The federal reserve system

The American banking system consists of the Federal Reserve System as its Central bank and four types of commercial banks and organizations: commercial banks, savings and loan associations, Credit Unions, and mutual savings banks.

The Federal Reserve System of the United States performs many of the functions of the Central bank of other countries. It was designed to control the banking system and the money supply in the country. The territory of the United States is divided into twelve Federal Reserve Districts, each one of which has a Federal Reserve Bank in a major city. Policies of these twelve banks are uniform, however, because they are set by the Board of Governors of the Federal Reserve System.

The FRS carries out operations similar to those that are the responsibility of central banks in other countries: conducting certain open market operations that can affect the money supply in the county, extending credit to member banks through advances or rediscounts (the rediscounting rate is set by each of the individual member banks), issuing national currency, advising the government on making the country's financial policy, regulating money supply, and supervising commercial banks and other financial institutions in the country. The Board can buy or sell US Government securities, thus increasing or decreasing the amount of money in circulation. Besides, other open-market interventions of the FRS include the purchase and sale of investments such as bankers' acceptances and bills of exchange.

The Federal Reserve Board can influence the volume of activity on the Stock Exchanges by setting margin requirements for the purchase of securities. In other words, the FR Board can set the percentage of the market price of securities that a buyer must pay when buying stocks or bonds with a loan. Margin requirements thus limit the amount of credit that buyers of securities may be given to finance their investment activity. By raising or lowering margin requirements, the FR Board may limit or expand the volume of stock purchases.

The FRS supervises American commercial banks. A number of restrictions have been placed on banks for the fear they might monopolize the kinds of investments made. No bank may have branches outside the state it operates in. Stocks are to be bought or sold at separate brokerage houses subordinated to the FRS. Banks chartered by the FRS are less likely to be a risk for the depositor as the FRS insures most deposits against bankruptcy.

Vocabulary:

to design – розробляти

to be divided into – бути поділеним на

similar to – схожий на

to affect – впливати

advance – аванс

amount – сума, кількість

acceptance – акцепт (прийнята до сплати платіжна вимога)

bill of exchange – переказний вексель, тратта

Stock Exchange – фондова біржа

margin requirement – гранична вимога

market price – ринкова ціна

to limit – обмежувати, лімітувати

restriction – обмеження

bankruptcy – банкрутство

Questions:

1. What does the American banking system consist of?

2. What functions does the FRS perform? What are they similar to?

3. How is the territory of the USA divided (in terms of banking system)?

4. Who governs the FRS?

5. What is the Federal Reserve Board?

6. How can the Federal Reserve Board influence the volume of activity on the Stock Exchanges?

7. What restrictions have been placed on commercial banks by the FRS?

BANK ORGANIZATION

Banks are among the most important financial institutions. The way in which a bank is organized and operates is determined by its objectives.

A central bank accepts responsibility for advising the government to make the country's financial policy, issues national currency and regulates money supply. The aim of commercial bank is to earn profits.

Over the years banks have developed organizational forms, or structures to perform their various roles and to supply services to their customers demand.

Many banks offer the combination of wholesale and retail banking. Wholesale banking provides services to companies and other banks; the retail ones mainly provide services to public (individuals).

Typically a bank consists of some divisions. At the head of it there are Chief Administrative Officers including the Board Chairman and the President, who are elected by the shareholders and are responsible for the efficient management of the bank.

Then come different divisions:

Lending division which deals with commercial and consumer loans;

Accounting and Operations division which consists of Accounting and Audit departments and Operations subdivision dealing with check clearing, posting, account verification, and customer complaints;

Fund-Raising and Marketing division dealing with tellers, new accounts, advertising and planning;

Trust divisionconsisting of Personal Trusts and Business Trust subdivisions.

There is often close contact between top management and the management and staff of each line division. Such banks present a relatively low-risk working environment and place the banker close to the customer and give the bank employees the opportunity to see the results of their work.

Vocabulary:

to accept responsibility – брати на себе відповідальність

money supply – грошова маса (в обігу)

various – різноманітний

wholesale banking – банківські послуги для першокласних корпоративних клієнтів і інституційних інвесторів; міжбанківські операції

retail banking –

divisions – робота банків з індивідуальними клієнтами; банківські послуги для фізичних осіб

Board Chairman – голова ради директорів

to elect – обирати

lending division – відділ кредитування

clearing – кліринг (безготівковий розрахунок, система взаємозаліків)

teller – касир, операціоніст

complaint – скарга

staff – штат, персонал

environment – середовище

Questions:

1. What responsibility does the central bank accept?

2. What is the aim of commercial banks?

3. What is the difference between wholesale and retail banking?

4. Who is at the head of the bank?

5. What main divisions of a bank do you know? Enumerate them.

6. There is often close contact between top management and the management and staff of each line division. Why is it so important?

