Банковская система Англии

The discount houses guarantee to buy the full amount of Treasury bills issued each week by the Bank. The government's short-term financing needs will therefore always be met by the discount market. If the discount houses have not enough funds to pay for the Treasury bills, the Bank will lend them the money to do so.

So the functions of the discount houses are also: to provide liquidity for the banking system as a whole; to act as a link between the Bank and the banking system; to act as dealers in the money markets as a whole.

The assets of the discount houses consist of; Treasury and other bills;

funds lent (such as certificates of deposit and other loans); investments (mainly in government stocks). The discount houses also have some foreign currency assets and liabilities, but not in significant amounts.

 

 

 

 

 

 

 

 

Unit 2

SPECIALIZED BANKS AND NONBANK FINANCIAL INSTITUTIONS

As for so called nonbank financial institutions and specialized banks, in the UK they are represented by pension funds and insurance companies, investment and savings banks, investment trusts and unit trusts, building societies, finance companies, credit and loan associations.

 

 

2.1. INVESTMENT AND SAVINGS BANKS

Investment bank is a specialized bank that originates, underwrites and distributes new security issues of corporations and government agencies. The investment banking house operates by purchasing all of the new security issue from a corporation at one price and selling the issue in smaller units to the investing public at a price sufficiently high to cover expenses of sale and leave a profit. The major responsibility for setting the public offering price rests on the investment bank because it is in close contact with the market, is familiar with current interest rates and yields, and is best able to judge the probable demand for the issue in question.

In the underwriting and distribution of most security issues a syndicate of investment banking firms is organized. If the amount of capital sought is large enough to prohibit one investment banking firm’s undertaking the risk of purchasing the entire issue, the investment bank that initiates the issue with the corporation organize a group of investment bankers to divide the liability for the purchase, with the originator acting as manager of the group.

If the market coverage that can be obtained by the members of the syndicate is deemed insufficient, selected dealers are used to bring about a wider distribution. Securities are sold to the dealer at a reduction (known as a concession), which reimburses the dealer for his expenses and provides him a profit if the distribution is performed skillfully.

When new securities are to be issued, an investment firm having close contact with the corporation is likely to be asked to originate the issue/ this process often is called private negotiation. An alternative arrangement is competitive bidding, under which the corporation itself settles upon the terms of the issue to be offered and then invites all banking firms to submit bids. The issue will be sold to the highest bidder.

Savings bank is a financial institution that gathers savings, paying interest or dividends to savers. It channels the savings of individuals who wish to spend more. This function is served by the savings deposit departments of commercial banks, mutual savings banks and trustee savings banks (banks without capital stock whose earnings accrue solely to the savers), savings and loan associations, credit unions, postal savings systems. Except for the commercial bank, these institutions do not accept demand deposit. Postal savings institutions enjoy government guarantee; savings are invested mainly in government securities and other securities guaranteed by the government.

The first British savings banks were founded in 1810 as a Savings and Friendly Society; it proved to be the forerunner of the trustee savings bank.

 

2.2. INVESTMENT TRUSTS AND UNIT TRUSTS

 

Both mutual funds, or open-ended investment companies and unit trusts (the British name) are legal constructions which permit the pooling of a large number of small unequal amounts of money belonging to different individuals in a common fund to be invested by skilled managers. Pooled investments can take a variety of forms, exemplified in the confusion which continues to arise in British discussion between unit trusts and investment trusts. The latter involve an investment vehicle with share capital fixed in amount and are referred to closed-ended company. Unit trusts or open-ended funds issue new units or shares every time they receive additional money from subscribers.

