P. 34. The banking system, p. 496.

Banks are financial intermediates. Their money forms part of the money supply, whereas other financial institutions' assets don't.

Primary banks - transmission of money.

1.    High street banks (commercial banks, clearing banks). Functions:

1.     credit creation

2.     transmission of money(credit cards, (travellers)cheques, standing orders, direct debit, EFTPOS)

3.     Advisory services (trusteeship, foreign exchange, brooking, investment management, taxation)

4.     Other financial products offering (mortgages, insurance)

Balance sheet:

Liabilities (sight and time deposits), 56% is eligible

Assets - cash (coins + 0.45% cash ratio for the Bank), loans(up to 3 month to LDMA,

CDs, local authorities), bills(The Bank issues for 90 days), special deposits (0 now), investment (govn stock), advances(major, overdrafts + loans to customers), foreign currency.

2.    Discount houses (LDMA) - peculiar to UK, cushion between government and commercial banks.

They discount bills. Each week Treasury offers bills to sale. Interest determines money supply. LDMA buys them. The Bank is also the lender of the last resource to LDMA.

Secondary banks - dealing with other financial intermediates (bills) and providing services other than money transmission.

1.    Merchant banks - wholesalers in banking. Small margin, very large sums. Specialise in 1 ind.

They accept bills (making them fine (first class) bills by guaranteeing them - lowest discount rate.

Also exist

1.     Central bank - government

2.     Savings bank - to encourage small savers, insignificant in England (Germany)

3.     Co-operative banks (France) and credit unions

4.     Foreign banks

5.     Building societies (special privileges from the state, assist home-buyers)

Limits to credit creation:

1.    Liquidity ratios (9-12%)

To ensure stability, to allow the Bank to control money supply.

2.    The supply of collateral security (houses for mortgages)

3.    The monetary authority weapons

Regulation

1.    The banking act 1979

The licensing of the banks (LTD - licensed deposit taker), the allowance to call itself a bank and advertise, deposit protection scheme.

2.    Monetary control provisions 1981.

0.5% in cash for the Bank, a new monetary sector was defined (included LTD etc.)

3.    The Banking act 1987

stricter supervision (minimum capital to £5m)

4.    The Building societies act 1986 (regulated them)

Money markets

Classical market (the Bank, LDMA, commercial banks). Government lends to LDMA that lends to banks.

Parallel markets 1.     Local authorities market 2.     Finance houses (hire purchase) 3.     Large Companies 4.     Interbank market 5.     CD market 6.     Eurocurrencies

          Capital market - provision of long-term finance (money mkt is for short-term)

1.     Commercial banks  do not get involved for projects over 5 years in UK (except mortgages, not capital market). Banks do not buy shares and debentures.

2.     Merchant banks - their business, highly specialised.

3.     Insurance companies and pension funds - major contributors, have gathered loads of money over years. Buying of privatisation shares. Rich if correctly managed.

4.     Investment trusts - buys shares of other companies.

5.     Unit trusts - for small investors. Manager of the trust buys shares for you. Highly regulated.

6.     Government sponsored institutions-small businesses and high unemployment industries funding.

7.     Consortium bank - international institution, rare, no bank holds >50%)

8.     Private individuals - less nowadays, big inheritance tax.

9.     Self finance - major source, ploughed back profits.