individual customers. Banks that focus purely on retail clientele are relatively few, and most retail banking is conducted by separate divisions of large and small banks. The term commercial is meant to distinguish such banks from investment ones. But in fact, nowadays many large investment banks establish special divisions that offer the services of commercial or retail banks.
A commercial bank or the commercial division of a bank accepts deposits from customers, raises capital from investors or lenders, and then uses that money to make interest-bearing loans to other customers and offer attractive investment products. Banking loans (such as personal loans, commercial loans, and mortgage loans) are used by people and businesses to buy goods or expand business operations, which in turn leads to more deposited funds that make their way to banks. Efficient allocation of accumulated capital makes the bank more profitable and increases the price of its shares. If a bank can lend money at a higher interest rate than it has to pay for the collected funds, it makes money.
Commercial banks typically provide security and convenience to their customers by offering safe keeping for their money and documents not only in vaults and safe deposit boxes, but also in cash deposits in checking and savings accounts.
As payment agents, banks make commercial transactions much more convenient; it is not necessary to carry around large amounts of physical currency when merchants can accept checks, drafts, debit or credit cards and Letters of credit issued by the banks. Processing payments with the use of such instruments, banks actually underwrite financial transactions by lending their reputation and credibility to the transaction. A check is basically just a promissory note between two people, and without a bank's name and information on that note, no merchant would accept it. The use of debit cards allows account holders to pay for goods without cash at hand and to arrange wire transfers.
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Retail banking likewise is the business of taking deposits, making consumer loans, mortgages and the like, offering different banking products. Customer deposits gathered by retail banking represent an extremely important source of funding for most banks. Retail banking is the banking that almost everybody will find most familiar. Also known as consumer banking or personal banking, retail banking is the visible face of banking to the general public, with bank branches located in abundance in most major cities.
Discussion
Answer the following questions:
1. What kind of banks do small businesses mostly rely on?
2. Why is retail banking an important part in the scope of operations of most banks?
3. Why are the banks interested in extending commercial loans?
4. What do you think must a bank do to be able to increase payments for collected funds?
5. What should commercial banks do to have the price of their shares go up?
6. What are the alternatives of physical currency offered by banks?
7. What are the most popular ways of safe keeping of clients money in banks?
8. What are the uses of debit cards?
Section B
Exercise 1.
a) Translate into Russian the following sentences:
1)After the great depression the U.S. Congress required that commercial banks only engage in banking activities, whereas investment banks were limited to capital market activities. This separation was mostly repealed only in the 1990s.
2)Commercial banks often function as retail banks as well, serving individual members of the public along with businesses.
3)A commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.
4) A commercial bank accepts various types of deposits, payable after a certain time period, such as current account deposits, saving account deposits, fixed deposits.
5) For a client with a variety of financial needs, doing business with a single diversified firm is highly convenient, because this reduces the imperative to shop around for services from different providers and makes unnecessary to have too many accounts and complicated record keeping.
b) Make sure you have learned these expressions in English:
1)
2)
3)
4) ,
5)
UNIT II
RETAIL BANKING
Warm up
1. Can you name some world famous firms, offering investment services?
2. Which of the two banks commercial or investment acts as an intermediary between the issuer of stocks and investors?
3. Are there any reasons for investors to buy bonds issued by companies with a bad credit rating?
Section A
Reading 1
Investment Banking
Investment banks, also called merchant banks, function primarily in higher finance. They play a huge role in the workings of Wall Street and are represented by such giants of financial business as Goldman Sachs, Morgan Stanley, JPMorgan, Wells Fargo, UBS, Credit Suisse and Deutsche Bank.
The main and most traditional function of such financial institutions is to help companies, business owners and even government agencies to raise capital for their operations by selling investment securities to the general public. For example, when a company wants to raise money for expansion or other needs by issuing stocks or bonds, investment bankers facilitate its access to respective markets, introducing there new stock or bond issues through an IPO (initial public offering). By doing so, investment banks act as the agents, brokers or intermediaries between the issuer and investors. They can insure bonds, help to find buyers for the securities, and handle all paperwork, along with a team of lawyers and accountants. On the buy side, such banks work with pension funds, mutual funds, hedge funds and the investing public to help them maximize returns when trading or investing in securities. Of course, the banks charge a commission on the securities they sell or buy.
