Business of Banking (Volumul I)

FOREWORD
The book “The business of banking” is addressing the students of the

Economic Faculties, especially to those having a foreign affairs profile,
focusing on the banking field issues.
At the same time, the book intends to be a support for the future economists
in the banking field, as well as for the bankers, the foundation upon which
they can expand their technical knowledge of the Romanian banking system;
money services; foreign exchange operations; international trade; payment
methods and means of payment or settlement; lending, and risks.
It is underlined the fact that the book is a very important work, especially
for the beginners, for those which are studying for the first time the subject
explained in the book.
Various people must be thanked for the help given: my students and my
sponsor the Commercial Bank of Greece.
Ligia Georgescu–Goloşoiu
March 2002
Presentation
The aim of Business of Banking is to equip the students of the Economic

Faculties with the ability to take an active part in banking activities in
English. The course is intended to be used by students at intermediate to
advanced economic levels and is planed to get them actively understanding
of economic and banking issues, not only during the classroom.
At the same time, Business of Banking is addressing not only the Romanian
students, but also the foreign students who are studying in Romania and are
interested in expanding their technical knowledge of the banking system.
The book consists of a variety of materials and is organized around

seventeen chapters, divided into two volumes. The first volume ranks from
The Banking System in Romania and England to Risk management and the
second volume ranks from the exchange rates to Guarantees or Bonds.
These seventeen are known to be frequently used by economists and
bankers in the banking field.
The material in each chapter contains a definition, descriptive passages or

extracts about the topic. This provides the student with some of the
structural items and vocabulary used when talking about the topic.
Finally, the readers will be acquired the ability to argue, to discuss, to hear
and say things they have not heard before, and to be aware of what reaction
is hoping to provoke. In short they get a flexible ability to communicate (not
only in Romanian, but in English too) in the give-and-take situation of real
conversation on economic, trade or banking issues.
For this reason we appreciate that the book represents a real support for all
those who are on their way to become economists or bankers, as well as for
people who intend to start a business in this period of transition.
Professor Gabriela Anghelache

PhD in Finance
Chief of Money Department
The Banking System in Romania
THE BANKING
SYSTEM
IN ROMANIA
D Objectives:
After studying this chapter you should understand:

1.1 The history of the Romanian banking system - brief presentation
1.2 The banking system in Romania after 1989
1.3 The National Bank of Romania and its role in the banking system
1.4 Banks – a main part of the Romania banking system
1.5 The supervision and control of the National Bank of Romania
1.6 The balance sheet of the National Bank of Romania and of a bank,
Romanian legal entity
1.7 Recent developments and perspectives
1.1 The history of the Romanian banking system – brief presentation
The first modern commercial bank was established in the Romanian

Principalities in 1865 under the name of The Bank of Romania. The bank
was organized as a limited joint-stock company, with subscribed capital
worth FF 25,000,000. The Bank of Romania was initially set up as an
issuing and commercial bank by the English and French investors who
governed the Banque Imperial Ottomane. Four years later, the Romanian
Government revoked the Bank of Romania’s monopoly of issue.
Accordingly, this institution operated further as a private commercial bank
until its liquidation in 1948 by the communist regime.
The establishment of a modern-type banking system, designed to replace
money lenders and trade houses that had developed healthily before the mid
of the 19th century, was a slow process until the setting up of the National
Bank of Romania, on the 17th of April 1880. During 1866-1880, there were
established only three credit institutions: the Rural Credit Bank (1873), the
Urban Credit Bank (1874), and the Commercial Bank Marmorosch
Blank&Co (1874).
The National Bank of Romania was established at the initiative of the

Liberal Party in order to grant credits in high demand after the
Independence War (1877), and providing financial stability for the country.
The National Bank of Romania was designed not only to play the role of
state financing and note issuing, but also to perform purely commercial
banking functions. In compliance with the provisions of the law governing
its establishment, the new banking institution was a joint-stock company,
with the Romanian government holding 1/3 of the capital stock
(shareholders holding the remainder). These provisions precluded foreign
shareholders from sharing the National Bank of Romania’s capital, closely
following the principle of domestic control over the national economy
required by the liberals. In 1901, The National Bank of Romania became a
private institution. Under the Liberal Party’s control, the National Bank of
Romania played a significant part in the foundation of the Romanian
modern type banking system and contributed to the strengthening of the
Romanian bourgeoisie economic position.
The economic progress that accompanied the consolidation of the Romanian

state and the support provided by the National Bank of Romania accelerated
the establishment of private commercial banks, especially during the period
that preceded the outbreak of World War I. The number of commercial
banks increased to 215 in 1914, from 3 banks existing in 1880. If the setting
up of the National Bank of Romania and long-term credit institutions were
done only with domestic capital, in turn, foreign capital would be involved
substantially in the creation of the new private commercial banks.
Accordingly, in 1914, German, Austrian, French, Belgian and English
banking institutions held 40 percent of the Romanian commercial banks’
capital.
On the eve of World War I, the Romanian banking industry was highly
concentrated, being dominated by 9 leading commercial banks, called “the
big Romanian banks”. In 1913, these banks held 70 percent of the total
commercial banks’ resources, while 188 small and middle-sized banks held
the remainder of the total resources. Taking into account the origin of the
capital, the composition of the group of “the big Romanian banks” was the
following: 4 banks with national capital (Banca Agricola, Banca Comertului
from Craiova, Banca Romana de Scont, Banca Romaneasca), 4 banks with
foreign capital (Banca Generala Romana, Banca de Credit Romanesc, Banca
Comerciala Romana, Banca Romaniei), and one bank with foreign and
domestic capital (Marmorosch Blank &Co. Bank).
After World War I, under national oriented policies promoted by the Liberal
governments, the weight of the foreign capital in the banking system
declined in relative terms. Despite this capital trend, the banks with foreign
interests maintained significant positions in the banking system and were
able to better identify profitable investments than their Romanian-controlled
competitors.
During 1931-1932, the banking sector felt the repercussions of the

economic crisis due to its close links with the industry. Banks’ supervision
was almost nonexistent. This state of affairs contributed to the collapse of
some large banks, but generally the banks with foreign interests withstood
the shocks.
In order to strengthen the banking system, the Romanian Parliament passed

“the Law on the organization and regulation of the banking commerce”, on
May 8, 1934. Under this law, The National Bank of Romania was deeply
involved in drafting measures for recovering the banking system by
liquidating non-viable credit institutions and merging institutions weakened
by the crisis. Consequently, the number of banks was diminished from 893
in 1933, to 523 in 1937 and 246 in 1944.
After 1934, the state intervention in regulating the banking sector forced the
foreign-controlled banks to comply with imposed requirements and to apply
a policy in line with Romania’s general interests.
Soon, after the communists took the power in Romania according to the
Decree Law no. 197/1948, all the Romanian and foreign-controlled banks
were liquidated, except for the National Bank of Romania, the National
Company of Industrial Credit and the Savings Bank.
The 1934 banking law being abrogated, the remaining banks continued their
activity under the provisions of the Commercial Code and their specific
laws. In the years that followed, the Romanian banking system was
organized as a mono-bank system, typical to a centralised economy. It is
noteworthy that in the 70s, during a period of economic liberalization two
foreign banks were allowed to establish branches in Romania:
Manufacturers Hanover Trust (the branch being now part of the Chase
Manhattan Bank network), and Societe Generale.
1.2 The banking system in Romania after 1989
The issuing of the Law on banking activities (33/1991) and the Law
concerning the Statute of the National Bank of Romania (34/1991)
represented the beginning of the organization of the banking system in
accordance with the market economy principles.
The banking system structures and functions were different during the
former system. So, the National Bank, the agent of the State, had the
functions of a central bank and of a commercial bank at the same time.
There were three banks that were specialized in different fields of activity:
Banca de Investitii which granted credits for the investment projects, Banca
pentru Agricultura si Industrie Alimentara which granted credits for the
agricultural activities, and Banca Romana de Comert Exterior which was
specialized in foreign trade operations.
The single institution to receive the savings of the population was Casa de
Economii si Consemnatiuni. During that system, there were no financial
markets and no competition between banking institutions, as the Romanian
legal tender was not convertible and the interest rate had only a formal role.
The new banking system started its activity on December 1st, 1990. Its
structure has been organized in two tier levels: the National Bank of
Romania as the Central Bank of the state on one side, and the commercial
banks on the other side.
In accordance with the provisions of its Law, the National Bank of Romania
has become a real central bank. It formulates and conducts monetary and
credit policy within the framework of the country’s economic and financial
policies, with the goal of preserving the stability of the national currency.
The former commercial banks have changed themselves and have become
real commercial banks for the market economy. In 1990, the former
commercial banks have been established as follows: Banca Comerciala
Romana SA, Banca Romana de Comert Exterior SA, Banca Agricola SA,
Banca Romana pentru Dezvoltare SA and many other new commercial
banks have also been established, such as:
• State capital: Banc Post SA;
• Private capital: Mind Bank SA.
Until December 31st, 20001, the National Bank of Romania has authorized
33 banks, Romanian legal entities, to render banking services in the
national currency (Lei), as well as in foreign currency, and 8 branches of
the foreign banks (see Annex no. 1).
The structure of the capital of banks operating in Romania at the end of the
year 2000 was the following:
1
Source: the National Bank of Romania – Annual Report per 2000
Banks operating in Romania, by the type of the capital
Number 1994 1995 1996 1997 1998 1999 2000

