Банковская система Англии

Ministry of Education of Russia

St. Petersburg State University of Economics and Finance

 

 

 

 

 

The banking system of the UK

 

 

 

 

                                                                   Precise on Business English

                                                                       IV year

 

 

 

 

 

 

 

 

 

2005

 

 

Contents

 

INTRODUCTION………………………………………………………….3

 

Unit 1. THE BANKING SYSTEM OF THE UK………………5

1.1. THE BANK OF ENGLAND....................................................................6

1.2. RETAIL BANKS....................................................................................11

1.3. WHOLESALE BANKS (MERCHANT BANKS)....................................13

1.4. DISCOUNT HOUSES..........................................................................14

 

Unit 2. SPECIALIZED BANKS AND NONBANK FINANCIAL        INSTITUTIONS..............................................................................................16

 

2.1. INVESTMENT AND SAVINGS BANKS..............................................16

 

2.2. INVESTMENT TRUSTS AND UNIT TRUSTS.....................................17

 

2.3. PENSION FUNDS AND INSURANCE COMPANIES.........................20

 

2.4. BUILDING SOCIETIES AND FINANCE COMPANIES.....................22

 

Conclusion....................................................................................26

Glossary........................................................................................27

Bibliography.................................................................................30

 

 

INTRODUCTION

 

The principal types of banking in the modern world are commercial banking and central banking. A commercial banker is a dealer in money and in substitutes for money such as checks or bills of exchange. The banker also provides a variety of financial services. The basis of the banking business is borrowing from individuals, firms, and occasionally governments. With these resources and also with the bank own capital, the banker makes loans or extends credit and also invests in securities.  The banker makes profit by borrowing at one rate of interest and lending at a higher rate and by charging commissions for services rendered. A bank must always have cash on hand in order to pay its depositors upon demand or when the amounts credited to them become due. It must also keep a proportion of its assets in forms that can readily be converted into cash. Only in this way can confidence the banking system be maintained. Provided it honours its promises, a bank can create credit for use by its customers by issuing additional notes or making new loans, which in their turn become new deposits. The amount of credit it extends may considerably exceed the sums available to it in cash. But a bank is able to do this only as long as the public believes the bank can and will honour its obligations, which are accepted at face value and circulate as money. So long as they remain outstanding, those promises or obligations constitute claims against that bank and can be transferred by means of checks or other negotiable instruments from one party to another. These are the essential of deposit banking as practiced throughout the world today with the partial exception of socialist type institution.

Another type of banking is carried on by central banks, bankers to governments and “lenders of last resort” to commercial banks and other financial institution. They are often responsible for formulating and implementing monetary and credit policies, usually in cooperation with the government.

Some institutions often called banks such as finance companies, saving banks, investment banks, trust companies do not perform the banking functions described above and are the best classified as financial intermediaries. Their economic function is that of channeling savings from private individuals into the hands of those who will use them, in the form of loans for business purposes or for the purchase of capital assets. These financial intermediaries can not, however, create money (i. e. credit) as the commercial banks do, they can lend no more than savers place with them.

 

Unit 1

THE BANKING SYSTEM OF THE UK

In the beginning of the twentieth century banking system of the UK had two levels and comprises:

• the first level  - Bank of England, the central bank;
• the second level:

deposit banks which were able to accept deposits, give shirt-term loans against safe securities( for example, government securities) to large-scale enterprises and aristocrats and also  buy short-term bills and offer money loans to stock brokers:

credit and merchant banks which did not accept deposits, they were performing only speculative transactions and granted export credits;

credit intermediaries, represented by bill brokers, which were occupied with buying bills and reselling  them to banks and  stock jobber which provided intermediary services at negotiating    deals;

clearing houses. 

In our century the british banking  system have changed a little. Nowdays nearly every country with market-oriented economy has two level`s banking system, where the central bank functions at the first level, and commercial  banks–  at the second level. Today there are following types of commercial banks in UK.

Deposit banks. The group includes the largest present day banks, so called clearing banks, prevailing in acceptance of deposits and provision of credit  - Barclay`s Banks, Lloyd`s Bank, Midland Bank and National Westminster (NatWest) Bank. They are the basis of the banking system of the UK. They are often called retail banks.

Merchant banks. They are wide-spread over the country and have old traditions. It`s difficult to differentiate and classify merchant banks because they are essentially smaller in size than clearing banks.

The merchant banks provide a range of specialist services for customers, mainly in the industrial and commercial sector, perform in the sphere of foreign trade and international financial-credit operations.

Foreign Banks.  Foreign Banks refer to large bank groups according to figures in their balance sheets. There are about 450 foreign banks.