Investment trust is a company which uses the funds provided by shareholders to "invest" in the shares (stocks) of other companies. Despite a fixed share capital, "gearing up" of ordinary shares by borrowing is possible, thereby making the risk - expected return combination facing shareholders different from that of the asset portfolio. Consequently, because of gearing and the forces of supply and demand for the closed-ended investment companies' fixed stock of shares, the market price of closed-ended funds' shares can be greatly above or below the market value of the underlying share portfolio. This cannot happen with open-ended funds, because gearing is prohibited by charter and the number of units or shares is not fixed. Being open-ended, the supply of units, i.e. capital, can be increased or decreased according to demand. If unitholders wish to dispose of all or some of their units, the manager of the fund can simply cancel the units and sell off the corresponding assets. Accordingly, the market value or price of the units will, within set limits, vary directly with the market value of the securities represented by those units.

By allowing individuals to purchase a share of a managed portfolio, mutual funds perform a number of functions which we group under three headings. First, there is what we have called the "brokerage" function, in which information is processed and collected for resale. Left to their own devices, people would need to gather information about the various securities, assess the inherent risks, devote time to monitor and evaluate new information on an ongoing basis, and then undertake all the administration involved in making alterations to the composition of their portfolio. The fund arrangement centralizes the collection and the processing of the information and the administration. Subscribers acquire the information and professional investment management at a price - the management fee - but are left to assess the ability of the managers of the various funds.

Second, diversification is made possible by the size of the fond. This

is the factor which prompted the formation of the first British pooled fund in 1868, its prospectus making clear that the purpose was "to secure for the  investor a degree of diversification in his investment portfolio which a single individual is unable to obtain unless he is extremely wealthy".

Third, units can be readily encashed, and open-ended funds are more liquid than direct shareholdings. This comes about partly from the lower variability of the market value of a well-diversified portfolio, but mainly from the nature of fund arrangements. All pooled funds are, of course, owned by the unit-holders, but they are held in trust and invested in the name of the trustee (normally a bank or insurance company), such investment being performed, for a fee, by the management company. Under the trustees' supervision, the job of the manager is to invest and administer the funds, advertise and promote the units and conduct a market in the units. This market is a distinctive feature of mutual funds.

The main differences between unit trusts any investment trusts are:-Unit holders in authorized unit trusts have an extra measure of protection arising from Department of Trade and Industry supervision and die fact that most trustees are major banks or insurance companies. It is possible to buy units with regular savings of very small amounts; units can be acquired through a unit-linked insurance policy; unit trusts distribute their income on regular (normally half-yearly) dates, dividend payment dates for investment trusts are less predictable; authorized unit trusts can not invest in assets such as property, investment trusts are not so limited.

- Units may be bought from and sold to the managers without going through The Stock Exchange. The managers must buy units back if an investor wishes to sell. Shares in investment trusts are sold through The Stock Exchange. With some smaller investment trusts, the market in the shares is very small and it may be difficult to find a purchaser.

- Unit prices are calculated according to the rates laid down in the trust deed (as approved by the Department of Trade and Industry) and are directly related to the value of the underlying assets. The price of the investment trust shares is determined by supply and demand and it is usual to find prices below net asset value.

 

2.3. PENSION FUNDS AND INSURANCE COMPANIES

 

Insurance companies, like banks, are in the financial intermediation business of transforming one type of asset into another for the public. Insurance companies use the premiums paid on policies to invest in assets such as bonds, stocks, and mortgages; the earnings from these assets are used to pay out the claims on the policies. In effect insurance companies transform assets such as bonds and stocks into insurance policies that provide a set of services (for example, claim adjustment, savings plans, friendly insurance agents). If the insurance company’s production process of asset transformation efficiently provides its customers with adequate insurance services at low cost and it can earn high returns on its investments, then it will make profits, if not, it will suffer losses.

Life insurance companies specialize in selling policies that provide income if a person dies, is incapacitated by illness or retires. Property or casualty companies specialize in policies that pay for losses incurred as a result of accidents, fire or theft.

The insurance companies are organized in two forms: as stock companies or as mutuals. Stock companies are owned by stockholders, while mutuals are technically owned by the policyholders. Most of life insurance companies are organized as stock companies but over half the assets in the industry are owned by mutual companies.