I. Romanian
20 24 31 33 36 34 33
banks, of which:
a) fully or majority
state-owned
7 7 7 7 7 4 4
capital, out of
which:
- fully state-owned
1 1 1 1 1 1 1
capital
- majority state-
6 6 6 6 6 3 3
owned capital
b) fully or majority
private capital, out 13 17 24 26 29 30 29
of which:
- fully or majority
8 9 14 13 13 11 8
domestic capital
- fully or majority
5 8 10 13 16 19 21
foreign capital
II. Foreign bank
7 7 9 10 9 7 8
branches
Total (I+II) 27 31 40 43 45 41 41
Source: National Bank of Romania
1.3 The National Bank of Romania and its Role in the Banking System
Generally, a central bank acts as a state institution in order to establish and

co-ordinate the monetary and credit policy of the economy. It has an
important role in maintaining the stability of the national currency/legal
tender.
The main functions2 of a central bank may be the following:

Establishing and implementing the monetary and credit policy;
Issuing money;
Monitoring of the foreign exchange rates;
Managing the foreign exchange reserves;
Supervising the financial and banking institutions;
Bankers’ bank;
Lender of last resort;
Acting as the state’s agent and keeping the evidence of the State’s
Treasury account;
Performing analyses of the economic and monetary conditions.
The Romanian transition to the market economy had a strong impact on the
organization of The National Bank of Romania, its functions and role as a
central bank.
The National Bank of Romania is the only institution authorized to

issue banknotes and coins throughout the country.
Under its new law3, it establishes, implements, and is responsible for the
monetary, foreign exchange, credit, and payments policy, as well as the
banking licensing and prudential supervision in the framework of the
general policy of the State; for this it pursues the normal operation of
the banking system and the participation in the promotion of the
financial system to market economy. The National Bank of Romania
uses procedures and instruments specific to the monetary market,
lending to the banking companies, assures liquidity to the banking
system, and at the same time, it is responsible for licensing and
supervising all entities operating as bank entities in Romania.
Under the provisions of the law concerning the Statute of the National Bank
of Romania, it formulates and conducts the credit policy within the
2
Sometimes these responsibilities are shared with other governmental bodies.
3
Law no.101/1998 concerning the Statute of the National Bank of Romania, issued in
Monitorul Oficial al Romaniei, Part I, no. 203//June 1998
framework of the country’s economic and financial policy with the goal of
preserving the stability of the national currency.
The main functions of the National Bank of Romania are in the monetary
and credit field, banking supervision, foreign exchange operations,
operations with the state treasury, foreign exchange control.
The National Bank of Romania alone has the right to determine the
nominal value, size, weight, design and other technical characteristics of
banknotes and coins. It elaborates the banknote and coin issue program
so that the country’s requirements for cash are met strictly according
to the real needs of money circulation.
The National Bank of Romania distributes the money issue and

manages the banknotes and cash reserves. It may decide to cancel or
withdraw any banknotes or coins it issued, and to replace them with others
of a different kind.
The National Bank of Romania uses procedures and instruments

specific to the monetary market, lending to banks and controlling their
liquidity through minimum compulsory reserves operations.
The National Bank of Romania may discount, acquire, accept as

collateral or sell bonds, securities or other claims to the state, banks, or
other legal entities.
The National Bank of Romania establishes the minimum compulsory

reserves that banks must keep in accounts opened with the National Bank
of Romania.
For the minimum compulsory reserves, the National Bank of Romania will
grant interests at least as high as the level of the average interest rate
granted for sight deposits by the banks.
As a part of its monetary, foreign exchange, lending and payments policies,

the National Bank of Romania may lend to banks on up to 90 days term
against securities that include:
• Government bonds which are part of public issues redeemable within

no more than a year from the time of their acquisition by the National
Bank of Romania;
• Bills of exchange or promissory notes drawn or endorsed for

commercial, industrial or agricultural purposes by eligible legal entities
in accordance with the rules of the National Bank of Romania;
• Warrants or warehouse receipts issued for fungible goods or other
goods dully insured against loss, damage or destruction;
• Deposits with the National Bank of Romania or other legal entity
acceptable to the National Bank of Romania consisting of any assets,
which it may sell, buy or trade.
The National Bank of Romania elaborates and implements the foreign
exchange policy, establishes and monitors the enforcement of the
foreign exchange regime on the Romanian territory.
Managing the foreign exchange regime, the National Bank of Romania is

responsible for:
• Issuing rules and regulations for gold and foreign exchange operations
to protect the national currency;
• Setting up the balance of payments and foreign assets and liabilities
position of the country;
• Setting up and publishing the exchange rates at which the National Bank
of Romania and other legal persons are authorized to conduct gold and
other foreign exchange operations;
• Licensing and working licenses as well as regulating and supervising the
legal persons who are authorized to conduct foreign exchange
transactions;
• Setting up the ceiling value of gold and foreign exchange assets which
the authorized legal persons can hold in deposits;
• Maintaining and managing the state’s international foreign reserves;
• Setting up limits on the net foreign position of the banking companies.
The National Bank of Romania sets and holds international reserves.

These reserves are made up of the following elements:
• Gold holdings at the Treasury or in deposits abroad;

• Foreign assets under the form of banknote and coins or reserves in
accounts opened with foreign banks and other foreign financial
institutions which are denominated in such currencies and held in such

countries as the National Bank of Romania may decide;
• Any other internationally recognized reserve assets, including the right
to buy from the International Monetary Fund within the reserve
instalment, and special drawing rights holdings;
• Bills of exchange, cheques, promissory notes and other securities,
negotiable or not, issued or guaranteed by non-resident legal persons
classified in the first categories by internationally recognized rating
agencies, denominated and payable in foreign exchange at such places
accepted by The National Bank of Romania;
• Treasury notes, bonds and other government securities issued or
guaranteed by foreign governments or intergovernmental financial
institutions, which are negotiable or not, and denominated and payable
in foreign exchange at places accepted by The National Bank of
Romania.
The National Bank of Romania has exclusive competence for granting

banks the license and it is responsible for the prudential supervision of the
banks.
In order to ensure a viable and operational banking system, the National

Bank of Romania has been empowered to:
• Issue regulations, take measures to enforce their observance and rule

lawful penalties for non-compliance;
• Check and verify on the basis of reports and field inspections the books,
accounts and any other documents.
The National Bank of Romania takes part on behalf of the State in the
external issue. It may negotiate and conclude agreements concerning short-
term loans and swap operations with central banks and international
monetary institutions on the conditions those loans and operations are repaid
within the period of one year and are reported in the annual report of
National Bank of Romania.
The National Bank of Romania is vested by the Parliament with the

authority to participate in and become a member of international
organizations concerned with financial, banking and monetary matters.
Under the provisions of its law, the National Bank of Romania is entitled to
request all financial and credit institutions documents and information that
may be required in connection with conducting its functions.
The National Bank of Romania may undertake studies and analysis on
currency, credit and transactions of the banking system for its own needs
and those of public authorities. Once the studies and analyses are made, the
National Bank of Romania can establish the monetary survey in accordance
with the credits and monetary resources in the economy.
The National Bank of Romania together with the Ministry of Finance
pursues to keep the stock of international reserves at a level assessed as
appropriate for the foreign transactions of the State.
The National Bank of Romania is authorized to perform the following
operations:
• Purchase, sell and otherwise trade in gold and other precious metals
ingots and coins;
• Purchase, sell and perform other foreign exchange transactions;
• Purchase, sell and otherwise trade in Treasury notes, bonds and other
securities issued or guaranteed by foreign governments or
intergovernmental financial organizations;
• Purchase, sell and otherwise trade in securities issued or guaranteed by
central banks, international financial institutions, banking and non-
banking companies;
• Open and keep accounts with central banks and monetary authorities,
banking companies and international financial institutions;
• Open and keep accounts and make counterpart operations for
international financial institutions, foreign central banks and monetary
authorities, financial and banking companies, international financial
organizations abroad and for foreign governments and their agencies.
Organization of the National Bank of Romania

