Banking Central Banking

BANKINGCENTRAL BANKING

MK, U 14RB, pp.56-64

INTRODUCTION

“Neither a borrower, nor a lender be.”(from Hamlet, Shakespeare)

“If you owe your bank a hundred pounds, you have a problem. If you owe it a million pounds, it has a problem.”

(J. M. Keynes)

VOCABULARY

WHICH OF THESE BANKING SERVICESDO YOU USE?

CURRENT ACCOUNTSAVINGS ACCOUNTDEBIT CARDCREDIT CARDCHEQUEBOOKCASH DISPENSER

(ATM)

STANDING ORDERLOANSOVERDRAFTMORTGAGEEXCHANGE OF

FOREIGN CURRENCY INTERNET BANKING

WHICH VERB IS MISSING?

1. If I _________money from a bank, I need to ________it one day.

2. The current account allows me to _______money when I need it.

3. Banks________ high interest to borrowers.

4. Banks _________low interest to depositors.

WHICH VERB IS MISSING?

5. Clients who took out a loan must _________the

principal and interest.

6. Clients can _________ a standing order.

7. If you _________your account (are in the red) you

pay high interest.

8. Banks _______mortgages to people who need a

place to live.

RB, P.56

TYPES OF FINANCIAL INSTITUTIONS(MK, P. 73)

1. RETAIL (COMMERCIAL) BANKS2. INVESTMENT BANKS3. PRIVATE BANKS4. HEDGE FUNDS5. GLASS STEAGALL ACT (1934-1999)6. LARGE FINANCIAL CONGLOMERATES (AFTER 1999)7. ISLAMIC BANKS8. NON-BANK FINANCIAL INTERMEDIARIES

TYPES OF FINANCIAL INSTITUTIONS(MK, P. 73)

1) Retail banks r… d…from people.

2) Retail banks m… l… to people and companies.

3) Investment banks g… financial a…

4) Investment banks r… c… for companies.

5) Investment banks i… s… and b…

6) Investment banks a… takeover b…

7) They o… stockbroking a…

8) They o… p... management services.

TYPES OF FINANCIAL INSTITUTIONS(MK, P. 73)

1) Private banks p… s… to welathy clients.

2) Hedge funds u… a variety of risky investing s…

3) Hedge funds want to a… higher r…

4) The Congress p… Glass Steagall A… in 1934.

5) This Act s… c banking from i…banking.

6) The Act was r… in 1999.

7) Large banks are now big c… which offer many s…

8) Islamic banks do not p… i… to borrowers or c… i… to lenders.

CENTRAL BANKING

Central banks implement monetary p________supervise exchange r_________regulate the credit s________supervise commercial b_________act as a lender of last r________ maintain the national currency s________

→ LISTENING, MK 2ND ED. TRACK 9, RB p. 61

COLLOCATIONS (LISTENING)CENTRAL BANKS…

IMPLEMENT …

SET…

LIMIT…

SUPERVISE /

OVERSEE…

CONTROL…

ESTABLISH…

ENSURE…

INTERVENE…

LEND…

SELL/BUY…RB P. 62, 63, 64

CENTRAL, RETAIL OR INVESTMENT BANK…?offers portfolio

management servicesissues and underwrites

securitiesexchanges foreign

currencieslimits the fluctuations of

interest ratesalters the money supplyraises funds for industryreceives deposits

lends money to customers

sets interest rates ceilings and floors

makes a profit from spread

lends to commercial banks

makes a profit from fees and commissions

issues government bonds

READINGNORTHERN ROCK BANK CRISIS (RB, p.59,60)

VOCABULARYbank run - the concerted action of depositors who try to

withdraw their money from a bank because they think it will fail

shakeout -an elimination of some competing businesses, products, etc., as a result of intense competition in a market of declining sales or rising standards of quality.  

credit squeeze- a restraint or limitation of credit;

restricted bank lending that is accompanied by rising

short-term interest rates and a decline in economic

growth

The Treasury -the department of government that has

control over the collection, management, and

disbursement of the public revenue.

The Chancellor -the British cabinet minister responsible

for finance 

THE SUBPRIME CRISIS AND THE CREDIT CRUNCH MK p. 75

1) Lenders granted mortgages to subprime borrowers.

2) Financial institutions created securities out of

mortgages (MBS).

3) The mortgage lenders sold mortgage-backed

securities to investors on Wall Street.

4) American house prices fell and many borrowers

defaulted on repayment.

THE SUBPRIME CRISIS AND THE CREDIT CRUNCH MK p. 75

5) The value of MBS fell and banks lost billions of dollars.

6) Some went bankrupt and some were bailed out by the government.

7) There was little capital left for lending and borrowing (this was the credit squeeze).

SUBPRIME MELTDOWN (www.investopedia.com) ANTICIPATE THE ANSWER TO THE QUESTION AT THE

END OF THE SENTENCE.

Following the tech bubble and the events of September 11, the

Federal Reserve stimulated a struggling economy …HOW?

..by cutting interest rates to historically low levels. WHAT WAS

THE RESULT ON THE HOUSING MARKET?

As a result, a housing bull market was created. People with

poor credit got in on the action when mortgage lenders created

non-traditional mortgages.

Eventually, interest rates climbed back up… WHAT WAS THE CONSEQUENCE FOR BORROWERS?

…and many subprime borrowers defaulted when their mortgages were reset to much higher monthly payments.

This left mortgage lenders with property that was worth …HOW MUCH?

…less than the loan value.Defaults increased; the problem snowballed, and several

lenders (financial institutions) …WHAT HAPPENED TO THEM?

…went bankrupt.

Investors and hedge funds also suffered because lenders

had sold mortgages they originated into …WHICH

MARKET?

…the secondary market.

Here the mortgages were bundled together and sold to

investors as collateralized debt obligations (CDOs) and

mortgage-backed securities (MBSs). When the higher risk

underlying mortgages started to default, WHAT

HAPPENED TO THE VALUE OF ASSETS UNDERLYING

THESE SECURITIES?

…investors were left with properties that were quickly

losing value. 

In the wake of the meltdown, …WHAT DID CENTRAL

BANKS DO?

…central banks released liquidity into the market place,

which allowed struggling lenders and hedge funds to

continue operations and make the necessary payments on

their obligations.

http://www.youtube.com/watch?v=bx_LWm6_6tA