Types of Banking Institutions

Student: What type of bank is this? Banker: We're a commercial bank.

Does that mean that your services arc limited?

To some extent. For instance, we can't offer the

fiduciary services that a trust company can.

What are they?

Well, they have lo do with pre^dminislralion of

trusts and estates.

Suppose 1 wanted lo buy or sell some securities. Docs

your bank handle such transactions?

Yes, through our brokerage house.

Is your broker a member of the slock exchange?

Yes.

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This is a state bank, isn't it?

That's right.

Do you offer fewer services than a national bank?

No. In general, the only difference is that a state bank

gets its charter from the slate it's in, and the na­tional bank gets its charter from the federal govern­ment in Washington, D.C. Are there banks that don't offer regular commercial

services?

Oh, yes. For example Savings and Loan Associations and the Federal Land Banks arc only lending insti­tutions.

Would you say a savings and loan association is a bank?

No. I'd rather call it a financial institution. How about a credit union? That's not really a bank, either. And a finance company is something entirely different. Yes.

Questions on the dialogue:

1. Whal regular services does a commercial bank offer lo ils
customers?

2. Whal is Ihe difference belween a nalional bank and a slate
bank?

3. Which inslilulions deal wilh fiduciary services?

4. Whal do you understand by fiduciary services?

5. What is Ihe job of a broker?

6. Where are brokerage transactions concluded?

7. What services are offered by:

—Savings and Loan Associalions?

—Federal Land Banks?

—credil unions?

Text

The reason for which the Bank of England was founded in 1694 was lo look afler Ihe Government's debl, commonly called the National Debt, and this is still a most important function. A large proper lion of the debl is made up of Gov­ernment bonds, that is pieces of paper staling that the holder has subscribed such-and-such a sum of money and is entilled to so much interest per year. Two world wars have helped to swell the issue of bonds to some $,40,000 million. Another sizable slice of debl is in the form of Treasury bills which arc rather like bonds wilh a very shorl life span before Ihe Gov-ernmenl buys Ihem back again and so repays Ihe loan. Their purpose is to provide Ihe governmenl wilh day-lo-day money lo cover Ihe inevitable gaps which occur belween ils disburse-inenls, e.g. on such Ihings as uncmploymenl benefil and ils receipls from laxation. A Ihird type of debl is the group of National Savings Securities, of which ordinary Post Office (now Nalional Savings Bank) accounts and Premium Bonds are perhaps the best-known examples.

The Bank of England is Ihe ullimale source from which Ihe general public can oblain cash. Other English banks used lo issue Iheir own notes, but now they all use the Bank of En­gland notes. Scottish banks have continued lo issue Iheir own, hut it is an expensive undertaking, and is closely controlled by Ihe cenlral bank in England.

The Bank also looks afler Ihe bank accounl of the Govern­ment just like an ordinary bank docs for its customers. Into this accounl go all lax receipls and/any other transfers of money from Ihe various banks, and out of il go all payments. Because all the imporlanl inslilulions in the Cily main lain accounls al Ihe Bank, Iransfers of money between Ihem and Ihe Governmenl, which go on every day, are made very eas­ily. The Bank merely debils one aecounl and credits another. The Bank also holds accounls for important inlernalional in­slilulions like Ihe World Bank, for just over a hundred cen-

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tral banks and also for some ordinary foreign banks, making a total of nearly two hundred accounts.

The Exchange Equalisation Account is the name of the fund in which are held the gold and foreign currency reserves of the country. The managers of the fund have the task of inter­vening from lime to time in the otherwise free market for foreign currency, so as to influence the price of the pound in line with Government policy, or simply to try to maintain a reasonably orderly market.

The pound is not the only currency whose price has to be carefully controlled. Most of the major world currencies have the same problems, and all greatly benefit from international cooperation. Dealing with other central banks and managing money on an international scale has l>ecomc an important side of the Bank's work. Every month the Governor (lies to Basle to spend a week-end in conference with his opposite numbers from the central banks of other western industrial countries.

The object of the Bank's management in the monetary field is to support the Government's activities in other fields, e.g. taxation policy, export promotion and so on. The methods of control used by the Bank are based on a system in which money available to be borrowed should be rationed by price, not by orders from the Bank or The Treasury.

The battery of instruments of control the Bank has may (>e summarized as follows:

1. Suggestion and request.From lime to lime the Bank
will make suggestions to the olher institutions in the City,
indicating the policy the authorities intend to pursue. If they
want specific aclion, the Government makes a "request" like
the following:

"Notice to banks.

All banks and finance houses are asked not to provide ei­ther loans to persons or check trading facilities for the pur­chase of..."

2. Open market operations.This is the name given to the
activities of the Bank in the financial markets for control pur-

poses. The point is thai by its interventions the Bank can influence markets to move in the directions which it desires. 3. Special deposits and supplementary deposits.From lime to lime, the Government may wish to reduce the amount ol'money lhal people can borrow in order lo reduce Ihe amount they spend. An effective way of doing this is 10 reduce what the banks have available for lending, and this is done by re­quiring them to deposit more money at the Bank of England in special accounts from which it cannol be withdrawn unlil the Bank says so.

Questions on the text:

1. Why and when was the Bank of England founded?

2. What type of securities make up the National Debl?

3. What is the money raised in Ihis way spcnl on?

4. Enumerate the most important functions of the Bank of
England.

5. What is the object of a central bank's managemenl in Ihe

monelary field?

b'. Whal principle does Ihe Bank of England follow in exer­cising its control over the monetary policy?

7. What instruments of control has Ihe Bank got al ils dis­posal ?