UNIT 12.

BANKING
LEARNING OBJECTIVES
After you have read and studied this unit, you should be able to
• Understand banking products and services and different types of banks
• Discuss the subprime crisis and microfinance

KEY TERMS

• deposit - to place money in a bank; or money placed in a bank

• liquidity - available cash, and how easily other assets can be turned into cash
• collateral- anything that acts as a security or guarantee for a loan
• A mortgage - a type of loan used to purchase or maintain a home, land, or other
types of real estate. The borrower agrees to pay the lender over time, typically in a
series of regular payments that are divided into principal and interest. The property
then serves as collateral to secure the loan.
• Overdraft- Something that occurs when you make a purchase with your debit card
or write a check for an amount that exceeds your checking account’s available
balance. Many bank accounts offer overdraft protection to help avoid overdraft
fees. Some banks don’t charge overdraft fees at all.
• A current account - an account at a bank against which checks can be drawn by
the account depositor; a checking account.
• A savings account - a deposit account that generally earns higher interest than an
interest-bearing checking account. Savings accounts limit the number of certain
types of transfers or withdrawals you can make from the account each monthly
statement cycle.
• A deposit account - a bank account maintained by a financial institution in which
a customer can deposit and withdraw money.
• Solvency- When banks have enough money to cover potential losses. Banks are
expected to maintain a sufficient level of capital to remain solvent and avoid
failure. The FDIC and other federal regulators work with banks to maintain
standards for solvency.
• Maturity date: This is the date of expiration for the contractual obligation of a
financial instrument. For example, certificates of deposit have a maturity date that
depends on the length of the CD term. When the CD matures, you have the option
to withdraw the money. Some banks and credit unions also allow you to roll it into
a new CD or enable the CD to renew automatically.

LEAD- IN
Which of the following banking products or services do you find the most useful or necessary?
- a current account (BrE) or checking account - buying or selling foreign currency for
(AmE) travelling (BrE) or travelling (AmE)
- a savings or deposit account (BrE) or time - a mortgage (a loan to buy property (BrE) or
or notice account (AmE) real estate (AmE)
- cashpoints (BrE) or ATMs (Automated
Teller Machines, AmE)
 - a chequebook (BrE) or checkbook (AmE) - an overdraft (the possibility to borrow
- a credit card money by spending more than you have in
your bank account)
- a debit card
- investment advice
- a loan
- Internet banking (payments, transfers)
- telephone banking (payments, transfers)

What other banking services do businesses use?