BANK SERVICES

Banks may be defined as firms producing and selling financial services. Their success or failure depends on their ability to identify the financial services which the public demands, produce those services efficiently, and sell them at a competitive price. The service menu of banks does not remain unchanged as new services are constantly developed by banks. Many of them offer a combination of wholesale and retail banking.

The most important functions of a central bank are to accept responsibility for advising the government to make the country’s financial policy, to issue national currency, to regulate money supply and to supervise commercial banks. The aim of commercial banks is to earn profit and they are reaching it by providing different services to customers for the price which is called interest.

There are two general reasons for using bank accounts. The first and most common is the convenience and safety provided by a current account at a bank. The second is that small and regular surpluses are available to be saved, and for this purpose a bank provides deposit accounts.

So, a full range of banking services is offered to customers of the bank:

* It is a safe place for your money. You can open savings (deposit) account and earn interest. There are many different term-deposit accounts. Since these certificates of deposit offer very high interest rates they attract depositors to banks. To receive this high interest you needn’t withdraw money till the term is due, otherwise you will lose it;

* Banks open checking (current) accounts, which pay no interest to a customer but provide him with a checking book to write checks and pay any purchase or transaction. Recently new NOW and Super NOW accounts which pay customers interest have appeared in most banks;

* Banks offer credit services to customers: personal loans and different credit cards. They finance industries, commerce and direct services by commercial loans;

* Banks provide their customers with such classes of credit as overdraft, mortgages and home improvement loans;

* Banks provide their customers traveling abroad with foreign currencies, travelers checks (cheques), eurocheques, euro cards;

* Investment advice: banks open ways to find and invest large amounts of money;

* Banks provide brokerage services;

* Banks provide a wide range of trust services for individuals and businesses in the form of estate settlement, trust administration of a customer’s securities, the management of property and agency services.

Vocabulary:

failure – банкрутство, невдача

competitive price – конкурентна ціна

interest – відсоток

convenience – зручність

safety – безпека

current account – поточний рахунок

surplus – прибуток, профіцит

deposit account – депозитний рахунок

range – асортимент (послуг)

certificate of deposit (CD) – депозитний сертифікат

to withdraw – вилучати, знімати (гроші з рахунку)

due – до сплати

NOW (negotiable order of withdrawal) account – рахунок ОНВК (з обіговим наказом про вилучення)

commerce – торгівля

overdraft – овердрафт (технічний кредит, перевищення кредиту по рахунку)

mortgage – позика під заставу майна

securities – цінні папери

Questions:

1. Give the definition of a bank.

2. What are the most important functions of

central/commercial bank?

3. What are the reasons for using a bank account?

4. What accounts can you open in a bank? What is the difference between them?

5. What credit services do banks offer to their clients?

6. What other bank services do you know?

LOANS

Financial institutions, such as commercial banks, are profit-making organizations that receive deposits from individuals and busi­nesses in the form of current (US - checking) and deposit (US - sav­ings) accounts and use some of these funds to make loans. Therefore, the bank's most important domestic and international activity is the extension of credit in the form of loans, overdrafts, mortgages, lines of credit.

Loan is money lent to a customer (borrower) to use temporarily and is made for interest, which varies with the risk involved.

Banks make loans only for worthwhile purposes; financing trade, expanding business, and so on. They want to manage their funds ef­fectively, that is why banks base their lending proposition on the creditworthiness of the recipient, carefully screen loan applicants to be sure that the loan plus interest will be paid back on time.

Loans are classified according to:

1. Purpose of use (commercial/business loans for businesses: per­sonal loans which are made to individuals, but not for buying cars or houses: auto loans, but not in Ukraine yet; and home mortgage loans);

2. Time period of use (short-term or long-term loans depending on whether they are to be repaid within one year or over a longer pe­riod of time);

3. Types and amount of collateral required (an unsecured loan, that is not backed by any collateral and is given to only highly regarded customers of the bank, and a secured loan, that is backed by something valuable such as property. If the borrower fails to pay the loan, the lender may take possession of the collateral. That takes some of the risk out of lending money. Banks use different types of collateral: pledging, that is using accounts receivable as security; inventory financing that is inventory (such as raw mate­rials, products) is used as collateral for a loan. Other property can also be used as collateral, including buildings, equipment, or other things of value: stocks, bonds, etc.

