ACCA F9 考試：Banking System

1 Financial Intermediaries

1.1 Financial Institutions

The following financial institutions act as financial intermediaries:

Commercial banks.

Merchant/investment banks, which provide banking services for business customers. These services include advice on items such as share issues and mergers.

Building societies, which take deposits from the domestic sector and lend to those buying their own house.

Insurance companies, which can invest much of their premium ncome in long-term assets, as their outgoings are reasonably easy to predict.

Investment trusts and unit trusts/mutual funds, which attract investors and then reinvest the funds raised in other companies.

Pension funds, which receive regular premiums and thus have predictable cash outflows and can invest for the long term.

Finance companies, which provide business and domestic credit, leasing finance and factoring/invoice discounting services. These companies are often a subsidiary of another financial institution.

Discount houses, which trade in investments such as bills of exchange.

1.2 Role of Financial Intermediaries

Financial intermediaries are important as they carry out the following roles:

Aggregation: small deposits are combined and lent to large borrowers.

Maturity transformation: a continuing stream of short-term deposits can be used to lend monies in the long term.

Risk diversification: the risk of each particular borrower is effectively spread across many lenders.

Liquidity: providing a liquid market with flexibility and choice for both lenders and borrowers.

Hedging: providing instruments to business for hedging risk (e.g. forward contracts, options and swaps).

2 Commercial Clearing Banks

The commercial clearing banks carry out the following roles:

They accept deposits from their customers which are then held in current or deposit accounts.

They issue certificates of deposit, which may then be traded.

These relate to large deposits, which have a term to maturity of at least three months.

They lend money in a number of different ways, thus ensuring that adequate returns are made. At the same time, some cash must be held in order to ensure that sufficient liquidity is maintained. Banks therefore have to find the right balance between profitability and liquidity.

They provide a money transmission service through the clearing system.

Bank lending takes the following forms:

Overdraft facilities and term loans to individuals and business customers.

Investments in other financial intermediaries, such as leasing companies.

The purchase of short-term government securities.

The purchase of trade or commercial bills.

The lending of money in the very short term to discount houses, which will re-lend in the longer term, as not all of their borrowings are likely to be called in at any one time.

3 Credit Creation

Banks need to keep only a small proportion of their assets in the form of cash as only a small proportion of their depositors will require repayment on any particular day. The rest of their assets can be in the form of investments with which the bank hopes to make the returns required by their shareholders.

Central banks, such as the Bank of England, will often want to control the creation of credit, and therefore the growth in the money supply, as part of their monetary policy. One of the policy tools available to them is to specify a minimum liquidity ratio which the banks must maintain.