Evolution Trends in the Financial Sector

By definition, investment banks do not provide retail banking services. Unlike savings banks, they are not supposed to seek cash deposits from individual customers and make traditional interest-bearing loans to their clients. However, large investment banks tend to merge risky investment banking and comparatively safer deposit-taking and begin to serve as commercial banks or retail banks. Among the most notable events along this trend has been the evolution of JPMorgan Chase, Bank of America and Barclays into universal banks.

To keep up with the changes in consumer demand in highly competitive environment and stay viable, many financial companies chose to merge with each other. Mergers within each major line of business result in appearing bigger firms, capable of providing lower-cost, timely, and personalized service. For a client with a variety of financial needs doing business with a single diversified firm is also more convenient. Therefore, commercial banks, investment banks, securities firms and insurance companies more and more often take decisions to merge and consolidate into larger organizations, offering multiple lines of business and becoming diversified financial services empires. That was the case when Citicorp merged with Travelers Group to form Citigroup, which began offering financial services under business names such as Citibank, Smith Barney and Primerica.

Discussion

Answer the following questions:

1. Why are some banks called universal?

2. What is the main trend in the efforts of financial companies to stay competitive and satisfy a wider range of financial needs of their clients?

3. Do you think that by taking on the functions of commercial banks investment banks make their business riskier?

4. Why are some players of the financial services industry called empires?

5. How did Citigroup emerge and diversify its financial services?

Reading 3

Loans and Bonds

The most significant function of commercial banks is the creation of credit. The banks can extend major loans for real and capital purchases because they are required to hold only a fraction the money deposited by its customers as cash reserves. While sanctioning a loan, they do not provide cash to a customer, but open a deposit account from which the borrower can withdraw.

Historically, commercial banks, as their name implies, drew most of their earnings from commercial and consumer loans. But changes in banking laws enabled them to extend more mortgage loans - the kind of debt instrument used to purchase real estate, such as a home, property or business. In such arrangements commercial banks are given security - a lien on the title to the house - until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can use its legal right to repossess the house and sell it to recover the originally lent money. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount. Banks also give demand loans to all types of clients against proper security. The loans, where the borrower pledges some asset or property to the creditor as collateral for the loan, are called secured.

Most of loans however are not secured by connecting them to the borrower's collateral. Instead, almost all monetary loan agreements contain a credit insurance policy that protects the lender if the consumer defaults. The range of unsecured loans is really great: from credit cards for small businessmen to significant credit lines to large corporations. The unsecured loans may also be available from banks in different forms or marketing packages such as bank overdrafts, personal loans, cash credit, bill discounting, money at call, corporate bonds, etc.

When small companies need to borrow, they only rely on bank loans. But well-known big businesses can finance long-term investment projects by issuing bonds. This longer-term debt instrument is used as receipt for the money borrowed from banks, which act as lenders or creditors. The bonds can be traded by banks, making profit on the difference (called spread) between the bid price at which they buy and the offer price at which they sell. If credit standing (rating) of the company goes down, investors into its bonds expect a premium (a higher interest rate, or yield, or coupon) for greater risk. In this case the bonds lose value. However some investors buy such junk bonds as they are prepared to take the risk of default (non-repayment of the principal at maturity) in return for a higher interest rate.

Discussion

Answer the following questions:

1. Why is credit creation an important function of commercial banks?

2. How are mortgage loans secured?

3. What can be done if collateral is not enough to pay off debt?

4. How can a lender protect himself while extending unsecured loans?

5. What happens to the bonds of the company, which faces a credit rating fall?

Section B

Translate the following sentences into Russian:

1. The interest rate at which company is able to borrow largely depends on its credit standing.

2. The main function of investment banks is to help companies, business owners and government agencies to raise capital for their operations by selling investment securities to the general public.

3. When a company wants issue stocks or bonds to raise money, investment bankers facilitate its access to respective markets by introducing there new stock or bond issues through an IPO.

4. Investment banks do not seek cash deposits from customers in the form of checking and savings accounts, and do not make traditional interest-bearing loans to individual customers.

5. Traditionally, large commercial banks underwrite bonds, and have dealings with currency, interest rates, and credit-related securities

6. Large commercial banks usually have an investment branch that is involved in some typically investment related activities.

Part b) Make sure you have learned these expressions in English:

1) заимствовать по низкой процентной ставке

2) привлекать капитал путем продажи инвестиционных ценных бумаг

3) инвестиционные банки облегчают доступ компаний к рынкам акций и облигаций

4) предоставлять процентные кредиты для индивидуальных клиентов

5) гарантировать облигации и иметь дело с валютой, процентными ставками и ценными бумагами

6) создать подразделение по инвестиционной деятельности

Exercise 2.

Part a) Fill in the gaps in the table below.

Noun	Verb	Person
		judge
credit
competition
		investor
	Share
		manager
	hedge

Part b) Complete these sentences using the words from the table above.

1.______ banks act as the agents, brokers or intermediaries between the issuer and investors.

2. Banks work with pension funds, mutual funds, _____funds and the investing public to help them maximize returns when trading or investing in securities.

3. For high-net-worth individuals some private banks arrange exclusive wealth _____ and tax planning.

4. The results of the company’s work were presented to _____at the annual General meeting.

5. Commercial banks have to _____in offering credits to small businesses.

6. If the sale of the collateral does not raise enough money to pay off the debt, the _____can obtain a deficiency _____against the borrower.

7. Every month I _____5% of my salary in a fund.