A Board of Directors heads the National Bank of Romania. The
governor exercises the executive management of the National Bank of
Romania, together with the prime-vice governor and two vice governors.
The Board of Directors consists of nine members:
• The Governor of the National Bank of Romania as the president;
• The prime vice Governor as vice president;
• Seven members out of which two are also vice Governors of the
National Bank of Romania and five are not employed by the National
Bank of Romania.
The Board of Directors of the National Bank of Romania decides,

according to the law, on:
• Monetary, foreign exchange, credit and payments policies and monitors

their enforcement;
• Measures in the field of licensing and prudential supervision of the

banks licensed by it;
• Internal organization, staff salaries and profits, etc.
The members of the Board of Directors are appointed by the Parliament on

the recommendation of the permanent specialty commissions of the two
Chambers of the Parliament.
The auditing commission comprises five auditors, out of which one is the
chairman. The auditors’ committee verifies the compliance with the legal
provisions concerning valuation of the National Bank of Romania’s assets,
the elaboration of the balance sheet and the profit and loss account,
according to the books, vault cash, and securities owned or received in bail,
or in custody, as well as of the revenue and expenditure budget. Annually,
the auditors’ committee prepares a report on the balance sheet and profit and
loss account of the National Bank of Romania.
The National Bank of Romania’s own capital is ROL 100 billion and
belongs entirely to the State. The bank’s own capital may be increased using
part of the annual net profit up to the equivalent of five per cent of the
aggregate monetary liabilities in the balance sheet as at the end of every
fiscal year.
The ROL 100 billion own capital is made up of the ROL 5 billion own
capital as of December 31, 1996 plus ROL 95 billion allocated from the
reserve fund of the National Bank of Romania.
The reserve fund of the National Bank of Romania is built up within the
limit of a 20 per cent share of gross profit until it equals the own capital,
when the share drops to 10 per cent until the reserve fund is twice the
National Bank of Romania’s own capital at which point the share is set at
5 per cent.
The National Bank of Romania’s internal organization has been changed

from one year to another according to the market economy conditions.
The National Bank of Romania internal organization on the 31st of

December 2000 is presented in the chart (see Annex no.2).
1.4 Banks - A Main Part of the Romanian Banking System
Under the provisions of the Romanian Banking Law, with subsequent

amendments, a bank represents a credit institution4 authorized to
perform mainly the activity of collecting funds from both legal and
natural persons through deposits or negotiable instruments payable on
demand or on maturity as well as that of granting credits.
The European Union countries utilize the concept “credit institution” in

order to define the above activity. The credit institution represents an
undertaking whose business is “to receive deposits or other repayable
funds from public and to grant credits for its own account”5.
No entity is allowed to perform any banking business within the Romanian

territory, without the National Bank of Romania’s previous authorization.
Banks, Romanian legal entities, as well as branches of foreign banks may
perform, within the limit of the authorization granted, the following
operations6:
• Open accounts in ROL and in foreign currencies;
4
Including: banks (Romanian legal entities), branches of foreign institutions and credit
cooperatives.
5
Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000
relating to the taking up and pursuit of the business of credit institutions, published in the
Official Journal L 126, 26/05/2000;
6
Law no.58/1998 - Banking Law issued in Monitorul Oficial al Romaniei, Part I,
no. 121/1998.
• Receive demand, time and notice deposits;

• Loan agreements (grant short, medium and long term loans and credit
lines in ROL and in foreign currency), factoring operations and
discounting of trade bills, including forfeiting;
• Carry out banking operations in Romania and abroad;
• Issuance and management of the instruments of payment and credit;
• Payments and settlements;
• Financial leasing;
• Funds transfers;
• Issuing guarantees and assuming commitments;
• Issue and operate credit cards;
• Buy and sell government securities;
• Transactions on their behalf or in their clients’ account with: negotiable
money instruments (cheques, bills of exchange, certificates of deposit),
foreign currencies, financial derivatives, precious metals, securities;
• Management of clients’ portfolios;
• Securities custody and management;
• Renting of security safe boxes;
• Financial and banking consulting;
• Electronic banking.
Banks, as Romanian legal entities, are allowed to operate only based on the
authorization issued by the National Bank of Romania, in compliance with
the legal provisions in force.
The National Bank of Romania may withdraw the authorization granted to a

Romanian bank or a subsidiary, to a subsidiary or branch of a foreign bank:
upon the bank’s request, as a sanction, etc.
The organization and management of banks are established through

their incorporation documents, according to the commercial legislation
in force and in compliance with the banking law. The minimum share
capital of a bank is ROL 250 billion.7
In all its official documents, the bank must identify itself clearly through a
minimum of data: the company under whose name the bank is registered in
the Trade Register, its share capital, the address of its headquarters
premises, number and date of incorporation in the Trade Register, number
and date of incorporation in the Bank Registry.
Every bank must have its own operating regulations, approved by the
statutory bodies through which they have to establish at least:
• The organizational structure of the bank;
• The tasks of every bank department and the relations among them;
• The tasks of the branches and other secondary offices of the bank;
• The tasks of the risk committee, of the credit committee;
• The competence and responsibility of the bank managers, executive
managers, heads of branches other subsidiaries of the banks as well as
other employees who are engaged in financial and banking operations
on behalf and account of the bank;
• The internal audit of the bank.
The administrators of the bank may be only individuals, in a number of

maximum 11. The term of their mandate cannot be more than 4 years, with
the possibility of being re-elected.
Each bank is a legal entity, organized as a joint stock company.

The network structure of a bank may consists of the following:
Headquarter;
Branches;
Subsidiaries;
7
The National Bank of Romania’s Norms No.9/2000 regarding the minimum capital of
banks and of branches of foreign banks, published in Monitorul Oficial al României,
Part I, No. 474/2000.
Agencies.
The branches, subsidiaries and agencies are operational units of the bank,
and there are in a direct connection with the customers (individuals or legal
entities).
The following bodies generally, manage the bank:

o The General Meeting of the Shareholders – it decides the general
tasks concerning the banking activity;
o The Board of Directors – it includes: the president, the vice-
presidents, and the members elected by the General Meeting of the
Shareholders;
o A committee nominated by the Board of Directors; it realizes the
Operational Management of the bank. This committee accomplishes
all the decisions of the Board. The committee is made of the
president, the vice-president and members.
o The headquarter president; vice-presidents and the directors of the
directions/departments of the bank realize the Current Management
of the bank.
o The independent auditors commission.
The headquarters of a bank co-ordinates the activity of the branches,
subsidiaries and agencies and supervises the compliance with the banking
norms, rules and laws.
Some of the main departments of a bank (see Annex No.3a) may be the
following:
• Synthesis (Co-ordination and strategy) department;
• Treasury department;
• Cash department;
• Methodological and control department;
• Foreign commercial transactions department;
• Foreign non-commercial department;
• Credit department;
• International department;
• Capital markets department;

• Own Investments department;
• General Secretariat;
• Consulting department;
• IT department;
• Human Resources department;
• Legal department;
• Accounting department;
The activity of a headquarters is organized in departments, divisions, and
offices.
The headquarters’ departments have some similar attributions resulting from

their co-ordination activity. Thus, the main attributions are:
• Elaborating the methodological norms for each department;
• Guiding and controlling the activity of the territorial units;
• Making analysis concerning the banking activity.
The Synthesis/Co-ordination department issues the credit plans and obtains
the approval of the Board of directors of the bank; it distributes the
resources to the branches, etc.
The Treasury department ensures the resources to the banks and obtains
credits from the inter-bank market, it participates in the auctions organized
by the National Bank of Romania in order to obtain refinancing credits, and
it elaborates drafts of issue for securities and co-ordinates their placements.
The Cash department ensures and co-ordinates all the operations with cash
and other values. It analyses with other departments the main trends in the
cash circulation, co-operates with the National Bank of Romania in order to
establish the cash flow in the economy, etc.
The Foreign commercial and non-commercial transactions department
ensures the processing of the documents concerning the export and the
import of goods, and of rendered services to and from abroad by economic
agents, institutions and other legal entities, as well as the settlement of the
operations in the favour of the individual or legal entities (budgetary
institutions, non-profit institutions, etc.).
The Credits department. Taking into consideration the destination, the term
and the beneficiary of the loans, the loans department participates in:
Establishing the size of the monetary survey and of the credit on short,
medium and long term for the state and private field;
Analysing the credits application that surpass the competencies of the
units in the country;
Establishing the loans documentation/file;
Proposing the issue of the letter of guarantee;
Analysing the evolution of the short, medium and long term loans;
Analysing the banking indicators, etc.
The International department realizes, under the legal framework and the
Board of Directors’ decisions, the attributions in the external payments and
credits field, such as:
¾ To negotiate the payments agreements drafts concluded with other
countries;
¾ To contact the corresponding banks on the carrying out of the payments
agreements;
¾ To administrate the foreign exchange portfolio of the bank;
¾ To negotiate the external banking credit lines;
¾ To analyse and, if the case, to modify the banking corresponding
network.
The branch of a bank has the organizational structure as that presented in

Annex No. 3b.
The operations of the banks are subject to the regulations and orders issued
by the National Bank of Romania (see the list in the Annex No. 4), in order
to implement the monetary, credit, foreign exchange, payment policies,
banking prudence and the banking supervision policies.
Banks have to organize all their operations according to the rules of a
prudent and healthy banking practice and the requirements of the law.
The whole share capital of a bank must be paid up in monetary form, when
it is subscribed.
The National Bank of Romania establishes the minimum share capital.

