Text 9. Definition and Characteristics of Banks

A bank is a financial intermediary that holds assets and issues liabilities, but issues at least two classes of liability — typically, forms of debt and equity — with differing claims to its assets in the event it defaults. A bank is like a mutual fund in so far as it is a financial intermediary that invests on its own account. And issues claims against itself to the "ultimate" investors who provide the funds it invests. However a bank is unlike a mutual fund and like most other large firms in capitalist economies and in so far it has a capital structure consisting of two or more distinct classes of liability. Indeed, one can think of a bank simply as a debt-and-equity-issuing company that is engaged in business of financial intermediation, in a manner analogous to the way in which, say, a typical steel-producing company is a debt-and-equity company engaged in the business of making steel.

Banks are (and always have been) the dominant form of financial intermediary.

Banks are particularly dominant in the provision of short-term finance, and in all major countries bank loans are still much greater than the next largest source of short-term commercial and industrial finance.

The institutions we recognize as banks have five notable empirical characteristics. The first is that they have a high ratio of financial to"real assets", relative to firms whose principle business is non-financial. Virtually all firms hold both financial and "real" assets, but a non-financial firm typically holds most "real" assets, (e. g. factories) while a bank mainly holds financial ones such as bonds, loans or equity. A bank's real assets mainly consistent of its own offices and equipment, and these are only a fraction of its total assets. The first characteristic therefore merely reflects the fact that a bank's main line ofbusiness is financial intermediation. The second empirical characteristic is that bank liabilities tend to be more liquid than the liabilities ofmost other firms. The third characteristic, related to the second, is that many banks liabilities are trans-actable, i. e. are used as media ofexchange. Obvious examples are bank notes and cheques drawn against chequable deposits. The forth characteristic is that banks' assets usually have much longer terms than their liabilities, and are therefore generally less liquid. Banks thus "transform" relatively illiquid longer-term assets into relatively liquid short-term liabilities. Finally, banks are more highly levered than other firms. The banks' lower capital assets ratios might reflect a perception that the banking industry is safer than most other industries, and therefore has lower capital adequacy requirements; however, it also appears, especially in the USA to reflect regulatory policies that have encouraged banks to run down their capital and rely for their safety on deposit insurance guarantees or expectations of central bank bailouts, but we shall have more to say on these Issues in due course (R. Dowd. Competition and Finance. N. Y.: St. Martin's Press, 1996).

Vocabulary list:

intermediary — посредник, агент, брокер (лицо, уполномоченное на совершение операций за счет клиента);

intermediation — посредничество; размещение денежных средств у финансовых посредников;

assets — актив;

liabilities — пассивы;

equity — 1) капитал компании, разница между активами и текущими обязательствами, заемным капиталом и привилегированными акциями;

equities = ordinary shares;

mutual fund — взаимный фонд;

short-term — краткосрочный;

long-term — долгосрочный;

liquidity — ликвидность.