Life insurance companies have never experienced widespread failures like commercial banks, so the federal government has not seen the need to regulate the industry: instead, regulation is left to the states in which the company operates. State regulation is directed at sales practices, the provision of adequate liquid assets to cover losses, and restrictions on the amount of risky assets (such as common stock) that the companies can hold. Life insurance companies hold long-term assets that are not particularly liquid – corporate bonds and commercial mortgage as well as some corporate stocks.

The investment policies of property and casualty insurance companies are effected by fact that property losses are more uncertain than the death

Property and casualty insurance companies will insure against losses from almost any type of event, including fire, theft, negligence, malpractice, earthquakes, automobile accidents, and so on.

If a possible loss being insured is too large for any one firm, several firms will frequently join together to write a policy in order to share the risk. The most famous risk-sharing operation is Lloyd’s of London, an association in which different insurance companies can insure a fraction of an insurance policy. It began in 17th century as a coffee house patronized by merchant, recognized as the most likely place to find underwriters for marine insurance. Edward Lloyd’s was reorganized in Lloyd’s List, still in existence: Lloyd’s was reorganized in 1769 as a formal group of underwrites accepting marine risks. With the growth of British sea power, Lloyd’s became the dominant insurer of marine risk, to which were later added fire and other property risks. Today Lloyd’s is a major reinsurer as well as primary insurer but it doesn’t itself transact insurance business. It consists of more than 20000 individual underwriting members who accept insurance for their own account and risk. The members are formed into several hundred syndicates, each comprising from a few to several hundred members. These syndicates are represented at Lloyd’s by underwriting agents, and it is they who accept insurance business on behalf of the syndicate members.

In performing the financial intermediation function of asset transformation, pension funds provide the public with another kind of protection - income payments on retirement. Employers, unions, or private individuals can set up pension plans, which acquire funds through contributions paid in by the plan's participants. Although the purpose of all pension plans is the same, they can differ in a number of attributes. First is the vesting of the plan, that is, the length of time that a person must be enrolled in the pension plan (by being a member of a union or an employee of a company) before being entitled to receive benefits. Typically, firms require that an employee work ten years for the company before he or she is vested and can receive pension benefits; if the employee leaves the firm before the ten years are up, either by quitting or being fired, all rights to benefits are lost.

A second characteristic is the method by which payments are made: if the benefits are determined by the contributions into the plan and their earning, the pension is a defined contribution plan; if future income payment (benefits) are set in advance, the pension is a defined benefit's plan.

A defined benefit's plan is fully funded if the contributions into the plan and their earnings over the years are sufficient to pay out the defined benefits when they come due. If the contributions and earnings are not sufficient, then the plan is underfunded.

 

2.4. BUILDING SOCIETIES AND FINANCE COMPANIES

Building societies are the most significant competitors of the banks. From their beginning in eighteenth century they have developed into highly specialized financial services institutions.

The origins of the modem building societies go back to institutions  first founded in the eighteenth century to assist people to save money to buy property and land. Although the first of these societies were not allowed to borrow money from the public except for this purpose the rule was changed in the mid-nineteenth century when the first permanent, building societies were founded. Indeed some building societies still retain the use of this word in their names, such as "Leeds Permanent".

Today's building societies are owned by their "members". Each  society operates a "share" account into which members or shareholders subscribe money. The Act of 1986 gave the building societies the power to become registered limited companies and seek investment from the public.

Apart from the Abbey National, which became a public company in 1989, the building societies are owned by their customers who have deposited money in share accounts and who receive interest and not dividends on their investments.

There are still some deposit account holders who technically (because they are not shareholders) do not participate in affairs of the society, and in the event of liquidation they would be treated as creditors and be given preferential treatment over shareholders. However, the majority of accounts are share accounts. Building societies have been the banks' main competitor for personal deposits for many years.