Banks should permanently maintain a minimum level of their share capital,
in monetary form, according to the regulations of the National Bank of
Romania.
Banks may also increase their share capital, besides subscriptions of new
contributions in monetary form, according to the current laws in force, using
the following sources:
• Share premiums and other capital premiums;
• Dividends from the net profit due to the shareholders after paying the
tax on dividends, according to the laws in force;
• Foreign reserves left from the exchange rates influences related to the
appreciation of the reserves, which represent the share capital in foreign
currency, etc.
Banks will distribute 20% of their gross profit to set up a reserve fund until
this fund equals the share capital, then maximum 10%, until the moment
when the fund reaches twice the amount of the share capital. After reaching
this goal, the distribution of amounts to the reserve fund shall be done from
the net profit.
Banks have to distribute from their gross profit, the amounts designated to
build up the general reserves for the credit risk, within the limit of 2% from
the balance of granted loans.
Under the provisions of the Banking Law, banks operating in Romania

may not perform the following operations:
• Engagement in transactions with chattel and real estate assets;

• The acquisition of the bank’ s own equity or their pledging, on the
account of the bank’s debts;
• Loan granting or other services rendered to clients, conditioned by the
sale or purchase of the bank’s shares;
• Granting loans secured with the shares issued by the bank;
• Receiving deposits, securities or other valuables, when the bank stops
payments;
• Deposits receiving, if most of the deposits come from the bank’s

employees.
Banks have to keep their accounting ledgers according to the provisions of

the accounting laws and the regulations specific for their implementation,
and they must also draw up appropriate financial statements in order to
show, truly and fairly, their operations and their financial position.
The National Bank of Romania establishes rules regarding bookkeeping and

balance sheets, following approval by the Ministry of Finance.
Banks are obliged to present to the National Bank of Romania their

financial statements made up by the elements of their balance sheet, as well
as other data requested by the National Bank of Romania, in the terms and
in the formats established through regulations.
Banks are forbidden to provide insurance, brokerage and leasing

services, but they are allowed to hold shares of such companies.
*
* *
Other institutions that co-operate with the Romanian banking system are the
following:
The Bank Deposit Guarantee Fund. It ensures the reimbursement of the

deposits held by individuals in the case that a bank becomes insolvent.
Deposits are reimbursed within a ceiling, which is periodically modified in
line with the inflation rate published by the National Institute of Statistics
and Economic Studies.
The Bank Asset Recovery Agency. It was established in 1999, and is

specialized in taking over non-performing loans and off-balance sheet
items from majority state-owned banks, aiming at recouping them from
the debtors.
In the last 2-3 years, three state-owned banks were privatised (Banca
Romana pentru Dezvoltare, Banca Postei and Banca Agricola), while
Banca Comerciala Romana is now undergoing a privatisation process.
Some of the most prestigious European banks (Societe Generale, ABN

AMRO, ING Bank, and HVB Bank) are already established and operate
in Romania.
1.5 The Supervision and Control of the National Bank of Romania
When granting loans, banks must be careful that applicants are credible in
repaying them at maturity. Therefore, banks have to ask the applicants to
guarantee the loans under the conditions established by their lending norms.
Banks must comply with the following prudential requirements as

stated in the regulations of the National Bank of Romania:
The minimum level of solvency, determined as a ratio between the level

of the bank’s own capital and the total assets and off - balance sheet
items, weighted according to their risk level;
Maximum exposure to a single debtor, expressed in percentage as a ratio

between the total value of the maximum exposure and the level of the
bank’s own capital;
Maximum exposure aggregate, expressed in percentage as a ratio

between the total value of large exposures and the level of the bank’ s
own capital;
Minimum level of liquidity determined according to the deadlines of the

amounts receivable and the bank’s commitments;
The classification of granted loans and of uncased interests related to

them and the setting up of specific risk provisions;
Currency position, expressed in percentage according to the level of the

bank’s own capital;
Resource management and investments of the bank;
Enlargement of the branch network and other subsidiaries of the bank.

The total amount of the long-term investments of a bank in securities issued
by a company that is not engaged in one or more financial businesses will
not exceed:
• 20% of the share capital of the respective companies, and

• 10% of the banks own capital.
The total amount of the long term investments of the bank in the securities
issued by such companies will not exceed 50% of the bank’s own capital.
The total amount of a bank’ s investments in securities, performed in the
bank’ s name and account, will not exceed 100% of the bank’s own capital,
except for investments in government securities.
Any entity that intends to purchase a participation of at least 5% of a bank’s
share capital must get the prior approval of the National Bank of Romania.
The National Bank of Romania supervises the operations performed by

banks, Romanian legal entities and the branches of foreign banks, on the
basis of the prudential reports drawn up according the law and implemented
regulations of the National Bank of Romania, as well as through on-site and
off-site inspections:
At the headquarters of the banks, branches and other subsidiaries in the

country and abroad;
At the headquarters of the branches of foreign banks and their
subsidiaries.
The National Bank of Romania launched a bank-restructuring program

targeted at preventing systemic risk, with an immediate impact on the
soundness of the banking sector. The program focused on the following
issues:
- Solving the situation of problem banks;
- Improving the quality of the banks’ prudential supervision, materialized
mainly in:
The introduction of an early-warning and bank-rating system aimed
at detecting the negative trends in the banking system;
Improving the legal framework for the regulation of prudential
conduct in the banking sector;
Reorganizing the supervision activity;
Increasing the exigency in sanctioning banks, and
Maintaining a prudent licensing policy for the new banks;
- Improving the functioning of the deposit guarantee mechanism.
In 1999, the National Bank of Romania adopted a coherent program in order

to reorganize and strengthen the prudential supervision by introducing an
early warning and banking system (which ensures an efficient bank
supervision, in line with the international standard and practices) and by
improving the legal framework concerning the prudential behaviour in
the banking sector.
One of the main objectives of the National Bank of Romania was the further
transposition of the acquis communautaire in its regulations. In this context,
the Law No. 58/1998 – the Banking Law is to a great extent harmonized
with the provisions of the Directive No. 2000/12/EC on the establishment
and operation of credit institutions.
1.6 The balance sheet of the National Bank of Romania and of a bank,
Romanian legal entity
The annual balance sheet of the National Bank of Romania was prepared
in accordance with the provisions of: Law no.101/1998 – the National
Bank of Romania Act, the Accounting Law no.82/1991, with subsequent
amendments and additions, the Chart of Accounts and the Methodological
Norms specifying the use of the National Bank of Romania’s accounts,
and the guidelines of the Ministry of Finance on actions for closing the
fiscal year.
Since January 1st, 1999, the National Bank of Romania adopted a new Chart
of Accounts and the Methodological Norms for its implementation,
prepared in accordance with the provisions of the Law no. 101/1998, and
with the national accounting standards.
The changes that the new Chart of Accounts brought about consisted mainly
in the distinct classification of monetary assets and liabilities depending on
their maturity. For taxation purposes, the deductibility of certain expenses
(e.g. protocol-related and social expenses) is limited by law to the share in
the profits.
The balance sheet of the National Bank of Romania was drawn up
consistent with the accounting assumptions, such as: prudence, consistency,
the going concern, the matching principle, periodicity, and non-set-off
assets against liabilities.
The majority part of the total assets of the central bank is represented
by the foreign assets (see Annex No. 5), such as: SDR holdings with the
International Monetary Fund, monetary gold, foreign securities, foreign
investments etc.
The balance sheet of the National Bank of Romania shows the international
reserves, which consist of foreign exchange reserves (of which: at sight,
deposits, investments); gold reserves (of which: at sight, deposits), and total
reserves (of which: at sight, deposits, investments).
The structure of the liabilities of the National Bank of Romania is the
following: currency in circulation, foreign liabilities (bonds issued and
deposits taken by the National Bank of Romania), General Account of State
Treasury, banks’ current accounts, capital funds, reserves, etc.
The profit and loss account of the National Bank of Romania (see Annex
No.6) consists of: revenues (operating revenues, other revenues) and
expenses (operating revenues, overheads etc).
The operating revenues include the following items: interest on government
securities, interest on loans granted and revenues from commissions and
fees for inter-bank settlements, interest on foreign exchange deposits,
dividends on foreign investments and revenues from foreign exchange
securities operations, interest revenue in gold and silver and exchange rate
differences arising from operations with precious metals.
The main operating expenses include: interest paid/due to banks and the
Treasury, foreign exchange interest, commissions and fees for loans taken
from the International Monetary Fund, interest for inter-bank loans and
commissions in foreign exchange etc.
Overheads consist of the following: provisions, salaries and wages etc.
In comparison with the financial statements (the balance sheet and profit
and loss account) of the National Bank of Romania, a bank, Romanian legal
entity records differences in this field, as you can see in the Annexes No. 7
and 8.
The balance sheet of a bank, Romanian legal entity
A bank conducts its business in compliance with the regulations of the
central bank regarding the classification of loans, constitution of provisions,
solvency ratios, compulsory minimum reserves and foreign position.
The bank’s assets mainly consist of: cash, current accounts and ROL and
currency term deposits of individuals, and private or public enterprises,
loans etc.
The bank’s liabilities mainly consist of: deposits (demand and term
deposits) of individuals, and private or public enterprises, other borrowed
funds, share capital, reserves, etc.
The profit and loss account includes two big parts: incomes and expenses.
Incomes include: interest income on loans, interest on interest bearing
deposits, interest on trading securities, dividends, etc.
Expenses include: interest for demand and term deposits, salaries, social
insurance, operating expenses (amortization), advertising, etc.
1.7 Recent developments and perspectives
During the previous years, The National Bank of Romania had the
following objectives8:
• Achievement of lasting macroeconomic stabilization together with the

