MODERN BANKING

MODERN BANKING

The goldsmith bankers were an early example of financial intermediary. A financial intermediary is an institution that specializes in bringing lenders and borrowers together. A commercial bank borrows money from the public, crediting them with a deposit. The deposit is a liability of bank. It is money owed to depositiors. In turn the bank lends money to firm, households or governments woshing to borrow.
Banks are not only financial intermediaries. Insurance companies, pension funds and building societies also take in money in order to relend it. The crucial feature of bank is the some of their liabilities are used as a means of payment and therefore part of the money stock. Commercial bank are financial intermediaries with a government licence to make loans and issued deposits, including deposits against which cheques can be written.
We begin by looking at the present day UK banking system. Although the details vary from country to country, the general principle is much the same everywhere. In the UK, the commercial banking system comprises about 600 registered bank, the National GiroBank operating through post offices and about a dozen trustee saving banks. Much the most important single group is the London clearing banks. The clearing banks are so named because they have a central clearing house for handling payments by cheque.
A clearing system is a set of arrangements is which debts between banks are settled by adding up all the transactions in a given period an paying only the net amount needed to balance inter-bank accounts.
Altought in both cases the cheque writer`s account is debited and the cheque recipient`s account is credited, it does not make sense for the two banks to make separate inert-bank transactions between themselves. The clearing system calculates the net flows between the member clearing banks and these settlements that they make between themselves. Thus system of clearing cheques represents another way society reduces the cost of making transactions.
( Taken from Economics : English for Academic Purpose Series by C. St. J. Yates )