In the last 20 years they had the privilege of paying interest on deposit and share accounts income tax and they opened for longer hours than the banks, and thus were able to attract customers away from the banks. However, since 1985 the banks have been placed on the same footing as far as paying interest net of tax is concerned and they have kept their branches open for longer hours and in many cases, on Saturday mornings. Several of the societies now offer current account facilities. including cheque books, in competition with the banks and have become members of APACS. The societies pay interest on their current accounts, such as Nationwide's Flexi Account, and this competition forced the banks to do the same from 1988. The building societies established networks which eventually merged as one network link, which now competes with the two networks run by the banks. A number of the societies have established homebanking facilities whereby customers can make inquiries about the balances on their accounts and recent transactions on them, order cheque books, and statements, arrange standing orders, transfer funds from one account to another and pay with some suppliers directly.

The supervision of the building societies is carried out by the Chief Registrar of Friendly Societies, and their range of activities is limited, but the Building Societies Act 1986 permitted them to lend for purposes other than house purchase to a limited extent and to become involved in running estate agencies and even in building houses. The Abbey National, as a public company, comes under the Banking Acts 1979 and 1987, and is therefore under the supervision of the Bank of England.

Building societies accept their deposits mostly on a short-term basis and the rate of interest paid varies with the amount invested and the length of notice that is required. The interest is quite low, especially on small amounts, and one society pays no interest at all on balances below Ј100. On share accounts somewhat higher rates are paid where there is instant access, whilst on investment accounts involving 3 month or even 6 months' notice for withdrawal, interest rates are some 3 or 4 per cent higher than the basic rate on instant access accounts. Several of the societies offer postal accounts on which they otter better rates of interest, even on instant access, because the amount of work involved is minimized. The Finance Act 1983 gave the societies power to raise money through the wholesale money markets by-the use of certificates of deposit, and hence they now compete with the banks for these funds.

The main way in which the building societies invest their shareholders' funds is of course by lending on a long-term basis against mortgage on house property.

By means of rapid expansion of branch networks and several mergers the building societies grew in size to the point where they attracted more personal savings than the banks. The largest societies now see themselves as institutions existing for the benefit of their members

Finance companies acquire funds by issuing commercial paper or stocks and bonds and use the proceeds to make loans (often for small amount) that are particularly suited to consumer and business needs.  The financial intermediation process of finance companies can be described by saying that they borrow in large amounts but often lend in small amounts – a process quite different from that of commercial banks, which issue deposits in small amounts and then often make large loans. A key feature of finance companies is that compared to commercial banks and thrift institutions they are virtually unregulated. State’s authorities regulate the maximum amount they can loan to individual consumers and the terms of the debt contract, but there are no restrictions on branching, the assets they hold, and how they raise their funds. The lack of restrictions enables finance companies to better tailor their loans to customer needs than banking institutions.

There are three types of finance companies. Sales finance companies make loans to consumers to purchase items from a particular retailer or manufacturer. Sales finance companies compete directly with banks for consumer loans and are used by consumers because loans can frequently be obtained faster and more conveniently at the location where the item is purchased. Consumer finance companies make loans to consumers to buy particular items such as furniture or home appliances, for home improvements, or to help refinance small debts. Business finance companies provide specialized forms of credit to businesses by purchasing accounts receivable (bills owed to the firm) at a discount, this provision of credit is called factoring.

 

CONCLUSION

 

In conclusion, we can say that the banking system of the UK has a very long history. We can confirm, that the British banking system includes a great variety of credit institutions, though the British banking system is the prototype of branch banking and it is dominated by the four largest deposit banks – Barclay’s Bank, Lloyd’s Bank, Midland Bank and National Westminster Bank, which are able to offer a wide range of services to different clients. The UK has unique modern banking system, meeting all the requirements of present-day economy.

