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Commercial & Retail Bank U4EBII

Commercial and retail banks accept deposits from customers and use the money to make loans to other customers and businesses. Banks earn profits from the difference between the interest rates paid to depositors and charged to borrowers. Banks must balance liquidity needs with credit creation to expand the money supply through the banking system in a controlled manner.

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28 views2 pages

Commercial & Retail Bank U4EBII

Commercial and retail banks accept deposits from customers and use the money to make loans to other customers and businesses. Banks earn profits from the difference between the interest rates paid to depositors and charged to borrowers. Banks must balance liquidity needs with credit creation to expand the money supply through the banking system in a controlled manner.

Uploaded by

jose
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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m Commercial and retail banking

- Commercial and retail banks


When peoplc have more moncy than they nccd to spcnd, they may choose to save it. They
dcposir ir in a bank accounr, ar a commcrcial or retail bank, and rhe bank gcnerally pays
inrcrest ro rhe dcpositors. Thc bank thc-n uses rhe moncy rhat has been deposited to grant
loans - lend money ro borrowers who necd more rnoney than they have availa ble. Banks
make ;:i profit by charging a highcr rate of intcrest to borrowers than th ey pay ro depositors.
Commercial banks can also movc or transfer mon ey from onc cusrom er's ba nk. account

-
to anothcr one, a t the sarne or ;mother bank, when the custom er asks them to.

Credit
Banks also create credit - make money available for s~meone to borrow - beca use the
money rhey lend, from their deposits, is usually spent and so transferred to another ha nk
accounr.
The capital a bank has and the loans it has made are irs assets. The customers' deposits
are liabilities because the money is owed to someone else. Banks have to keep a certain
percentage of their assets as reserves for borrowers who want to withdraw their money.
This is known as the reserve requirement. For example, if the reserve requirement is 10%,
a bank rhar receives a€ 100 deposit can lend ¤ 90 of it. If the borrower spends the fllOney
and wrires a cheque to someone who deposits the ¤ 90, the bank receiving thar deposir
can lend €81. As the process continues, the banking system can expand the first deposir
of € 100 into nearly € 1,000. In this way, ir crea tes credit of almost ¤ 900.

- loans and risks


Before lending money, a bank has to a5sess or calculare rhe risk involved. Generally, _the
grearer the risk for thé bank of not being repaid-, rhe higher rhe interest rate they charge.
Mosr rerail bariks have standardized products for personal customers, such as perso!lal
Joans. This meaos rhar ali customers who have been granted a loan have the same terms
and conditions - they have the same rules for paying back thé money.
Banks ),ave more complicated risk assessment methods for corporate customers - business
clients - but large companies these days prefer to raise their own finance rather than
borrow froni banks.
Banks ha ve to find a balance between liquidity - having cash available when depositors
want ir - and differenr maturities - dares when loans will be repaid. They also have to
balance yield - how much money a loan pays - and risk.

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Pro(essional English in Use Finance


20.1 Complete thc semcnces fro rn bnnk s· wcbsires. Look ar A a nd C o ppo site to h elp you .
l

J
lf yo u need instant access to all yo ur mon ey, this is the ...... ....... ___ ..
fo r yo u .

j
2
O ur pro duc ts fo r .. .. ...... lnclude b usiness overdratts . loan
repa ym e nls th at refl ect your cash fl o w , and comm e rcial m o rtgages .

3
Our loca l bran c h manage rs a re en c ourag ed to help local bu sin~sses and are

4
a uthoriz ed to ........................... and overdrafts .
1\

..
\{ve offer standardized loans : you can be sure you woñ't get less favo urable terms
and ............................. than our other ............................. ............... .

2 0.2 Ma tch the rwo pa n s of the sentences. Look ar A, B and C o pposite to help you .

--
1 Ba nks lend savers' depos its
2 They also c rea re credit by
3 H ow much credit ba nks ca n creare
1 Befare le nding m o ncy,

--
4
5 The interest ra te o n a loa n
' 6 Ba nks a lways need liquidity,

-•.
a ba nks have to assess the risk involved.
tr depend s. o n the reserve requirem ents.
e · d epends o n h ow risky ir is for the bank ro lend the mane)'..
d so th ey ca n't lend a li their money in loans ·w_ith long maturities.
e lending the same origina l deposir severa! times .

.
f to people wh o need to bo rrow money.

2 0.3 Find verbs in A , B and C opposire tha t can be used to mak-e word combinatio n s w ith the
n o uns below . Then use sorne of the verbs to complete the sentences .

••
•• 1 With standardized products, ali customers are ........................... the same interest rate.
2 Banks generall y know from experience how much cash to keep in their reserves for customers
who want to ........................... it.
3 Banks carefull y study tb e financia! situation of a company to ........................... the risk involved in
lending it money.

Ove,r ~o tjou
Look at some commercial bank websites from your country. Which bank offers the best
rates to borrowers and lenders?

Professionpl English in Use Fino(lce 4~

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