READING 1:
The Goldsmith bankers were an early example of a financial intermediary.
A financial intermediary is an institution that specializes in bringing lenders and borrowers
together.
A commercial bank borrows money from the public, creating them with a deposit. The deposit is a
liability of the bank. It is money owed to depositors. In turn the banks lend money to firms,
households, or governments wishing to borrow.
Banks are not the only financial intermediaries. Insurance companies, pension funds, and building
societies also take in money in order to relend it. The crucial feature of banks is that some of their
liabilities are used as a means of payment, and are therefore part of the money stock.
Commercial banks are financial intermediaries with a government license to make loans and issue
deposits, including deposits against which cheques can be written. We begin by looking at the
present-day UK banking system. Although the details vary from country to country, the general
principle is much the same everywhere.
In the UK, the commercial banking system comprises about 600 registered banks, the National
Giro-bank operating through post offices, and about a dozen trustee savings banks. Much the most
important single group is the London clearing banks. The clearing banks are so named because they
have a central clearing house for handling payments by cheque.
A clearing system is a set of arrangements in which debts between banks are settled by adding up
all the transactions in a given period and paying only the net amounts needed to balance inter–bank
accounts.
Suppose you bank with Barclays but visit a supermarket that banks with Lloyds. To pay for your
shopping you write a cheque against your deposit at Barclays. The supermarket pays this cheque
into its account at Lloyds. In turn, Lloyds presents the cheque to Barclays which will credit Lloyds’
account at Barclays and debit your account at Barclays by an equivalent amount. Because you
purchased goods from a supermarket using a different bank, a transfer of funds between the two
banks is required. Crediting or debiting one bank’s account at another bank is the simplest way to
achieve this.
However, on the same day someone else, call her Joan Groover, is probably writing a cheque on a
Lloyd’s deposit account to pay for some stereo equipment from a shop banking with Barclays. The
stereo shop pays the cheque into its Barclay’s account, increasing its deposit. Barclays then pay the
cheque into its account at Lloyds where Ms Groover’s account is simultaneously debited. Now the
transfer flows from Lloyds to Barclays.
Although in both cases the cheque writer’s account is debited and the cheque recipient’s account is
credited, it does not make sense for the two banks to make two separate inter-bank transactions
between themselves. The clearing system calculates the net flows between the member clearing
banks and these are the settlements that they make between themselves. Thus, the system of clearing
cheques represents another way society reduces the costs of making transactions.
Read the passage and decide if the following statements are T (True), F (False), or NG (Not
given):
1. The role of a financial intermediary serves as a bridge to link lenders and borrowers
2. Banks are the biggest financial intermediaries.
3. Commercial banks are not allowed to lend and issue deposits.
4. Besides banks, there are other types of financial intermediaries, among which are insurance
companies.
5. In a clearing system, debts between banks are settled by adding up all the transactions.
6. Settlements made between member clearing banks are calculated by the clearing system.
7. Society can benefit from the system of clearing cheques as it makes the costs of transactions
lower.
8. Because you used a separate bank to pay for your grocery purchases, a money transfer between
the two banks is necessary.
Fill in the blanks with suitable words
Lender of last resort, Fixed, Transfer, Bankruptcy, Target, Stability, Cheques

1. A ________________ of funds between the two banks is required if you purchased goods from
a supermarket using a different bank.
2. A lot of small companies are in danger of ________________ because of the worse economic
situation in the country and in the world.
3. For processing ________________ as payment, the clearing banks have a central clearing
house.
4. When prices are ________________ by the government, it means that the market mechanism
is not working.
5. The government sets an inflation ________________ and the Bank’s Monetary Policy
Committee tries to meet it by raising or lowering the official interest rate when necessary.
6. The Bank sometimes acts as ________________ to financial institutions in difficulty, to prevent
panic or a loss of confidence spreading through the whole financial system.
7. In addition, the ESCB contributes to the smooth conduct of policies relating to the supervision
of credit institutions and the ________________ of the financial system.

READING 2: Insert the names of the following types of financial institutions in the spaces in
the text.
Banks and financial institutions
commercial banks hedge funds investment banks stockbrokers
Islamic banks non-bank financial intermediaries private banks
Retail banks or (1) _______________ (often called High Street banks in Britain) receive deposits
from and make loans to, individuals and small companies. (2) _______________ work with big
companies, giving financial advice, raising capital by issuing stocks or shares and bonds, arranging
mergers and takeover bids, and so on. They also generally offer stockbroking and portfolio
management services to rich corporate and individual clients. Wealthy individuals can also use (3)
_______________ which provide them with banking and investment services, and (4)
_______________, which are private investment funds for wealthy investors (both individuals and
institutions) that use a wider variety of (risky) investing strategies than traditional investment funds,
in order to achieve higher returns.
In the USA, where many banks went bankrupt following the Wall Street Crash in 1929, a law was
passed in 1934 (the Glass-Steagall Act) that separated commercial banks and investment banks or
stockbroking firms. For the rest of the 20th century, there were regulations in the US, Britain and
Japan that prevented commercial banks from doing investment banking business. In other countries,
including Germany and Switzerland, large banks did all kinds of financial business. But starting in
the 1980s, many rules were ended by financial deregulation, and Glass- Steagall was repealed in
1999. Large banks became international conglomerates offering a complete range of financial
services that were previously provided by banks, (5) _______________ and insurance companies.
(6) _______________, in Islamic countries and major financial centres, offer interest-free banking.
They do not pay interest to depositors or charge interest to borrowers, but invest in companies and
share the profits (or losses) with their depositors.
Some car manufacturers, food retailers and department stores now offer products like personal
loans, credit cards and insurance. Technically these are not banks but (7) _______________.
Vocabulary: Find the words or expressions in the text which mean the following:
1. money placed in a bank
2. a sum of money borrowed from a bank
3 the money invested in a business
4. certificates representing part-ownership of a company
5. certificates of debt issued by governments or companies to raise money
6. when one company combines with another one
7. when one company offers to buy or acquire another one
8. buying and selling stocks or shares for clients
9. all the investments owned by an individual or organization
10. the profits made on investments
11. unable to pay debts or continue to do business
12. the ending or relaxing of legal restrictions
13. a group of companies, operating in different fields, which have joined together
14. the price paid for borrowing money, paid to the lenders