Consortia Banks. Banks of, at least, two countries have their share in capital of consortia bank and no one possesses controlling stake of shares.                                                                               These banks become to develop rapidly with the expansion of euromarket. They are represented mainly by specialized banks of transnational and multinational industrial concerns.

 

1.1. THE BANK OF ENGLAND

The Bank of England was founded in 1694 in the City of London by a royal charter granted by William III. A royal charter is a grant by the monarchy under the royal prerogative. It is an exclusive privilege or right creating a corporate body of the highest form in law, similar to that granted to the Chartered Institute of Bankers itself in 1987.

The reason for the foundation of the Bank of England was to provide finance for the war against France. A group of men led by a Scotsman called William Peterson came up with the idea of establishing a bank which could lend much of its capital and funds to the state. So the Bank of England was established and run by a court of directors, a group of people similar to a board of directors of a modern company.

The bank raised ₤1.2m from subscribers of capital which was then lent to the state. ₤1.2m might not sound very much is a bank today, but in 1694 it was a very great deal of money.

The Bank of England has a number of special privileges, particularly with regard to issue of notes, which helped to establish and strengthen its position in its association with the Government, brought about by the legislation.

In the later years of the nineteenth century the Bank assumed responsibility for the integrity of the banking system. In other words the Bank undertook to ensure good practice and public confidence in the banks. There was a real need for this undertaking, because there had been losses of confidence and "runs" on several large banks. A major collapse in the banking system was averted by the Bank of England lending money to banks which were having difficulty meeting their commitments to lenders and depositors. The phrase "lender of last resort" was coined to describe this particular function of the bank. It is this function which helped to establish the Bank of England's role as the centra] bank.

The Bank of England Act of 1946 consisted primarily of the provisions necessary to bring about the nationalization of the central bank, which is of course more than 300 years old. It provided for the transfer of ownership of the Bank's stock, authorized the Government to appoint the Bank's senior officials, and empowered the Treasury to issue directives to the Bank, but made no reference to monetary policy or to the Bank's role in formulating and implementing it. This fundamental weakness helps to explain why post-war Britain has suffered severe bouts of inflation and currency degradation.

Structure and decision-making

The Bank of England is formally governed by its Court of Directors which consists of the Governor, Deputy Governor, and 16 Directors, no more than four of whom can be employed full-time by the Bank. The 12 (non-executive) Directors are drawn from commercial banking, industry and academia; since 1946, one has usually been a trade unionist. The Court meets weekly, but has not been active in important policy decisions, in part because of worries about outside non-executive Directors obtaining inside information on future policy changes. Its principal role has therefore been to serve as a sounding board for the Governor. In practice, the Bank is managed by the Governor, with the assistance of the Deputy Governor, and the four Executive Directors.

The Bank's subordination to the Government is firmly grounded in the Bank of England Act, which stipulates that the Chancellor may issue directions to the Bank of England after consultation with the Governor. This power was not designed to permit day-to-day interference by the Treasury in the ordinary work of the Bank, but rather to ensure that, in the event of disagreement, the Government would have the last word. In fact, although disagreements have arisen between the Treasury and the Bank, the process of policy coordination has ensured that no Chancellor has ever issued a directive to the Bank.

There is considerable contact at all levels between the Bank of England and the Treasury, The Chancellor and Governor, for example, meet at least once a week. The precise details of the arrangements for meeting at more junior levels change over time, but at least for some years there has been a formal process of coordination that coincides with the collation of monthly data. Each month, the Monetary Committee within the Bank of England meets under the direction of one of the Executive Directors to form preliminary judgments on monetary conditions and trends. These judgments form the basis of discussions held in a smaller meeting with the Governor and senior officers. The process culminates in a report, which reviews both domestic and international monetary conditions and sets out the Bank's views on the appropriate interest rate policy for the forthcoming weeks. A similar report is also prepared within the Treasury. The two reports are then discussed at a meeting of senior Bank and Treasury officials, held at the Treasury and chaired by the permanent secretary to the Treasury. The senior Bank official in attendance is the Director for Home Finance. Subsequent to these meetings, the Governor of the Bank of England regularly lays out the Bank's views in writing to the Chancellor of the Exchequer, who is then responsible for making ultimate policy decisions.