Commercial/business loans are characterized as short-term or long-term. To obtain urgently needed cash businesses borrow on a short-term basis paying lower interest to the lender. If you develop a good relationship with a bank, it will open a line of credit for you. A line of credit means the bank will lend the business a given amount of unsecured short-term-funds, provided the bank has the funds available. Some firms will even apply for a revolving credit agreement that is a line of credit that is guaranteed. However, the bank usually charges a fee for guaranteeing the loan. A line of credit or revolving credit agreements are good ways of obtaining funds for unexpected cash needs that arise. Long-term loans are often more expensive than short-term loans because larger amounts of capital are borrowed and the re­payment date is less secure. Most long-term loans require some form of collateral, including real estate, machinery, equipment, or stock. The interest rate for such loans is based on factors such as whether or not there is adequate collateral, the firm's credit rating, and the gen­eral level of market interest rates.

Mortgage is a legal device that gives a creditor, known as themortgagee, an interest in property owned by a debtor, known as the mortgagor. The primary purpose of a mortgage is to provide collateral, in the form of property, to secure the repayment of a loan. A mortgage enables a person to buy property without having the funds to pay for it outright. Thus, many more people can enjoy the benefits of owning land and homes. Mortgages ordinarily have two components: the mort­gage itself, containing a description of the property and a statement that it is pledged in security of the loan; and a bond or note stating that the mortgagor is personally responsible for repaying the loan. If the mortgagor violates the terms of the note (by failing to repay the debt on time, for example), the mortgagee has the right, subject to certain conditions, to foreclose - to take over the property or to sell it and re­tain the amount of money due on the debt.

At the loan department of a bank you investigate credit proposi­tions, agree or do not agree to all of the terms and conditions. After the bank and the borrower reach an agreement, the banker arranges for the borrower to sign the necessary documents and then disburses the funds to him.

Vocabulary:

to lend (lent; lent) – надавати в кредит

temporarily – тимчасово

worthwhile – вартий

creditworthiness – кредитоспроможність

recipient – одержувач(ка)

collateral – застава, забезпечення

(un)secured loan – (не)забезпечена позика

accounts receivable (A/cs.Rec.; a/c rec) – дебіторська (поточна) заборгованість

line of credit – короткостроковий кредит

available – наявний

revolving credit agreement – обертова кредитна угода

fee – оплата

legal device – кредитний договір, законний засіб mortgagee – заставоутримувач, кредитор із застави

mortgagor – заставник, боржник за заставною

to pledge – обтяжувати заставою (якесь майно) to foreclose – відчужувати заставлену нерухомість, втрачати право викупу заставленого майна

to disburse – сплачувати, використовувати кредит

Questions:

1. What is a loan? What purposes do banks make loans for?

2. How are loans classified?

3. Give the classification of long- and short-term business loans. What is the difference between them?

4. What are the peculiarities of a mortgage?

5. What are the conditions of getting a loan?

ACCOUNTING, ITS PARTS AND SYSTEMS

Today's finance divisions focus their attention on the ultimate needs of decision makers who use accounting information, whether those decision makers are inside or outside the business.

So, accounting is an information system that measures, records, identifies, summarizes and communicates financial information about an organization or other entity in order to help management to make correct informed decisions. An economic entity is a unit that exists in­dependently - for example, a business, a hospital, or a governmental body. Bookkeeping is the process of recording financial transactions and keeping financial records. Mechanical and repetitive, bookkeeping is only a small, but important, part of accounting. Accounting, on the other hand, includes the design of an information system that meets the users' needs. The major goals of accounting are the analysis, interpretation, and use of information. Accountants were among the earliest and most enthusiastic users of computers, elec­tronic tools that are used to collect, organize, and communicate vast amounts of information with great speed.

Personal record keeping often uses a simple single-entry system in which amounts are recorded in column form. Such entries include the date of the transaction, its nature, and the amount of money in­volved. Record keeping of organizations, however, is based on a dou­ble-entry system, where each transaction is recorded on the basis of its dual impact. That means that every economic event has two aspects (effort and reward, sacrifice and benefit, source and use) that balance each other. In the double-entry system, each transaction must be re­corded with at least one debit and one credit, so that the total money amount of debits and the total money amount of credits equal each other. The whole system is always in balance. All accounting systems, no matter how sophisticated, are based on the principle of duality.

Information relating to the financial position of an enterprise is presented in a balance sheet, while operating results are displayed in an income statement. Data relating to an organization's liquidity and changes in its financial structure are shown in a statement of changes in financial position. Such financial statements are prepared to provide information about past performance, which in turn becomes a basis for readers to try to project what might happen in the future.

Vocabulary:

accounting – звітність, бух. облік

bookkeeping – рахівництво

to meet one’s needs – задовольняти потреби

accountant – бухгалтер

single-entry system – проста бухгалтерія

entry – вхідні дані, входження

dou­ble-entry system – система подвійного запису

dual impact (duality) – подвійний вплив (двоїстість)

to equal – дорівнювати

sophisticated – складний

performance – виконання, діяльність

Questions: