TYPES OF BANKS

The banking system of a country is made up of a variety of different institutions supervised by the country's central bank. We know state, private, commercial, investment, merchant, and clearing banks. They are all commercial institutions, and as such they have to sell their services.

For the general public and many businesses, banking services are provided by the Commercial banks. These banks offer a wide range of banking services, e.g., accepting and holding deposits, managing customers' accounts, providing credit cards, arranging loans, arranging mortgages and insurance. Customers can open current (or cheque) accounts, savings and deposit accounts. Commercial banks issue Letters of credit, collect payments, discount bills of exchange, handle foreign currency transactions, and trade in securities. They act as profit-making companies as they sell their services. They make a profit from the difference (known as a spread or a margin) between the interest rates they pay to lenders or depositors and those they charge to borrowers. Commercial banks invest into public and corporate securities.

Merchant banks do not deal with the public but specialize in providing services to companies, raising capital for industry and financing international trade. They advise companies on corporate finance, on flotation’s and takeover bids. Banks issue and underwrite securities, and manage investment portfolios of rich corporate and individual clients. They are particularly active in arranging mergers and acquisitions.

Investment banks provide finance for companies by buying stocks and securities and selling them in smaller units to members of the public. They can only act as intermediaries offering advisory services, and do not offer loans themselves. These banks make their profits from the fees and commissions they charge for their services.

The distinction between different kinds of banking has become less clear in recent years. Deregulation in the USA and Britain is leading to the creation of 'financial supermarkets', such conglomerates combining the services offered by banks, stockbrokers, insurance companies and so on. In some European countries, notably Germany, Switzerland and Austria, there have always been universal banks combining deposit and loan banking, share and bond dealing, investment services.

The central bank looks after the government's finance and monetary policy and also acts as banker to other banks. It has 4 main functions.

1. The first one is to implement monetary policy. There are roughly 3 ways to do it. First is setting interest rate ceilings and floors, which means limiting the fluctuations of the interest rate. The second way to implement monetary policy is simply printing money, or destroying it – coins, banknotes. The third is buying and selling government bonds to and from commercial banks.

2. The second one is exchange rate supervision, mainly for floating exchange rates. But even for a fixed exchange rate the central bank still has to make sure that it has enough reserves to counteract any upswing or downswing of this exchange rate.

3. The third main task is commercial banking supervision – that is making sure that the commercial banks have enough liquidity, for instance, to avoid any bank run. The bank run is a sort of panic, a situation in which investors or customers run to the bank and take their money out because they realize or they think they realize that their bank is not trustworthy any more.

4. The fourth main task of the central bank would be to act as a lender of last resort in case one of these commercial banks goes bankrupt and the investors have to get back their money.

In some countries the central bank is independent from the government, in others it is controlled by the government. In the former case the government will be unable to instigate expansionary policies, either to boost an economy in a recession, or to increase money supply before elections to favour employment. Of course, this has a negative effect on inflation. It's more efficient for a separate body to implement monetary policy while the government implements budgetary policy and taxation.

The two most independent central banks are in Switzerland and Germany. Italy has a quite an independent central bank. The American Federal Reserve Board, the Fed, is slightly independent. France is being slowly privatized and made independent. But the Bank of England, the Bank of Japan and the Chinese central bank are examples of central banks, which are influenced by the government. It is generally accepted that the independent bank is a model for the future. Though it should not be completely independent. The independence should be adapted to the economic conditions in the country and outside the country.

Task 8. Translate into English: