1 16.Banks : Functions and Services

2 Chapter 16 : main menu 16.1The economic role of banks Progress Checkpoint The services of commercial banks 16.3The services of merchant banks 16.4Functions of the central bankProgress Checkpoint 2

3 Progress Checkpoint 1 Q16.1 Why are banks regarded as the middlemen between savers and borrowers?

4 This is because banks accept deposits from savers and lend loans to borrowers. Hence savings is channeled from savers into investment to investors. Progress Checkpoint 1

5 Q16.2 How does a commercial bank make profits? Progress Checkpoint 1

6 Banks offer a lower interest rate to depositors and charge a higher interest rate on borrowers. They earn the interest differential as profits. Progress Checkpoint 1

7 Q16.3 Mr. Li is the owner of a watch manufacturing firm, which is a listed company in the stock exchange. He wants to import some raw materials from Europe. He also needs huge capital for expansion. What kind of banking services are suitable for him? Progress Checkpoint 1

8 As he needs to import raw materials, the service of issuing letter of credit is suitable for him. As he needs huge capital for expansion, the service of lending bank loan is suitable for him. Also, he may issue new shares in the stock exchange. Hence the service of being the underwriter of new shares is also suitable for him. Progress Checkpoint 1

9 Q16.4 “The Hong Kong Association of Banks sets the prime rate ( 最優惠利率 ) in Hong Kong.” Do you agree? Progress Checkpoint 2

10 No. The prime rate in Hong Kong is set individually by different banks, according to the market condition. The Hong Kong Association of Banks does not set any interest rate in Hong Kong. Progress Checkpoint 2

11 Q16.5 Why is supervision on private banks required? Progress Checkpoint 2

12 This is to avoid possible financial crises and bank runs. Progress Checkpoint 2

13 End of Chapter 16