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But the banks can also earn money by creating securities, including stocks and bonds, and trading them for their own accounts. Besides originating and distributing new security issues, investment banks may underwrite securities by buying large blocks of previously issued shares and then reselling them to institutional investors, such as mutual fund companies. An investment bank can use its own money to speculate in gold futures, acquire call options on gold mining firms or purchase gold bullion for storage in secure vaults.
Performing a variety of other tasks, the banks can act as consultants on mergers, acquisitions and other corporate reorganizations, prepare the company prospectus, which presents important data about the company to potential investors.
For high-net-worth individuals some private banks arrange exclusive wealth management and tax planning. Such investment banking services are more personalized than those of normal retail banks.
Discussion
Answer the following questions:
1. What is the main and most traditional function of merchant banks?
2. What is the role of investment banks in relations between security issuers and investors?
3. What interest do investment banks get for trading in securities on behalf of their clients?
4. In what other ways do investment banks earn money?
5. What do banks do to underwrite securities?
Reading 2
Discussion
Answer the following questions:
1. Why are some banks called universal?
2. What is the main trend in the efforts of financial companies to stay competitive and satisfy a wider range of financial needs of their clients?
3. Do you think that by taking on the functions of commercial banks investment banks make their business riskier?
4. Why are some players of the financial services industry called empires?
5. How did Citigroup emerge and diversify its financial services?
Reading 3
Loans and Bonds
The most significant function of commercial banks is the creation of credit. The banks can extend major loans for real and capital purchases because they are required to hold only a fraction the money deposited by its customers as cash reserves. While sanctioning a loan, they do not provide cash to a customer, but open a deposit account from which the borrower can withdraw.
Historically, commercial banks, as their name implies, drew most of their earnings from commercial and consumer loans. But changes in banking laws enabled them to extend more mortgage loans - the kind of debt instrument used to purchase real estate, such as a home, property or business. In such arrangements commercial banks are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can use its legal right to repossess the house and sell it to recover the originally lent money. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount. Banks also give demand loans to all types of clients against proper security. The loans, where the borrower pledges some asset or property to the creditor as collateral for the loan, are called secured.
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Most of loans however are not secured by connecting them to the borrower's collateral. Instead, almost all monetary loan agreements contain a credit insurance policy that protects the lender if the consumer defaults. The range of unsecured loans is really great: from credit cards for small businessmen to significant credit lines to large corporations. The unsecured loans may also be available from banks in different forms or marketing packages such as bank overdrafts, personal loans, cash credit, bill discounting, money at call, corporate bonds, etc.
When small companies need to borrow, they only rely on bank loans. But well-known big businesses can finance long-term investment projects by issuing bonds. This longer-term debt instrument is used as receipt for the money borrowed from banks, which act as lenders or creditors. The bonds can be traded by banks, making profit on the difference (called spread) between the bid price at which they buy and the offer price at which they sell. If credit standing (rating) of the company goes down, investors into its bonds expect a premium (a higher interest rate, or yield, or coupon) for greater risk. In this case the bonds lose value. However some investors buy such junk bonds as they are prepared to take the risk of default (non-repayment of the principal at maturity) in return for a higher interest rate.
Discussion
Answer the following questions:
1. Why is credit creation an important function of commercial banks?
2. How are mortgage loans secured?
3. What can be done if collateral is not enough to pay off debt?
4. How can a lender protect himself while extending unsecured loans?
5. What happens to the bonds of the company, which faces a credit rating fall?
Section B
Translate the following sentences into Russian:
1. The interest rate at which company is able to borrow largely depends on its credit standing.
2. The main function of investment banks is to help companies, business owners and government agencies to raise capital for their operations by selling investment securities to the general public.
3. When a company wants issue stocks or bonds to raise money, investment bankers facilitate its access to respective markets by introducing there new stock or bond issues through an IPO.
4. Investment banks do not seek cash deposits from customers in the form of checking and savings accounts, and do not make traditional interest-bearing loans to individual customers.
5. Traditionally, large commercial banks underwrite bonds, and have dealings with currency, interest rates, and credit-related securities
6. Large commercial banks usually have an investment branch that is involved in some typically investment related activities.
Part b) Make sure you have learned these expressions in English:
1)
2)
3)
4)
5) ,
6)
Exercise 2.
Part a) Fill in the gaps in the table below.
| Noun | Verb | Person |
| judge | ||
| credit | ||
| competition | ||
| investor | ||
| Share | ||
| manager | ||
| hedge |