revitalization of the financial market for an efficient allocation of the
resources, transparency of information, and achievement of economic
equilibrium. The National Bank of Romania considers that the well
functioning of a complete market system in Romania is a condition
for a lasting economic growth.
• The foreign exchange market liberalization by allowing all the

authorized banks to be dealers in transactions and via exchange rate
liberalization.
Large foreign exchange purchases by the National Bank of Romania made
in order to avoid nominal appreciation of national currency led to the
increase of the foreign exchange reserves:
¾ The National Bank of Romania changes its position, from a net
creditor into a net debtor of the banking system, by drawing into the
deposits from the banks in order to reduce the excessive liquidity,
liquidity that results from the important entrance of the foreign capital
on the monetary market.
¾ The capital market experienced a large increase in trading on both
levels of The Stock Exchange, and of RASDAQ. The main reason for
the development of the capital market was the increase of the shares
8
The National Bank of Romania – Annual Report per 1998-2000
demanded from the non-resident corporate investors, bolstered also by

the increasing number of listed companies.
¾ The monetary policy conducted by the National Bank of Romania

aimed to ensure macroeconomic stabilization, specially the decrease of
the inflationary effect of price liberalization, the restoring the central
bank’s credibility to regain the confidence in the national currency and,
to achieve the remonetization of the economy.
The efficiency of the monetary policy was sustained by the following

achievements:
a) Release of the monetary policy from the quasi-fiscal constraints

consisting of directed and preferential credits;
b) Integration of the monetary policy in the macroeconomic policies:
c) Achieving of a healthy currency issue based on improving of the

National Bank of Romania portfolio by increasing the net foreign assets
and the foreign reserves;
d) Improvement in the transmission of the monetary policy measures

by the liberalization and development of the financial markets,
especially of the money market;
e) Achieving real-positive interest rates and maintaining those levels;
f) Improvement and completion of the legal framework for the

regulation of the banking and central bank’s activity by drafting of the
Banking Act, the Bank Insolvency Act, Bank Privatisation Act, and the
National Bank of Romania Act.
In the next years, the National Bank of Romania will focus its efforts on
carrying out a stable policy and a macroeconomic stability, as well as on
correlating the macroeconomic policies with measures taken in the
privatisation and structural adjustment areas.
The orientation of the National Bank of Romania reflects also important
performance concerning:
a) Guiding the monetary policy towards price stability;
b) Creation and development of financial markets;

c) Carrying out the open account convertibility of the national currency;
d) Increase the international reserves;
e) Consolidating its formal and operational independence.
Concerning the monetary policies, the program of the National Bank of
Romania is a part of the economic program of the Government. This
program has as major objective to reduce the inflation rate and to achieve
lasting macroeconomic stability. Other objectives of the program are:
• To improve the quality of the banking sector by supervision and
regulation;
• To improve the banking information and payments system, by:
¾ Modernization of the settlement and clearing system;
¾ Harmonization of the payment system operational procedures with
the new banking legislation;
¾ Modernization and expansion of the services rendered by the
banking information system.
• The National Bank of Romania will pay a special attention to the
developments in the Euro-area and will monitor the consequences of
starting stage III of the Economic Monetary Union. As a central bank of
a country candidate for the European Union, the National Bank of
Romania will strive both to carry on implementation of domestic reform
and to ensure the legal, institutional and procedural harmonization with
its correspondent entities in the European Union.
The National Bank of Romania supervision program for the future
stipulates9:
1. Dealing with problem banks:
• Restructuring of the state-owned banks’ balance-sheet assets;
• Insulation and exit of banks generating disruptions on the money
market.
2. Strengthening of the supervision:
• Specific regulations in line with European standards on:
9
Source: The National Bank of Romania
- Classification of loans and investments, and risk provisioning;

- Registration of executor loan agreements;
- Bank liquidity;
- Containment of credit risk;
- Bringing credit co-operatives under the supervisory authority of the
NBR.
• Increased rigorousness in bank licensing and supervision by:
- Minimum capital requirements updated periodically as follows:
- ROL 150 billion as of 31 May 2001;
- ROL 250 billion as of 31 May 2002.
- Rigorousness in approving banks’ management;
- Reduction in frequency of inspections from “every two years” to “at
least one a year”.
• Enhancing prudential supervision through the introduction of early-
warning indicator system;
• Improved co-operation between the National Bank of Romania and:
- The Romanian Banker’s Association;
- Banks’ executives; and
- Independent auditors
• 3. Smooth-functioning of the Bank Deposit Guarantee Fund.
At the same time, the National Bank of Romania’s Governor, Mr. Mugur
Isarescu, mentioned10 what are the main problems that the National Bank of
Romania intends to solve in the next period of time, such as:
o to prepare the strategy concerning the privatisation of Banca
Comerciala Romana SA;
o to integrate the credit co-operatives in the banking field and issue
regulations in the appliance of the Emergency Ordinance
No. 97/2000;
o to harmonize the accounting regulations with the EU legislation, as
well as with the international accounting standards;
o To improve the early warning and banking system;
10
During the Romanian Government Meeting of January 18, 2001 – source the NBR.
o To co-operate with the Justice Ministry, and with other

governmental bodies in order to eliminate the frauds from the
banking and financial system, the money laundering, and the
corruption;
o To introduce to the Romanian Government draft of the law
concerning the Guarantee Fund of the legal entities’ deposits in
banks etc.
*
* *
As a conclusion, it should be mentioned the following:

1. In Romania, the financial system consists of: banks (Romanian legal
entities and branches of foreign banks), credit co-operatives, mutual funds,
credit unions, brokerage houses, insurance companies, financial investment
companies, leasing companies and investment management companies.
2. The European Central Bank made a List of the Monetary Financial
Institutions subject to minimum reserves in accordance with Article 3.2 of
the amended Regulation of the European Central Bank of December 1st,
1998 concerning the consolidated balance sheet of the monetary financial
institutions sector (ECB/1998/16)11 and with Article 2.3 of the amended
Regulation of the European Central Bank of December 1st, 1998 on the
application of minimum reserves (ECB/1998/15)12.
The List of the Monetary Financial Institutions comprises institutions
resident in the European Union, which comply fully with the Monetary
Financial Institutions definition13. The objective of the List of the Monetary
Financial Institutions includes facilitating the production of a
comprehensive and consistent balance sheet of the money-creating sector in
the euro area and ensuring that the statistical reporting population is as
complete, accurate and homogeneous as possible. In addition to the national
central banks of the European Union and the European Central Bank, the
List of the Monetary Financial Institutions includes credit institutions,
11
Official Journal L356, 30.12.1998.
12
Official Journal L356, 30.12.1998.
13
”Monetary Financial Institutions” comprises resident Credit institutions as defined in
Community Law, and all other resident Financial Institutions whose business is to
receive deposits and/or close substitutes for deposits from entities other than Monetary
Financial Institutions, and, for their own account (at least in economic terms), to grant
credits and/or to make investments in securities.
money market funds and other institutions fulfilling the Monetary Financial
Institutions definition.
3. The International Monetary Fund has a different classification14 of the
financial system. The main sectors and sub sectors are the following:
Financial corporations
Central bank;
Other depository corporations;
Other financial corporations
Insurance corporations and pension fund;
Other financial intermediaries
Financial auxiliaries
Non-financial corporations
Public non-financial corporations
Other non-financial corporations
General government
Central government
State government
Local government
Social security funds
Households
Non-profit institutions serving households
Central Bank
In the International Monetary Fund’s opinion the central bank represents
the national financial institution (or institutions) that exercises control over
key aspects of the financial system and carries out such activities as issuing
currency, managing international reserves, transacting with the
International Monetary Fund, and providing credit to other depository
corporations.
Central banks in some countries also accept deposits from non-financial
corporations or provide credit to non-financial corporations.
14
IMF – Money and Financial Statistics Manual, Washington, 2000
The central bank sub-sector includes the following:

Central banks, which in most countries are separately identifiable
institutions that, across countries, are subject to varying degrees of
government control, engage in differing sets of activities, and are
designated by various names (e.g. central bank, reserve bank,
national bank, or state bank);
Currency boards or independent currency authorities that issue
national currency that is fully backed by foreign exchange reserves;
Government-affiliated agencies that are separate institutional units
and primarily perform central bank activities.
If an institutional unit is mainly engaged in central banking activities, the
entire unit is classified in the central bank sub-sector. Many central banks
regulate or supervise other depository and other financial corporations, and
central bank activities in these areas are also included in the central bank
sub-sector.
However, units that are affiliated with the government or with other sectors
and are mainly engaged in regulating or supervising financial units are
classified as financial auxiliaries rather than as units in the central bank sub-
sector.
Private units that perform activities such as check clearing operations are
assigned to other financial corporations sub-sectors depending on their
activities, rather than to the central bank sub-sector.
Other Depository Corporations
The other depository corporations sub-sector consists of all resident

financial corporations (except the central bank) and quasi-corporations that
are mainly engaged in financial intermediation and that issue liabilities
included in the national definition of broad money.
Examples of the designations given to institutional units in the other

depository corporations’ sub-sector are:
Commercial banks;
Merchant banks;
Savings banks, savings and loan associations, building societies, and
mortgage banks;
Credit unions and credit co-operatives;
Rural and agricultural banks, and

