B. Predict the answers to the questions before reading

1 A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers that have capital deficits to customers with capital surpluses. Due to their critical status within the financial system and the economy generally, banks are highly regulated in most countries. Most banks operate under a system where they hold only a small reserve of the funds deposited and lend out the rest for profit.

2 A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank, Reserve bank, or Monetary authority. Such a bank does not deal with the general public. It acts essentially as Government’s banker, maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the banker’s bank. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. It also prints the national currency, which usually serves as the nation's legal tender.

3 Commercial or retail banks are businesses that trade in money. They receive and hold deposits, pay money according to customers' instructions, lend money, offer investment advice, exchange foreign currencies, and so on. They make a profit from the difference between the interest rates they pay to lenders or depositors and those they charge to borrowers. Banks also create credit because the money they lend, from their deposits, is generally spent (either on goods or services, or to settle debts), and in this way transferred to another bank account - often by way of a bank transfer or a cheque (check) rather than the use of notes or coins - from where it can be lent to another borrower, and so on. When lending money, bankers have to find a balance between yield and risk, and between liquidity and different maturities.

4 The merchant banksare in many ways different from commercial banks as they deal mainly with businesses. Merchant banks in Britain raise funds for industry on the various financial markets, finance international trade, issue and underwrite securities deal with takeovers and mergers, and issue government bonds. They also generally offer stockbroking and portfolio management services to rich corporate and individual clients. Some merchant banks are known as accepting houses* as they specialise in acceptance credit*. Others are called issuing houses* as they float* new issues of shares on the capital market, both at home and overseas*. Investment banks in the USA are similar, but they can only act as intermediaries offering advisory services, and do not offer loans themselves, investment banks make their profits from the fees and commissions they charge for their services.

5A country's minimum interest rate is usually fixed by the central bank. This is the discount rate, at which the central bank makes secured loans to commercial banks. Banks lend to blue chip borrowers (very safe large companies) at the base rate or the prime rate; all other borrowers pay more, depending on their credit standing (or credit rating, or creditworthiness); the lender’s estimation of their present and future solvency. Borrowers can usually get a lower interest rate if the loan is secured or guaranteed by some kind of asset, known as collateral.

Notes