Retails Banks Or Commercial Banks

Readings

U14:

Retails banks or commercial banks (often called High Street banks in Britain)

receive deposits from and make loans to, individuals and small companies.

Investments banks work with big companies, giving financial advice, raising

capital by issuing stocks/shares and bonds, arranging mergers and takeover bids,

and so on. They also generally offer stockbroking and portfolio management

services to rich corporate and invidual clients. Wealthy inviduals can also us

private banks, which provide them with banking and investment services, snd

hedge funds, which are privste investment funds for weathly invesstors (both

individuals and institutions) that usa a wider variety of (risky) investing

strstegies than traditional investment funds, in order to achieve higher returns.

In the USA, where many bsnkd went bankrupt following in the Wall Street

Crash in 1929, a law was passed in 1934 ( the Glass-Steagall Act) that separates

commercial banks & investments banks or stockbroking firms. For the rest of

the 20th century, there were regulation in the US, Britain & Japan that prevented

commercial banks from dojng investment banking business. In other countries,

including Duc, Switzerland, large banks did all kinds of financial business. But

starting in the 1980s, many rules were ended by financial deregulation, and

Glass-Steagall was repealed in 1999. Large banks became international

conglomerates offering a complete range of financial services that were

previously provided by banks, stockbroker and insurance companies.

Islamic banks, in Islamiccountries and major fincial centres, offer interst free

banking. They do not pay interest to depositors or charge interest to borrowers,

but invest in companies and share the profits (or losses) with their depositors.

Some car manufactures, food retailers and department stores now offer products

like personal loan, credit cards and insurance. Technically these are not banks

but non-bank financial.

U16: Bonds

Companies finance most of their activities by way of internally generated cash

flows. If they need to raise more money to expand their operations

they can either issue new shares – selling them to their existing owners or on the

stock market (equity finance) – or borrow money (debt finance), usually by

issuing bonds. Companies generally use an investiment bank to issue their

bonds, and to find buyers, which are often institutional investors like insurance

companies, mutual funds and pension funds.

Bondholders get back their original investment (or ‘principal’] on a fixed

maturity date, and receive interest payments (the ‘coupon’) at regular intervals

(six-monthly or annually) until then. Most bonds have fixed interest rates.

For investors, bonds are generally safer than stocks or shares, because if an

insolvent or bankrupt company sells its assets, bondholders are among the

creditors who might get some of their money back, On the other hand, in the

medium or long term, shares generally pay a higher return than honds. For

companies, the advantage of debt financing over equity financing is that bond

interest is tax-deductible: companies deduct their interest payments from their

profits before paying tax, while dividends paid to shareholders come from

already-taxed profits, but debt increases a company’s financial risk. bond

interest has to be paid, even in a year without any profits to deduct it from, and

the principal has to be repaid when the debt matures, whereas companies are not