Travelers’cheque companies that mainly engage in the financial
corporation activities.
Other Financial Corporations
Insurance Corporations and Pension Funds This sub-sector includes

resident insurance corporations and quasi-corporations and autonomous
pension funds. Insurance corporations consists of incorporated mutual and
other entities whose principal function is to provide life, accident, health,
fire, or other forms of insurance to individual institution institutional units
or groups of units.
The pension funds included in this sub-sector are those that are constituted
as separate from the units that have created them. They are established for
purposes of providing retirement benefits for specific groups of employees.
They have their own assets and liabilities, and they engage in financial
transactions on their own account. These funds are organized, and directed,
by individual private or government employers, or jointly by individual
employers and their employees, and the employees and/or employers make
regular contributions.
Other Financial Intermediaries. This sub-sector of other financial

intermediaries covers a diverse group of units constituting all financial
corporations other than depository corporations, insurance corporations,
pension funds, and financial auxiliaries. Units in the other financial
intermediaries sub-sector generally raise funds by accepting long-term or
specialized types of deposits and by issuing securities and equity. These
intermediaries often specialize in lending to particular types of borrowers
and in using specialized financial arrangements such as financial leasing,
securities lending, and financial derivative operations.
Finance companies are institutional units primarily engaged in the extension

of credit to non-financial corporations and households.
Financial leasing companies engage in financing the purchase of tangible

assets. The leasing company is the legal owner of the goods, but ownership
is effectively conveyed to the lessee, who incurs all benefits, costs, and risks
associated with ownership of the assets.
Investment pools are institutional units that are organized financial

arrangements, excluding pension funds that consolidate investor funds for
the purpose of acquiring financial assets. Examples are mutual funds,
investment trusts, unit trusts, and other collective investment units.
Securities underwriters and dealers include individuals or firms that

specialize in security market transactions by:
- assisting firms in issuing new securities through the underwriting and
market placement of new security issues and;
- trading in new or outstanding securities on their own account.
Vehicle companies are financial entities created to be holders of secured

assets or assets that have been removed from the balance sheets of
corporations or government units as part of the restructuring of these units.
Financial derivative intermediaries consists of units that engage primarily

in issuing or taking positions in financial derivatives recognized as financial
assets.
Specialized financial intermediaries include holding corporations,

companies that provide short-term financing for corporate mergers and
takeovers, export/import finance firms, factors and factoring companies etc.
Financial Intermediaries. The most common designations for financial

corporations classified as financial auxiliaries are:
Public exchanges and securities markets are organized exchanges and

entities such as security depository companies, accounting and clearing
offices, and other companies providing exchange-related services.
Depositories and electronic clearing systems operated by financial
corporations fall into this sector, too.
Brokers and agents are individuals or firms that arrange, execute, or

otherwise facilitate client transactions in financial assets. Included are
brokers and agents handling the purchase and sale of securities or other
financial contracts for clients, and financial advisory services that provide
specialized services to brokers and their customers.
Foreign exchange companies comprise units that buy and sell foreign
exchange in retail or wholesale markets.
Financial guarantee corporations insure customers against losses to

specified financial corporations or against financial loss on specific
contracts.
Insurance and pension auxiliaries include agents, adjusters, and salvage

administrators.
Other financial auxiliaries comprise all other auxiliaries not classified

elsewhere.
Progress Test
1. Present a brief description of the history of the Romanian banking

system.
2. When did the new Romanian banking system start its activity?
3. Describe the structure and functions of the former banking system.
4. List five banks, Romanian legal entities authorized by the National Bank
of Romania to render banking services.
5. List five branches of foreign banks authorized by the National Bank of

Romania to render banking services.
6. What are the banking laws, which marked the beginning of the
organization of the Romanian banking system in accordance with the
market economy principles?
7. How was the new banking system organized after December 1990?
8. Enumerate the main functions of a central bank.
9. List the main functions of the National Bank of Romania.
10. What are the National Bank of Romania’s responsibilities in the foreign
exchange field?
11. List the elements of the international reserves.
12. What operations is the National Bank of Romania authorized to

perform?
13. List the securities that the National Bank of Romania requires as
guarantees for the loans granted to banks.
14. Describe the executive management of the National Bank of Romania,

as well as its internal organization.
15. Define the concept “bank” under the provisions of the Law No. 58/1998
– the Banking Law.
16. What operations can a bank perform within the authorization granted by
the National Bank of Romania?
17. In what ways can the banks increase their share capital?
18. What operations are banks not allowed to perform?
19. What prudential requirement banks must comply with?
20. List the bodies involved in the management of a bank.
21. Enumerate the main departments of a bank, and detail their attributions.
22. List the main foreign assets of the National Bank of Romania.
23. What are the main items included in the liabilities of the National Bank
of Romania?
24. List the main assets and liabilities from the balance sheet of a bank.
25. List the main items from the profit and loss account of a bank.
26. List the operating revenues from the profit and loss account of the
27. List the operating expenses from the profit and loss account of the
28. What are the recent developments and perspectives of the National Bank
of Romania?
29. What are the main directions of the supervision program?
30. List the main problems that the National Bank of Romania intends to
solve in the future.
31 What is the National Bank of Romania responsible for:
a setting up the balance of payment;

b maintaining and managing the State's international foreign reserves;
c can take sight and term deposits in cash and in the form of securities;
d a + b;
e b + c;
32 Which of the following forms represent the National Bank

of Romania refinancing:
a credit granted with derogation from regulations;

b small business loans;
c fixed interest rate loans;
d special credit;
e a + d;
33 Under its law, the National Bank of Romania is responsible for:
a maintaining compulsory reserves in accordance with applicable

regulations;
b taking sight and term deposits from both the physical and juridical
persons;
c setting up the ceiling of gold and foreign exchange assets which the
authorized legal persons can hold in deposits;
d a + b;
e a + c;
34 As a part of its monetary, foreign exchange, lending and payments

policies the National Bank of Romania can:
a lend to banks on up to 90 days term against securities;

b verify, on the premises, records, accounts, and any other documents of
the banking companies
c buy, sell, and conduct other transactions with, coins, gold bars, and
other precious metals;
d a+b
35 Besides deposits other sources of Romanian banks' funds are:
a borrowings from the National Bank of Romania;

