Банковская система Англии. 2. 2
Ministry of Education of Russia
St. Petersburg State University of Economics and Finance
The banking system of the UK
2005
Contents
INTRODUCTION………………………………………………
Unit 1. THE BANKING SYSTEM OF THE UK………………5
1.1. THE BANK OF ENGLAND.......................
1.2. RETAIL BANKS.........................
1.3. WHOLESALE BANKS (MERCHANT BANKS)........................
1.4. DISCOUNT HOUSES........................
Unit 2. SPECIALIZED BANKS AND NONBANK FINANCIAL
INSTITUTIONS..................
2.1. INVESTMENT AND SAVINGS BANKS.........................
2.2. INVESTMENT TRUSTS AND UNIT TRUSTS........................
2.3. PENSION FUNDS AND INSURANCE COMPANIES.....................
2.4. BUILDING SOCIETIES AND FINANCE COMPANIES.....................
Conclusion....................
Glossary......................
Bibliography..................
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.
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.
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.
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