The commercial banks Commercial banks tend to be large national banks, with a large number of local branches. They provide a wide range of banking services they are public limited companies, they are in business to earn profits for their shareholders.

This means that they must arrange their assets (i.e. their loans) so as to earn the highest possible rates of interest. On the other hand, they must look after the interests of their depositors. The banks must make sure that they can always meet their depositors' demands for cash. The banks, therefore, have two main objectives, profitability and liquidity.

Liquidity An asset is said to be liquid when it can easily and quickly be converted into cash. Notes, coins and bank deposits held in current accounts, therefore, are the most liquid of all assets. Time deposits in banks and building society deposits are not completely liquid, but they are still very liquid assets because they can be converted into cash fairly easily and with little delay.

Profitability and liquidity The need to have liquid assets and the desire to make as much profit as possible present the banks with a problem. The rates of interest on short-term loans tend to be lower than those on long-term loans. The banks are taking bigger risks when they lend money for long periods, and hence they charge higher rates of interest. Long-term loans, however, are illiquid assets

Bank deposits Bank deposits may be seen as claims to cash (notes and coin) because they can be converted into cash, either on demand or after some period of notice. The banks, however, do not have to keep cash reserves equal to the total value of their deposits. People with bank deposits normally use cash for smaller payments; for larger payments they tend to use their cheque books. This means that bank depositors will normally only demand a small percentage of their bank deposits in the form of cash.

Types of bank deposit Current accounts: A person who holds money in a current account can withdraw cash on demand. Holders of current accounts are given cheque books and can make payments from their bank deposits by cheque. Interest is not usually paid on money in current accounts. Aka. sight deposits or demand deposits Current accounts: A person who holds money in a current account can withdraw cash on demand. Holders of current accounts are given cheque books and can make payments from their bank deposits by cheque. Interest is not usually paid on money in current accounts. Aka. sight deposits or demand deposits

Types of bank deposit Time deposits: Money placed in a time deposit earns interest. It cannot be withdrawn on demand or transfcrred by means of a cheque. The bank normally requires several days' notice of withdrawal. Time deposits: Money placed in a time deposit earns interest. It cannot be withdrawn on demand or transfcrred by means of a cheque. The bank normally requires several days' notice of withdrawal.

Banking services 1. Receiving deposits: Bank deposits are a safe and convenient way of holding money. Banks will also act as a safe deposit for valuables other than money. 2. Making Loans 3. Making payments : The cheque system The cheque system Standing orders: These enable depositors to instruct their banks to make regular payments of fixed amounts. They are very useful for paying for such items as rent, rates, insurance premiums, mortgage payments and so on. Standing orders: These enable depositors to instruct their banks to make regular payments of fixed amounts. They are very useful for paying for such items as rent, rates, insurance premiums, mortgage payments and so on.

Credit cards These plastic cards (e.g. Access and Barclaycard) are now widely used by bank depositors. They enable cardholders to buy goods and services from

Direct debits Some bills are payable at regular intervals, but the amounts are variable. Obvious examples are the quarterly bills for the electricity, gas and tele­ phone services. Direct debits are instructions to a banker to pay these bills, whatever their amounts, when they fall due

Making Payments (contd.) Cash Dispensers Cash Dispensers Travellers Cheques and foreign currency Travellers Cheques and foreign currency

Making Loans This is the most profitable activity of the bank. It is apart of the banks core business. This is the most profitable activity of the bank. It is apart of the banks core business. Bank loans Bank loans Bank overdrafts Bank overdrafts Bank loan and security Bank loan and security

The clearing of cheques In a banking system with several different banks, it is very likely that many people making payments by cheque will have their accounts at different banks from the people receiving the payments.

Example suppose that Mr. Jones, with an account at Scotia-Bank, buys a second-hand car for $5000 from Mr Smith and pays for it by cheque. Mr Smith then pays this cheque into his own bank, say Commonwealth. Now Mr Smith cannot receive payment until $5000 has been transferred from Mr. Jones's account at Scotia to his account at Commonwealth. Every day millions of such cheques are paid into the banks. It would be impossible to transfer money for each individual payment.

Example (cont’d) In order to deal with this problem, the banks have cooperated to set up a cheque clearing system. Cheques which are drawn on one bank and are payable to another bank are sent to a clearing house

Other Bank services Help and advice with the investment of money Help and advice with the investment of money Acts as executors of wills Acts as executors of wills Insurance services through subsidiaries Insurance services through subsidiaries Operates unit trusts Operates unit trusts

Remember Bank deposits are claim to cash Bank deposits are claim to cash Banks depend on their financial assets to make a profit Banks depend on their financial assets to make a profit Assets of bank Assets of bank Liabilities of bank Liabilities of bank Bank creates money when a loan is made: See page 127: Stanlake. Bank creates money when a loan is made: See page 127: Stanlake.

Problems 1. Putting your money into a building society is one way of saving money. Name 2 other ways of saving money 2. Give 2 reasons why people might save money. Explain your answer. 3. What is a Commercial Bank? 4. List and explain two types of bank loans. 5. List and explain one asset and one liability of the bank

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