b borrowings from other banks;
c notes and debentures;
d a + b;
e b+c
ANNEX No 1
BANKS OPERATING IN ROMANIA∗
LICENCING
No BANK HEAD OFFICE LEGAL STATUS CAPITAL TYPE
DATE
Bucureşti,
BANCA NAŢIONALĂ Central Bank state-owned
Str. Lipscani nr.25,
A ROMÂNIEI of Romania capital
sector 3
I BANKS - ROMANIAN LEGAL ENTITIES
majority state-
Bucureşti,
Banca Comercială Joint stock owned and
1 Bd. Regina Elisabeta nr.5, 1990
Română company domestic private
sector 3
capital
Bucureşti, majority state-
Bd. Mircea Vodă nr.44, Joint stock owned and
2 Banca Agricolă1 1990
bl. M17, tronson II, company domestic private
sector 3 capital
Bucureşti,
Casa de Economii şi Joint stock state-owned
3 Calea Victoriei nr.13, 1949
Consemnaţiuni (CEC)2 company capital
sector 3
majority foreign
Bucureşti,
Banca Română pentru Joint stock and domestic
4 Str. Doamnei nr.4, 1990
Dezvoltare (BRD) company private and state-
sector 3
owned capital
Bucureşti, foreign and
Banca Comercială Joint stock
5 Calea Victoriei domestic private 1991
"Ion Tiriac" company
nr.15, sector 3 capital
Bucureşti, state-owned and
Joint stock
6 BANC POST Bd. Libertăţii nr.18, majority foreign 1991
company
bl.104, sector 5 private capital
Bucureşti, state-owned and
Joint stock
7 Banca Turco - Română3 Str. Ion Câmpineanu nr.16, foreign private 1994
company
sector 1 capital
Bucureşti,
ABN AMRO Bank Bd. Expoziţiei nr.2, Joint stock foreign private
8 1995
(România) World Trade Center, company capital
unit.2.23, sector 1
majority state-
Banca de Export-Import Bucureşti,
Joint stock owned and
9 a României Spl. Independentei nr.15, 1992
company domestic private
(EXIMBANK) sector 5
capital
Bucuresti,
Joint stock foreign private
10 Citibank România Bd. Iancu de Hunedoara nr.8 1996
company capital
sector 1
Bucureşti,
11 Alpha Bank România Piaţa Gh. Cantacuzino nr.6, 1994
company capital
sector 2
∗
31 Decembrie 2000
1
Subject to operational and financial restructuring, administration regime ahead of
privatisation
2
Reorganised as joint stock banking company pursuant to Law No. 66/1996
3
Banned from participating in final settlement of securities operations
(continued)
LICENCING
DATE
foreign and
Cluj-Napoca, Joint stock
12 Banca Transilvania domestic private 1994
Bd. Eroilor nr.36 company
capital
Bucureşti,
FINANSBANK Joint stock majority foreign
13 Str. Doamnei nr.17-19, 1993
(România) company private capital
sector 3
foreign and
Banca Comercială Bucureşti, Bd. Unirii nr.59, Joint stock
14 domestic private 1995
"ROBANK" sector 3 company
capital
Bucureşti,
International Business foreign and
Banca Daewoo Joint stock
15 Center, domestic private 1997
(România) company
Bd. Carol I nr. 34-36, et.1, capital
sector 2
Banca pentru Mică
Industrie şi Joint stock
16 Calea Grivitei nr.24, domestic private 1990
Liberă Iniţiativă company
sector 1 capital
MINDBANK
Joint stock
17 Banca Românească Bd. Unirii nr.35, bl. A3, domestic private 1993
company
sector 3 capital
Banca de Credit majority domestic
Târgu Mureş, Joint stock
18 şi Dezvoltare private and state- 1994
Piata Trandafirilor nr. 21 company
ROMEXTERRA owned capital
PIRAEUS BANK Joint stock
19 Bd. Carol I nr.34-36, et.VI, domestic private 1995
ROMÂNIA company
sector 2 capital
foreign and
Banca Comercială Joint stock
20 Arad, Str. Revoluţiei nr.88 domestic private 1996
West Bank company
capital
Banca Română pentru Bucureşti,
Joint stock domestic private
21 Relansare Economică Bd. Aviatorilor nr.46, 1996
company capital
LIBRA BANK sector 1
22 Banca Română de Scont Brasov, Str. Turnului nr.5 1996
company capital
Bucureşti,
Banca Comercială Joint stock domestic private
23 Str. Johann Strauss nr.1, 1996
"UNIREA"4 company capital
sector 2
DEMIRBANK Joint stock
24 Splaiul Unirii nr.16, domestic private 1997
(România) company
sector 4 capital
Commercial Bank Bucureşti, Joint stock foreign private
25 1996
of Greece (România) Str. Berzei nr.19, sector 1 company capital
Bucureşti,
Raiffeisenbank Joint stock foreign private
26 Bd. Unirii nr. 74, bl. J3B, 1997
(România) company capital
aripa 2-3, sector 3
Bank-Austria Bucureşti,
27 Creditanstalt Str. Grigore Mora nr.37, 1998
company capital
România sector 1
4
Subject to special settlement regime of interbank operations
(continued)
LICENCING
DATE
ROMANIAN Bucureşti,
28 INTERNATIONAL Str. Iuliu Teodori nr.1, 1998
company capital
BANK sector 5
Bucureşti,
BNP - Dresdner Bank Joint stock foreign private
29 Str. C.A. Rosetti nr.36, 1998
(România) company capital
sector 2
domestic and
Banca Comercială Sibiu, Joint stock
30 foreign private 1999
"CARPATICA" Bd. Mihai Viteazu, bl. 42 company
capital
BANCA DE Bucureşti,
31 INVESTITII ŞI Bd. Dimitrie Cantemir nr.2, 2000
company capital
DEZVOLTARE (BID) bl. P3, tronson 2, sector 4
VOLKSBANK Bucureşti, Joint stock foreign private
32 2000
(România) Str. Coltei nr.8, sector 3 company capital
foreign and
Cluj-Napoca, Joint stock
33 Banca "Dacia Felix" domestic private 1991
Str.Memorandumului nr.28 company
capital
II BANKS - FOREIGN LEGAL ENTITIES
Bucureşti,
ING Bank NV
1 Sos. Kiseleffnr.11-13, Branch 1994
- Bucharest Branch -
sector 1
Banque Franco - Bucureşti,
2 Roumaine P-ta Charles de Gaulle nr.3- Branch 1990
- Bucharest Branch - 5, sector 1
Bucureşti,
MISR Romanian Bank
3 Bd. Unirii nr.66, bl.K3, Branch 1987
sector 3
Frankfurt Bukarest Bank Bucureşti,
4 AG Bd. Carol I nr.34-36, Branch 1979
- Bucharest Branch - sector 2
National Bank of Bucureşti,
5 Greece Splaiul Unirii nr.4 Branch 1996
- Bucharest Branch - bl. B3, tronson 3, sector 4
Banca Italo - Bucureşti,
6 Romena SpA Bd. Carol I nr.34-36, Branch 1996
United Garanti Bank
International N.V., Bucureşti,
7 Branch 1998
Amsterdam Str. Paris nr.30, sector 1
Banca di Roma SpA Bucureşti,
8 Italia Str. Dr. Staicovici nr.75, Branch 2000
Source: National Bank of Romania – Annual Report 2000

Organization Chart of the NATIONAL BANK OF ROMANIA as of 31 December 2000 ANNEX No 2
BO ARD O F D I REC TO RS
GOVERNOR
VICE - GOVERNOR FIRST VICE - GOVERNOR VICE - GOVERNOR
HUMAN RESOURCES DEPARTMENT

M o n e ta ry P o lic y C o m m itte e S u p e rv is io n C o m m itte e
Human Resources Management Division
MONETARY POLICY DEPARTMENT MARKET OPERATIONS DEPARTMENT BANKING REGULATION AND LICENSING DEPARTMENT
Professional Training Division
LEGAL DEPARTMENT
Monetary Analysis Division Monetary Policy Operations Division Analysis and Strategy Division
Monetary Forecasting Division State Treasury Operations Division Banking Regulation Division
International Relations and EU Integration Division Foreign Reserve Management Division Licensing Division
Banking Risk Division Legal Documentation and Advisory Division
RESEARCH AND PUBLICATIONS DEPARTMENT BANK OPERATIONS DEPARTMENT Contract Assistance and Disputed Claims Division
SUPERVISION DEPARTMENT
INTERNAL AUDIT AND CONTROL DEPARTMENT
Research Division Issuance Division
Publications Division Settlements Division Synthesis Division
Documentation and Library Division Inspection Division I Internal Audit Division
ACCOUNTING DEPARTMENT Inspection Division II Internal Control Division
STATISTICS DEPARTMENT Inspection Division III
BRANCHES
Financial Division LOGISTICS DEPARTMENT
Statistical Reporting Division Accounting Division
Data Processing Division Internal Financial Audit Division
Statistical Analysis and Information Division Investment and Procurement Division
SECRETARIAT Transport Division
IT DEPARTMENT General Administration Division
Technical Services and Maintenance Division
Board Secretariat Division Bank Security Division
IT Systems Division Bank Correspondence Division Social Services Division
Network Administration Division Public Relations and Protocol Division
Archives and Museum Division
CENTRAL OFFICE FOR PAYMENTS AND BANKING SETTLEMENTS
Settlements Division
Gross Settlement Division
Settlement Monitoring and Databases Bureau
Design, Informatics and Communications Division
Resources Management Division
Logistics Division
Organizational Chart of a Bank ANNEX No 3a
RISK COMMITTEE GENERAL ASSEMBLY OF SHAREHOLDERS CREDIT COMMITTEE

Members Members
BOARD OF DIRECTORS
COMMITTEE FOR THE President FORFEITING COMMITTEE
MANAGEMENT OF ASSETS AND Members Members
LIABILITIES
Members ASSETS AND LIABILITIES
MANAGEMENT COMMITTEE MANAGEMENT (C)
General Manager
RISK CONTROL (C)
Members
METHODOLOGY AND CONTROL
CHIEF EXECUTIVE OFFICER
BANKING OPERATIONS LEGAL DEPARTMENT
COUNSELORS
VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT

INTERNATIONAL DEPT.
PROJECTS’ EVALUATION
GENERAL ACCOUNTING
GENERAL SECRETARY
FOR THE POPULATION

CREDIT DEPARTMENT
PERSONNEL TRAINING
OWN INVESTMENTS
FOREIGN EXCHANGE
BANKING SERVICES
CREDITS RECOVERY
AND DEVELOPMENT
CAPITAL MARKETS
HUMAN RESOURCES
TREASURY DEPT.
SYNTHESIS DEPT.
NON-PERFORMING
BANKING OPERATIONS
PRIVATIZATION DEPT.
IT DEPARTMENT
AND FINANCING
OF THE BANK
WITH COMMERCIAL
MARKETING DEPT.
DEPARTMENT
OPERATIONS
ECONOMIC
DEPT.
DEPT.
DEPT..
DEPT.
PAPERS
FINANCIAL MANAGER
IT DEPARTMENT
ANNEX No 3b
PAY OFFICE
DEPARTMENT
ACCOUNTING
DEPARTMENT
SUBSIDIARIES
AGENCIES
ORGANIZATIONAL CHART OF A BRANCH OF A BANK
FOREIGN EXCHANGE
DEPUTY GENERAL MANAGER
GENERAL MANAGER
OPERATIONS
ADMINISTRATIVE,
SECRETARY
EVALUATIONS AND
CONSULTANCY
OWN INVESTMENTS
CREDITS, BANKING SERV.
CREDIT COMMITTEE
FOR POP.
RISK COMMITTEE
CAPITAL MARKETS
RECOVERING NON-
PERFORMANT CREDITS
HUMAN RESOURCES
DEPARTMENT
INCOMES & EXPENDITURE
BUDGET
LEGAL DEPARTMENT
ANNEX No 4
BANKING REGULATIONS
THE BANKING ACT

