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Spring Term Third Year Term VI Variant A Use of English Task 1. Read the text and say if the statements given below it are true or false.
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Spring Term Third Year Term VI
Variant A
Use of English
Task 1. Read the text and say if the statements given below it are true or false.
Spring Term Third Year Term VI
Variant A
Use of English
Task 1. Read the text and say if the statements given below it are true or false.
During the past 15 years or so international bank regulation has been concerned mostly with the ability of the system to sustain shocks, such as stock market crash, a foreign-exchange crisis or a terrorist attack. To guard against systemic shocks, regulators require banks to carry a cushion of regulatory capital, so banks have higher costs than do more lightly regulated financial companies. But they have privileges too, including deposit insurance and access to the “discount window” (allowing them to borrow money from the central bank), under a long-standing pact between banks and regulators.
The banks’ system of back-ups, capital buffers and procedures does indeed seem robust. Many of the world’s biggest banks are extremely strong, with plenty of capital and a long record of high profits. Part of their strength comes from having passed some of their risks to others, including hedge funds, private-equity firms, insurance companies and pension funds. Some observers now feel that in view of this reduced risk, the regulatory capital banks are required to hold may be excessive and could be better employed elsewhere.
Regulators want to safeguard the strength and soundness of the banks they supervise, so they tend to shield them from the full force of domestic or external competition. But how far should they stack the cards in favor of licensed banks? If the banks enjoy too much protection, they have little incentive to compete on price or quality with other banks, or indeed with non-banks offering similar services. If they have too little, they may compete recklessly and ruin themselves – and perhaps the entire banking system with them.
Yet because banks are so heavily regulated, and to a large extent shielded from non-bank competition, it is difficult to know how much better they would do in a more liberal environment. Banks mostly compete with other banks, but on mutually accepted terms. In some markets, such as Britain’s, that has led to dominance by just a few banks, despite apparently fierce competition between banking brands. When a handful of banks in a dominant position show exceptionally high returns on capital year after year, it suggests that potential competitors are being kept out. In Britain, that was the conclusion reached by a series of government-sponsored studies, which led to some attempts at corrective action.
Bank supervisors, because of their preoccupation with systemic risk, have tended to be quite tolerant of anti-competitive behavior by banks. Banks have found that imposing high charges for making payments, and being able to use customers’ cash while these payments are being processed, have been reliable sources of revenue, bearing little relation to the underlying costs. Anyone who wants to compete in these areas has to face the fact that almost every transaction ends with a payment into a bank account.
But now the pendulum is beginning to swing the other way. Bank regulators are becoming more concerned to ensure transparency in the way that banks operate and compete, and have realized that the real engines of an economy are the users if banking services, be they savers, consumers or businesses.
Moreover, some regulators worry that the credit risk and market risk which banks have traditionally borne is ending up elsewhere in the economy. That is fine if the new risk-takers, or their financial advisers, understand what they are doing; not so fine if it results in poorer returns from the pension and insurance funds on which everyone is relying to sustain an ageing population in future.
All this means that bank regulators will have to rethink their role. Perhaps they should be promoting leaner, less profitable, more utilitarian providers of basic services and recyclers of risk, leaving more of banks’ traditional businesses to be picked off by non-bank competitors. Meanwhile, the insurance industry and the pension funds should be subject to more systematic regulation. The nightmare alternative may be a handful of megabanks with a stranglehold on financial services whose profits are largely protected from outside competition.
1. Banks are known to have higher costs that other financial companies that are not so strictly regulated. True.
2. Since banks are strictly regulated they don’t have much of privileges. False.
3. One of the reasons of the banks’ strength is the fact that they have passed some of their risks to organizations like hedge funds, private-equity firms, insurance companies and pension funds. True.
4. Regulators tend to shield the banks they supervise from the full force of domestic or external competition, because they want to safeguard their strength and soundness. False.
5. Since banks are so heavily regulated, and to a large extent shielded from non-bank competition, it is easy to foresee how much better they would do in a more liberal environment. True.
6. When a bank shows exceptionally high returns on capital year after year, it suggests that potential competitors are being kept out. True.
7. Imposing high charges for making payments, and being able to use customers’ cash while these payments are being processed, haven’t been reliable source of revenue. False.
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