UNIT 3

Exercise 1

TYPES OF BANKS

This exercise defines the most important kinds of bank. Complete the text using these words:

central bank building society finance house

commercial banks merchant banks investment banks
supranational banks universal banks

(1) Central bank supervise the banking system; fix the minimum interest rate; issue bank
notes; control the money supply; influence exchange rates; and act as lender of last resort.

(2) Commercial banks are businesses that trade in money. They receive and hold deposits in
current and saving accounts, pay money according to customers’ instruction, lend money,
and offer investment advice, foreign exchange facilities, and so on. In some countries such
as England these banks have branches in all major towns; in some other countries there are
smaller regional banks. Under American law; for example, banks can operate in only one
state. Some countries have banks that were originally confined to a single industry, e.g.
the Credit Agricole in France, but these now usually have a wider customer base.

In some European countries, notably germany, Austria, and Switzerland, there are (3)
universal banks which combine deposit and loan banking with share and bond dealing,
investment advice, etc. Yet even universal banks usually form a subsidiary, known as a (4)
finance house , to lend money – at several percent over the base lending rate – for hire
purchase or instalment credit, that is, loans to consumers that are repaid in regular, equal
monthly amounts.

In Britain, the US and Japan, however, there is, or used to be, a strict separation between
commercial banks and banks that do stockbroking or bond dealing. Thus in Britain, (5)
merchant banks specialise in raising funds for industry on the various financial markets,
financing international trade, issuing and underwritng securities, dealing with takeovers and
mergers, issuing government bonds, and so on. They also offer stocbroking and portfolio
managemnet services to rich corporate and individual clients. (6) Investment banks In the
USA are similar, but they can only act as intermediaries offering advisory services, and do
not offer loans themselves.

Yet despite the Glas-Steaall Act in the USA, and Article 65, imposed by the Americans in
Japan in 1945, which enforce this separation, the distinction between commercial and
merchant or investment banks has become less clear in recent years. Deregulation in the US
and Britain is leading to the creation of “financial supermarkets” – conglomerates combining
the services previously offered by stockbrokers, banks, insurance companies, etc.

In Britain there are also (7) building societies that provide morgages, i.e. they lend money to
home-buyers on the security of houses and flats, and attract savers by paying higher interest
 than the banks. The savings and loan associations in the United States served a similar
function, until most of them went spectacularly bankrupt at the end of the 1980s.

There are also (8) supranational banks such as the World Bank or the European Bank for
Reconstruction and Development, which are generally concerned with economic
development.

Exercise 2

COMMERCIAL BANKING

Complete the text using these words: 

accounts bank loans cheque customers’
withdraw         debt                   depositors        deposits
lend                 liabilities                liquidity          optimize
overdraft          salary                   spread current account 
standing orders        return            transfer                wages                     

Commercial banks are businesses that trade in money. They receive and hold (1) deposits, pay
money according to (2) customers instructions, (3) lend money, etc.

There are still many people in Britain who do not have bank (4) accounts. Traditionally, factory
workers were paid (5) wages in cash on Fridays. Non-manual workers, however, usually receive
a monthly (6) salary in the form of a cheque or a (7) transfre paid directly into their bank
account.

A (8) current account (US: checking account) usually pays little or no interest, but allow the
holder to (9) withdraw his or her cash with no restrictions. Deposit accounts (in the US also
called time or notice accounts) pay interest. They do not usually provide (10) cheque (US: check)
facilities, and notice is often required to withdraw money. (11) Standing orders and direct debits
are ways of paying regular bills at regular intervals.

Banks offer both loans and overdrafts. A (12) banks loan is a fixed sum of money, lent for a
fixed period, on which interest is paid; banks usually require some forms of security or guarantee
before lending. An (13) overdraft is an arrangement by which a customer can overdraft an
account, i.e. run up a debt to an agreed limit; interest on the (14) debt is calculated daily.

Banks make a profit from the (15) spread or differential between the interest rates they pay on
deposits and those they charge on loans. They are also able to lend more money than they receive
in deposits because (16) depositors rarely withdraw all their money at the same time. In order to
(17) optimize the return on their assets (loans), bankers have to find a balance between yield and
risk, and (18) liquidity and different maturities, and to match these with their (19) liabilities
(deposits). The maturity of a loan is how long it will last; the yield of a loan is its annual (20)
– return how much money it pays – expressed as a percentage.
Exercise 3

BANKING VERBS

Across

1. “Of course I don’t have that kind of money. I had to borrow it.” (6)
4. See 10 across.
5. “I showed the bank my business plan, and they offered to lend me everything I asked for.”
(4)
7. With the cheque guarantee card, shops know that the bank will honour any cheque up to
$100. (6)
9. “When I discovered my mistake, I immediately called the bank and asked them to stop the
cheque” (4)
10 and 4. The borower was unable to repay the principal, and asked the bank to roll over the
loan. (4, 4)
12. “I had to stand in a queue for fifteen minutes just to cash a five pound cheque.” (4)
13 and 18. down. An important function of a central bank is to act as a lender of last resort
(4, 6)
16. “We nearly went bust, but at the last minute the bank agreed to bail us out.” (4)
19. “When I pointed out to the bank that it was their mistake, they agreed to reimburse me all
the extra charges I’d paid” (9)
21. See 22 across.
22 and 21. When it becomes obvious that it has a bad debt, the bank has to write it off (5, 3)
23. Investment banks usually trade in stocks and bonds. (5)
24. An investment with a high risk is usually compensated by way of a high yield (5)

Down

2. “I can’t borrow anymore; I already owe the bank over $10,000.” (3)
3. “This wonderful piece of plastic allows me to withdraw cash all over Europe!” (8)
4. “With all that money you got for your birthday, you should go and open a savings
account.” (4)
6. “Did you know that they even have machines now where you can deposit as well as take
out money?” (7)
8. Since they clearly could’t afford to pay back the loan then, the bank had to agree to
reschedule the debt. (10)
9. The clearing system makes it much easier to settle inter-bank debts. (6)
11. “They agreed to grant me a loan for six months. (4)
14. “If they make another big mistake like that I’m going to sever all my connections with
that bank.” (5)
15. It is usually the role of the central bank to fix the minimum interest rate. (3)
17. Many Third World countries are unable to service their debts, let alone repay the
principal. (7)
18. See 13 across.
20. Companies generally use investment banks to issue new shares or bonds for them. (5)

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21O F F S 22W R I T E
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23T R A D E 24Y I E L D