CASE STUDY 1:
Jill and Zuki are two friends who want to open a new beauty salon. They are both skilled
hairdressers, but they have not owned their own business before. They are applying for a large bank
loan to help with 'set-up' costs.
1. What 'set-up' costs will need to be paid before the business starts to trade? State two examples.
2. State three questions that the bank manager is likely to ask Jill and Zuki before giving the loan.
Briefly explain why each question is important.
3. Jill and Zuki decide to draw up a business plan. Will this convince the bank manager to give a
loan? Explain your answer.

CASE STUDY 2
The directors of a public limited company are planning to double the size of the existing factory.
This will cost $5m. The company already has substantial long-term loans. The directors still
control just over 50% of the shares between them. They are considering four possible sources of
finance: new share issue, long-term loan, overdraft, and retained profits.
Advise the directors on the most suitable method of financing this expansion. Give reasons for
your answer.

VOCABULARY
EXERCISE 1. Put the correct word in each space.
account Coin Currency note wages
change banknotes salary waste borrowed
lent earn spend win Sum back
1. In the USA, "quarters" (25 cents) and "dimes" (10 cents) are types of _______________.
2. In the United Kingdom, "a tenner" means a ten pound _______________.
3. The US dollar, the Yen and the Euro are types of _______________.
4. Hundred dollar bills and twenty-pound notes are _______________.
5. 2,000,000 Swiss francs is a large ______________ of money.
6. I need to ______________ Some Euros into Australian dollars.
7. My friend ________________ a hundred pounds from me.
8. I ________________ a hundred pounds to my friend. When she can, she'll pay me
_____________.
9. I buy a lottery ticket every week, but I never ______________.
10. Most dentists ____________ at least f30,000 a year.
11. _____________ are paid to employees weekly. _____________ are paid to employees monthly.
12. In business, you have to ____________ money to make money.
13. A: Do you have a bank ____________.
B: Yes. I bank with the Bank of Scotland. anything.
14. In my opinion, eating in expensive restaurants is a ______________ of money.

EXERCISE 2. Choose the correct word.

1. Spain now uses the euro. Pesetas are no longer ____________.
a. good money b. legal money c. legal tender
2. I bought a TV which doesn't work. I'll take it back to the shop to get ____________.
a. my money returned b. a refund c. a repayment
3. In a shop, to get a refund, you usually have to show the ____________.
a. receipt b. recipe c. payment ticket
4. I'm paying for my new car in 36 monthly ____________.
a. instalments b. pieces c. parts
5. l earn a lot of money, but I have a lot of ____________.
a. payouts b. expenses c. paying
6. Famous paintings are usually sold by____________.
a. bid b. highest price c. auction
7. In an auction, the item is sold to the person who makes the highest ____________.
a. bid b. price c. offer
8. In Japan, the US dollar is ____________.
a. foreign money b. strange money c. a foreign currency
9. In Britain, it's not usual to discuss your personal ____________
a. money b. finances c. money arrangements
10. You can ____________ a house and ____________ a car.
a. hire / rent b. hire / hire c. rent /rent or hire
11. Here's the fifty dollars I ____________
a. owe you b. pay you back c. must return
12. The best things in life are ____________
a. free b. not for sale c. not bought and sold
EXERCISE 3. Complete the text using these words:
accounts bank loan cheque customers’
current account debt depositors deposits
lend liabilities liquidity optimize
overdraft salary spread standing order
return transfer wages withdraw