Appointments

The Governor, Deputy Governor and Directors of the Bank of England are all appointed by the Crown, which in practice means the Prime Minister acting on the advice of the Chancellor of the Exchequer after consultation with the Governor (or where the appointment of the Governor is concerned, usually with senior Bank officials, present and past). All are appointed for renewable terms; five years in the case of the Governor and Deputy Governor, four years for the Directors. (Four of the sixteen Directors retire in rotation each February). However, the Bank of England Act does not provide the Government with the power to dismiss senior Bank officials. Since the officers are formally appointed by the Grown, they can only be dismissed by the Crown. Presumably a government could request the Crown to dismiss the Governor, but such an eventuality has never occurred.

Announcement of policy decisions

The Bank of England is accountable to the Chancellor of the Exchequer, who in turn is responsible for monetary policy before Parliament. The Chancellor may thus both announce and answer question on monetary policy. Since 1980, the Government has set out its views on monetary policy in a so-called Medium-Term Financial Strategy (MTFS) at the time of its annual spring budget. The MTFS has undergone considerable evolution in the past decade. Originally, it specified a target for the annual growth of a broad monetary aggregate for the forthcoming four year period. However, the authorities soon concluded that the aggregate was not linked closely enough to their ultimate objective (nominal income) and, equally important, that they could not exercise sufficient control over the supply of money. For this reason, the MTFS currently specifies a wide range of economic and financial indicators for use in evaluating monetary conditions and guiding monetary policy.

Amendments to policy may also be announced at any time by the Chancellor, but typically they emerge at an occasion like the Mansion House speech or the Autumn Statement setting out the Government's expenditure plans. The present Government has departed disastrously from this tradition—the Prime Minister pledging never to devalue sterling at an occasion in Scotland only a week or so before the pound was devalued; and the Chancellor announcing the devaluation outside the Treasury building.

For its part, the Bank of England also evaluates current monetary policy conditions and requirements in both its Quartely Bulletin and its Annual Report. The Annual Report is laid before Parliament, but has never been subject to debate; and it is highly improbable that MPs ever bother to read it. After all, only a handful took the trouble to read the Maastricht Treary. The Governor and other officers are, however, regularly examined on the policies and administration of the Bank of England by Parliamentary Select Committees.

 

Central Bank financing

The Bank of England may extend direct short term loans to the Treasury to cover its current budget spending requirements. It does not participate significantly in the direct financing of the Treasury, but there exist no specific limits on Bank purchases of Government paper in the market. Manifestly, therefore, it is open to any government to overspend recklessly and without constraint for electoral purposes, like the present Major Administration.

It is certainly ironic that the Major Government's difficulties reflect, to a considerable extent, its willingness to overspend in order to achieve electoral victory. For, behind the scenes, the intractable budgetary problems arising from that permissiveness undoubtedly contributed to the collapse of the Government's policies on 16th September 1992. The Prime Minister's public stance of inflexible opposition to devaluation, which he portrayed as a betrayal of the country, masked his irresponsibly permissive fiscal stance.

Budgetary procedures

The Bank of England Act implicitly grants the central bank budgetary independence. Until the 1970s, the Bank was not even required to publish accounts. The recommendations of a Select Parliamentary Committee led the Bank to publish its accounts with its Annual Report (beginning in 1971).

Auditing arrangements

The accounts of the Bank of England are audited annually by a leading firm of chartered accountants.

1.2. RETAIL BANKS

The largest present day banks, i.e. Barclays, Lloyds, Midland and National Westminster (NatWest), can trace their origins to the developments following the 1833 Banking Act which permitted the establishment of joint stock banks. The first of these banks was the National County and Westminster in 1835 and it was quickly followed by the other three plus the National Provincial Bank which merged with Westminster Bank much later to form NatWest.

These joint stock banks quickly grew during the second half of the nineteenth century, mostly by absorbing the hundreds of small private banks. The amalgamation process continued but at a much slower pace into the twentieth century, so that there are now relatively few banks and they all have network of branches.

The term retail banks (high street banks, commercial bank) is used to include all of the banks which have branch networks through which they are able to offer a wide range of services over the counter to a large amount of customers. The most important services which the retail banks provide are: the acceptance of deposits, the provision of ways in which deposits can be transferred and the

They have a great number of branches - 15000 branches. That`s why british banking system is prototype of branch banking. This system evolved because of the small size of the country, the early development of efficient transportation and communications, and legislation encouraging joint-stock bank companies, which spread risk among a number of owners and limited the liability of stockholders in case of a failure.

provision of credit.

National Girobank takes special place in the system of clearing banks. Girobank plc (then called National Girobank) was established by the government to meet the banking needs of the personal sector and the particular for people who are not particularly sophisticated in their needs for financial services. Some people see the large clearing banks as a little impersonal and prefer the familiar post office type organization through which Girobank operates.