 

Glossary

 

1. face value - the amount that appears on a coin, cheque etc. which shows how much money it is worth

2. vendor - someone who is selling something, especially a house or a piece of land

3. merchant - a person or organization that byes and sells goods or a particular type of goods

4. banking – 1 the business activity of banks and similar institution

2 using the services that a bank provides by a particular means

5. maturity – the date on which a bill of exchange, insurance policy etc. becomes due for payment

6. amalgamation – when two or more organizations amalgamate, often in order to increase profits by cutting costs

7. goldsmith – a maker or a dealer in articles of gold

8. broker – a person or organization that byes and sells securities, currencies, property, insurance etc. for others

9. dealer - someone whom byes and sells a particular type of goods

10. collapse – when a company, organization or system suddenly fails or becomes too weak to continue

11. compete – when one company or country competes with another, it tries to get people to bye its goods or services rather than those available from another company or country

12. income tax- a tax on money people earn or on the profits companies make, paid to the national, state, or local government

13.income – money that you earn from your job or that you receive from investments

14. preferential treatment – a treatment are deliberately more favourable than others in order to give an advantage to particular people, organizations

15. joint-stock bank – a bank which is a public company with shares owned by investors rather than a government

16. capital asset – something such as land, buildings or machinery used by a business to produce its goods or services

17. fiscal policy – government policy concerned with raising money, especially through taxation, and how this money is spent

18. monetary policy – the way a central bank controls the amount of money in the economy at a particular time, for example by changing interest rates

19. bill of exchange – a document ordering someone to pay a particular amount on a fixed day, used especially in international trade

20. security – a financial investment such as a bond or share etc., or the related certificate showing who owns it

21. subscriber- someone who ask or agrees to bye shares in a company that is offering shares to the public

22. run on a bank – when a lot of people all take their money out of a bank at the same time

23. nationalization – the act of bringing a company or industry under the control of a government

24. appoint – to choose someone for a job or a position

25. deputy- someone in an organization who is immediately below the rank of another important person, and who is officially in charge when that other person is not there

26. amendment – a small change to a law or a document in order to improve it, to make it more accurate, or to take account of new conditions

27. gearing – the amount of borrowing that a company has in relation to its share capital

28. pool – an amount of money or a number of things shared by a group of people evaluate – to carefully consider something to see how useful and valuable it is

29. ordinary shares – the most frequent type of share in most companies; if the company is in financial difficulty, dividends on common shares are paid only after those made on other particular types of share

30. portfolio – a collection of shares owned by a person or  company

31. fee - a payment for a piece of professional advice or for  some special service, or a charge made for giving permission to use or to do something

32. diversification - the placing of one's investments in a wide range of companies in order to spread the risk of losing one's money

33. trustee - a person or an institution that entered into a binding promise to hold and administer

34. disposal - the act of getting rid of something

35. promotion -  activities aimed to increase the demand for a product

36. savings account - an account into which personal savings are paid and on which the bank usually pays a slightly  higher rate of interest

37. discount loan - a loan made at a lower rate of interest

38. incorporate - to form and register a company in the manner required by the Companies Act

39. abolish – to put an end to

40. to clear checks - to pass a check through   a clearing house

41. charter - a document by a stale formally giving certain special rights and powers to a person or organization

 

 

 

Bibliography

 

The New Encyclopedia Britannica - Chicago, 1994.

 

S.N. Lyubimtseva, V.N. Koreneva Financial English textbook: Учебник – М.:ГИС, 2002.

 

Бархатов И.А., Григорьев И.В. English for financiers: Учебное пособие. – СПб.:Издательство СПбГУЭФ, 1998.

 

Деньги, кредит, банки: Учебник/ Под. Ред. О.И. Лаврушина. – М.: Финансы и статистика, 2003.

 

Общая теория денег и кредита: Учебник для вузов/ Под ред. Проф. Е. Ф. Жукова. – М.:Банки и биржи, ЮНИТИ, 1998.

 

www.bankofengland.com

 

www.bankofengland.co.uk