The commercial banks by fanzhongqing

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									The commercial banks

Commercial banks tend to be
large national banks, with a large
number of local branches. They
provide a wide range of banking
services they are public limited
companies, they are in business
to earn profits for their
shareholders.
  This means that they must arrange
 their assets (i.e. their loans) so as to
   earn the highest possible rates of
interest. On the other hand, they must
     look after the interests of their
depositors. The banks must make sure
    that they can always meet their
   depositors' demands for cash. The
    banks, therefore, have two main
  objectives, profitability and liquidity.
               Liquidity

  An asset is said to be liquid when it can easily
and quickly be converted into cash. Notes, coins
   and bank deposits held in current accounts,
therefore, are the most liquid of all assets. Time
 deposits in banks and building society deposits
 are not completely liquid, but they are still very
   liquid assets because they can be converted
     into cash fairly easily and with little delay.
     Profitability and
         liquidity
The need to have liquid assets and the
desire to make as much profit as
possible present the banks with a
problem. The rates of interest on
short-term loans tend to be lower than
those on long-term loans. The banks
are taking bigger risks when they lend
money for long periods, and hence
they charge higher rates of interest.
Long-term loans, however, are illiquid
assets
       Bank deposits
  Bank deposits may be seen as claims to cash
(notes and coin) because they can be converted
   into cash, either on demand or after some
  period of notice. The banks, however, do not
  have to keep cash reserves equal to the total
    value of their deposits. People with bank
     deposits normally use cash for smaller
payments; for larger payments they tend to use
   their cheque books. This means that bank
  depositors will normally only demand a small
percentage of their bank deposits in the form of
                      cash.
       Types of bank deposit
   Current accounts: A person who holds
    money in a current account can withdraw
    cash on demand. Holders of current
    accounts are given cheque books and can
    make payments from their bank deposits
    by cheque. Interest is not usually paid on
    money in current accounts. Aka. sight
    deposits or demand deposits
       Types of bank deposit
   Time deposits: Money placed in a time
    deposit earns interest. It cannot be
    withdrawn on demand or transfcrred by
    means of a cheque. The bank normally
    requires several days' notice of
    withdrawal.
             Banking services
1.   Receiving deposits: Bank deposits are a safe and
     convenient way of holding money. Banks will also act as
     a safe deposit for valuables other than money.
2.   Making Loans
3.   Making payments :
    The cheque system
    Standing orders: These enable depositors to
     instruct their banks to make regular payments of
     fixed amounts. They are very useful for paying
     for such items as rent, rates, insurance
     premiums, mortgage payments and so on.
       Credit cards
These plastic cards (e.g. Access
and Barclaycard) are now widely
used by bank depositors. They
enable cardholders to buy goods
and services from
      Direct debits
Some bills are payable at regular
intervals, but the amounts are variable.
Obvious examples are the quarterly
bills for the electricity, gas and
tele-phone services. Direct debits are
instructions to a banker to pay these
bills, whatever their amounts, when
they fall due
    Making Payments (contd.)
 Cash Dispensers
 Travellers Cheques and foreign currency
             Making Loans
 This is the most profitable activity of the
  bank. It is apart of the banks core
  business.
 Bank loans
 Bank overdrafts
 Bank loan and security
The clearing of cheques
 In a banking system with several
 different banks, it is very likely that
 many people making payments by
 cheque will have their accounts at
 different banks from the people
 receiving the payments.
                  Example
    suppose that Mr. Jones, with an account at
  Scotia-Bank, buys a second-hand car for $5000
   from Mr Smith and pays for it by cheque. Mr
  Smith then pays this cheque into his own bank,
    say Commonwealth. Now Mr Smith cannot
receive payment until $5000 has been transferred
from Mr. Jones's account at Scotia to his account
   at Commonwealth. Every day millions of such
   cheques are paid into the banks. It would be
 impossible to transfer money for each individual
                     payment.
        Example (cont’d)
In order to deal with this problem, the
banks have cooperated to set up a
cheque clearing system. Cheques which
are drawn on one bank and are payable
to another bank are sent to a clearing
house
        Other Bank services
 Help and advice with the investment of
  money
 Acts as executors of wills
 Insurance services through subsidiaries
 Operates unit trusts
              Remember
 Bank deposits are claim to cash
 Banks depend on their financial assets to
  make a profit
 Assets of bank
 Liabilities of bank
 Bank creates money when a loan is made:
  See page 127: Stanlake.
                Problems
1.   Putting your money into a building
     society is one way of saving money.
     Name 2 other ways of saving money
2.   Give 2 reasons why people might save
     money. Explain your answer.
3.   What is a Commercial Bank?
4.   List and explain two types of bank loans.
5.   List and explain one asset and one
     liability of the bank
The End

								
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