In recent years Girobank itself has become more sophisticated in meeting the needs of its customers which now include businesses as well as personal customers. In 1978 it was granted a bank status by the Bank of England. It has a sophisticated central computer and 'now provides a full banking service by post and phone. The great advantage of such a service is that costs are much reduced, thus benefiting both customer and bank. Girobank customers pay cash in at Post Offices and withdraw cash either by cheque encashment at Post Offices or by LINK ATM. Other transactions are arranged by post or over the phone. Prepaid envelopes and other standard stationery are supplied.

The Girobank has offered free banking for all accountholders in credit for many years and is currently offering an excellent deal on interest-bearing current accounts in the UK: free banking while in credit, guaranteed overdraft of half monthly salary credit, Visa and Ј100 cheque guarantee card. Lick ATM card and a competitive rate of interest on all credit balances. The Girobank provides accountholders with travel facilities, personal loans, a budget account, insurance and mortgages, all can be arranged by post and phone. It offers linked deposit accounts to current accountholders and an interest-bearing ATM only account.

 

 

1.3. WHOLESALE BANKS (MERCHANT BANKS)

Not surprisingly, merchant banks developed from the business of merchants, particularly in overseas trade. During the seventeenth, eighteenth and nineteenth centuries foreign trade developed rapidly. The main method of payment then, as it is today, was the bill of exchange. However, what happens when a merchant supplying goods to an overseas customer is offered a bill of exchange? The promise on the bill is made by a company he knows little about and he cannot be sure that when the bill becomes payable it will in fact be paid. It would be helpful if a reputable merchant company were to give its separate assurance that the bill would be paid, as well as the assurance of the overseas company importing the goods.

This process of reputable merchants, or merchant banks as they became, of guaranteeing payment of bills of exchange is called "accepting". This merchant bank accepts the bill of exchange by adding its name to mat of the trading parties. It is for this reason that merchant banks used to be known as accepting houses. This was often signified in the form a letter, and this was the origin of the acceptance credit.

The difference of merchant banks from clearing banks and their privilege is that they do not have to publish detailed financial statement. Thanks to it, merchant banks could develop freely for many years.

The services in which they might specialize, aside from accepting bills of exchange, include the following: dealing in the money market - large-scale term lending, activities in the bullion (precious metal) markets, making new issues of company shares, managing investments in stock and shares for clients, advice on corporate financial matters, leasing, retail finance.

Merchant banks make their profits in the secondary banking sector by providing their specialist services to customers. We have seen that they are beginning to compete on the retail side, and they are also in competition with those subsidiary companies of banks which also provide merchant and wholesale banking services.

 

1.4. DISCOUNT HOUSES

 

The history of the discount houses goes back around 200 years. At that time, trade was financed or paid for by using bills of exchange. A merchant buying goods from another would pay for the goods by accepting the vendor's or seller's bill of exchange. Terms of the individual bills varied, but it would, for example, have been a document whereby the buying merchant promised to pay the seller the amount due for the goods m ninety days time. But the vendor may not have been particularly happy about waiting this long for the funds. He himself may have needed funds before that time to pay his own suppliers.         

The practice grew for dealers or brokers in bills of exchange to buy them from merchants before maturity. Their fee for this service was a discount on the face value of the bill. The bill brokers, or discount houses as they became known, could then hold the bills until maturity and obtain the full face value, and so make a return on the transaction.

   As trade developed dramatically during the nineteenth century, both inland and particularly overseas, bill finance and discounting grew in importance.

  Through the discounting of bills the discount houses provided a vital service in the UK prior to the establishment of the network of branch banks in the latter part of the nineteenth century. They facilitated the movement of funds by discounting for merchants and industrialists bills which they resold to the banks that were looking for ways of investing surplus funds. But once the banks started transferring funds through their branch network and lending them to those in need of working capital, the need for domestic bills of exchange diminished. Instead the discount houses concentrated more on discounting bills drawn in connection with overseas trade. The first Treasury bill was issued by the government in 1877. As the cheque gradually replaced the bill as a means of payment for inland trade, the growing importance of treasury bill finance filled the vacuum in the discount market.                               

Today the discount houses and the discount market provide a means by which the movements of cash between the government (public deposits at the Bank of England) and the banks can be "smoothed out". In other words, by acting as a lender of last resort to the discount houses, the Bank of England indirectly acts as a lender of last resort to the banking system as a whole, with other banks borrowing indirectly by dealing themselves with the discount houses. The "last resort" lending is only necessary when the banking system as a whole is short of cash, because if it is not, individual banks that are short of cash can always borrow from other banks with a cash surplus.