Commercial banks are businesses that trade in money. They receive and hold (1) ____________,
pay money according to (2) ____________ instructions, (3) ____________ money, etc.
There are still many people in Britain who do not have a bank (4) ____________ Traditionally,
factory workers were paid (5) ____________ in cash on Fridays. Non-manual workers, however,
usually receive a monthly (6) ____________ in the form of a cheque or a (7) ____________ paid
directly into their bank account.
A (8) ____________ usually pays little or no interest, but allows the holder to (9) ____________
his or her cash with no restrictions. Deposit accounts pay interest. They do not usually provide (10)
____________ facilities, and notice is often required to withdraw money. (11) ____________ and
direct debits are ways of paying regular bills at regular intervals.
Banks offer both loans and overdrafts. A (12) ____________ is a fixed sum of money, lent for a
fixed period, on which interest is paid, bank usually require some form of security or guarantee
before lending. An (13) ____________ is an arrangement by which a customer can overdraw an
account, i.e. run up a debt to an agreed limit; interest on the (14) ____________ is calculated daily.
Banks make a profit from the (15) ____________ 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) ____________ rarely withdraw all their money at the same time. In order
to (17) ____________ the return on their assets (loans), bankers have to find a balance between
yield and risk, and (18) ____________ and different maturities, and match these with their (19)
____________ (deposits). The maturity of a loan is how long it will last; the yield of the loan is its
annual (20) ____________ – how much money it pays – expressed as a percentage.

LISTENING
LISTENING 1: EFB, P17, AUDIO7 Listen to a conversation between an online banking
customer and a customer adviser and answer these questions.
1. What problem does Mr Chatterjee have?
2. What does he need to provide to the bank representative?
3. How can he see the page for his account?
4. On the 'Proceed' page, what does the information on the right ask?
5. How can he see his statement?
6. What does Mr Chatterjee do at the end?
7. What does the bank representative tell Mr Chatterjee to do the next time he has a problem?

LISTENING 2: EFB, P54, AUDIO 23 Listen to the three conversations and decide which
aspect of corporate banking the people are discussing. Match the conversations (1-3) to a-c.
a) ___ risk assessment
b) ___ expansion
c) ___ financing international trade

LISTENING 3: EFB, P64, AUDIO 27 Listen to an investment manager talking to a journalist

about the economy. Are these sentences true (T) or false (F)?
1. When consumers pay lower interest rates, their instalment payments go down. (T / F) 2. Lowering
interest rates helps the economy very quickly. (T/F)
3. The currency of a country is always worth less when the central bank lowers interest rates. (T/F)
4. If governments invest in new projects, they will have more debts. (T/F)
LISTENING 4: Listen again and complete these slides from the interview.

LISTENING 5: EFB, P17, AUDIO10 Listen to Caroline, a

trainee retail banker, asking her manager some questions
about a customer's account, then answer the question:
1. What is the problem?
2. When does Mr Müller overdraw his account?
3. What does Mr Müller have to do to be in the black?
4. What does Mr Müller have to pay when he is over his limit?
5. Why is his overdraft expensive?
6. What is the solution?

UNIT REVIEW
1. Which of the banking facilities do you use?
2. What services do commercial banks offer in your country?
3. What changes have there been in personal banking recently?
4. Give the definition of a commercial bank.
5. Give the definition of an investment bank.