Managing Loans and Other Investments

Date: 2015-10-07; view: 457.

Banking Basics

TEXT 1

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General information

UNIT 5

Part II. Banking

Speech Practice

Points for discussion:

Ø Speak about the types of open market operations.

Ø Speak about advantages and disadvantages of credit cards.

Ø What type of credit card do you have and what can you do with it?

A good way to understand how banks work is to imagine starting your own bank. The first thing you need to do is put up some of your own money. You won't receive a banking license unless you have your own capital at risk.

Let's assume you raise $6 million in cash with help from other investors. That will be the bank's initial equity, the owner's stake. Next you obtain a charter, rent a building, furnish it with all the necessary equipment, hire and train a staff, and open your doors for business.

You'll need to deposit some of your initial stake at the Fed. Those funds will be used to clear checks written by your own depositors. You'll also need to keep enough cash in the vault to meet the demand for withdrawals by your depositors. Let's assume initial expenses of $1.2 million. That leaves $4.8 million, of which you allocate $2 million to vault cash and $2.8 million to your Fed account.

As your business develops, some customers will deposit their own money to open checking accounts. Others will invest in your savings accounts and certificates of deposit (term loans) which must pay a competitive interest rate. Still others will seek loans from the bank. It is up to you to determine whether prospective borrowers are good credit risks, and will be able to pay the interest charges and return the principal on the specified date.