Law No. 58/5 March 1998 (modified by Emergency Ordinance No.24/25
March 1999)
(Published in Monitorul Oficial al României, part I, No. 121/23 March
1998)
(modified by Emergency Ordinance No. 137 of 18 October 2001)
THE NATIONAL BANK OF ROMANIA ACT

Law No. 101/26 May 1998 (modified by Law No.156/12 October 1999)
(Published in Monitorul Oficial al României part I, No.203/1 June 1998)
LAW ON BANKS' PRIVATISATION

Law No. 83/21 May 1997 on privatisation of banks in which the state is
shareholder
(Published in Monitorul Oficial al României part I, No. 98/23 May 1997)
BANK INSOLVENCY ACT

Law No. 83/15 April 1998
(Published in Monitorul Oficial al României part I, No.159/22 April
1998)
CURRENCY REGULATION (including the norms NRV1-NRV9)

Regulation No. 3/23 December 1997
(Published in Monitorul Oficial al României part I, No.395/31 December
1997)
(modified by Circular No. 26 of 20 November 2001)
REGULATION ON OPEN MARKET OPERATIONS

Regulation No. 1/30 March 2000 on open market operations performed
by the NBR and on lending and deposit facilities granted to banks
(Published in Monitorul Oficial al României part I, No.142/5 April 2000)
REGULATION ON RESERVE REQUIREMENTS

Regulation No. 4/16 July 1998 (republished)
(Published in Monitorul Oficial al României part I, No.121/24 March
1999)
REGULATION ON CREDIT INFORMATION BUREAU

Regulation No. 1/21 May 1999 regards the organization and operation of
the Credit Information Bureau. It sets the information system,
organization and management of the Central Credit Register and the
Overdue Credit Register, and disclosure of information to the users.
(Published in Monitorul Oficial al României part I, No.614/16 December
1999)
ANNEX No 5
Balance Sheet of
The National Bank of Romania
as of December 31, 2000 and 1999
(Amounts in billions of ROL)

Dec 31, 1999 Dec 31, 2000 2000/1999
ASSETS %
Cash & similar items 42.2 45.0 106.6
Precious metals and stones 1,066.7 1,371.3 128.6
Interest Receivable 16.1 4.0 24.8
Foreign Assets 71,330.1 115,994.1 162.6
Interest Receivable on Time Deposits 324.1 709.0 218.8
Interest Receivable on Securities 556.0 919.1 165.3
Securities 16,838.9 16,176.1 96.0
Interest Receivable 1,472.8 1,151.0 78.1
Government loans - - x
Loans granted to banks 2,181.6 6,952.7 318.7
Interest Receivable 647.5 197.6 30.5
Specific provisions for credit losses 383.7 802.6 209.2
Specific provisions for interest losses 305.5 60.7 19.8
Other loans 32.1 25.5 79.4
Accrued interest 32.9 39.1 118.8
Interest Receivable - Total 2,743.9 2,959.1 107.8
Settlement from operations with the IMF 908.6 - x
Other Assets 3,596.3 3,835.9 106.7
Provisions for other assets - 152.2 X
Total Assets 98,740.4 147,359.7 149.2
LIABILITIES
Notes and coins in circulation 18,676.4 28,108.8 150.5

Bonds issued by NBR 5,365.8 6,771.3 126.2
Interest Payable 68.3 76.8 112.5
Foreign Liabilities 34,731.6 44,236.6 127.4
Interest Payable on Time Deposits 28.2 90.4 320.6
Interest Payable on Borrowings 96.7 134.7 139.3
Interest Payable on SDR allocations by the IMF - 20.1 X
Deposits of State Treasury 2,846.7 1,015.6 35.6
Banks’ deposits with the NBR 30,963.4 48,921.6 158.0
Interest Payable 17.5 153.9 879.4
Other deposits with the NBR 11.7 22.7 194.0
Interest Payable - Total 210.7 475.9 225.9
Other Liabilities 337.5 380.6 112.8
Capital, funds and reserve accounts 5,596.6 17,426.6 311.4
Total Liabilities 98,780.4 147,359.7 149.2
Source: National Bank of Romania – Annual Report for year 2000

ANNEX No 6
Profit and Loss Statement of

The National Bank of Romania
as of December 31, 2000 and 1999
(Amounts in billions of ROL)

Dec 31, 1999 Dec 31, 2000 2000/1999
REVENUS
Operating revenues 10,915.6 14,804.4 35.6
Interest on credit lines 1,308.9 709.4 -45.8
Revenues from commissions and fees 719.9 881.2 22.4
Revenues from ROL-denominated securities operations 6,427.4 9,176.1 42.8
Interests and revenues in foreign exchange 1,185.3 1,115.9 -5.9
Revenues from operations with forex-denominated securities 1,192.4 2,315.6 94.2
Revenues from operations with precious metals 81.7 49.1 -39.9
Revenues from provisions - 557.1 X
Other revenues 136.1 134.3 -1.3
I. TOTAL REVENUES (1+2) 11,051.7 14,938.7 35.2
EXPENSES
Operating expenses 8,314.6 11,993.8 44.2
Interests paid to the banks and State Treasury 4,599.6 7,203.2 56.6
Interests and commissions on IMF borrowing 439.8 658.7 49.8
Interests and commissions in foreign exchange for
NBR borrowings from other sources and other 1,552.6 1,667.1 7.4
expenses in foreign exchange
Expenses for operations with forex-denominated securities 1,057.1 373.9 -65.2
Expenses for operations with ROL-denominated securities 279.4 759.8 171.9
Note printing and coin mintage-related expenses 233.8 379.1 62.1
Expenses for operations with precious metals 124.2 84.9 -31.6
Losses from non-recoverable claims - 808.7 X
Other 10.1 58.4 478.2
Overheads 1,579.2 1,827.1 15.7
Salaries and wages 521.3 667.8 28.1
Expenses for provisions 731.2 883.3 20.8
Other 326.7 276.0 -15.5
TOTAL EXPENSES (1+2) 9,893.8 13,820.9 39.7
Profit/Loss (I-II), out of which: 1,157.9 1,117.8 -3.5

Reserve fund 4.4 46.5 956.8
Profit Tax 956.0 892.9 -6.6
Net profit 197.5 178.4 -9.7
Source: National Bank of Romania – Annual Report for year 2000

ANNEX No 7
Balance Sheet for the years ended
December 31, 2000 and 1999
B.R.D.
(Amounts in millions of ROL in terms of purchasing power as of December 31, 2000 unless otherwise
indicated)
December 31, December 31,

Note
2000 1999
ASSETS
Cash & cash equivalents 6 593,687 444,431
Current accounts and deposits at banks 7 7,329,295 4,852,889
Reserves at the National Bank of Romania 8 9,100,107 5,852,624
Treasury securities 9 1,104,371 2,147,496
Loans, net
Loans 15,132,853 15,055,379
Club Loan to NBR --- 256,863
Government and public sector loans 297,669 60,800
Allowance for loan losses (593,974) (759,366)
Total loans, net 10 14,836,548 14,613,676
Interest receivable and other assets, net
Accrued interest receivable, net 11 390,406 366,367
Other assets, net 12 456,093 290,801
Total interest receivable and other assets, net 846,499 657,168
Equity investments, net 13 519,074 480,572
Premises and equipment, net 14 5,676,130 5,871,207
Goodwill, net 15 430,859 407,989
Other intangible assets, net 16 227,038 81,268
Total Assets 40,663.608 35,409.320
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Demand deposits 17 10,053,218 7,730,868
Term deposits 18 20,152,048 17,073,140
Total deposits 30,205,266 24,804,008
Other borrowed funds 19 1,189,740 1,101,783
Accrued interest payable 20 381,361 447,098
Deferred tax liability, net 21 614,101 500,672
Other liabilities 22 983,494 1,150,648
Total Liabilities 33,373,962 28,004,209
Share capital - nominal 23 1,742,253 1,742,253
Share capital restatement reserve 24 9,483,352 9,843,352
Reserve for general banking risks 25 77,618 77,618
Revaluation surplus 26 917,523 1,092,382
Accumulated deficit 4,931,100 (4,990,494)
Total Shareholders’Equity 7,289,646 7,405,111
Total Liabilities and Shareholders’Equity 40,663,608 35,409,320
The accompanying notes are an integral part of these financial statements
Source: BRD – Annual Rep. 2000
The financial statement on this page was approved by the Board of Directors, and was signed on its behalf on
April 9, 2001 by Bernard Caussignac, general manager.
ANNEX No 8
Profit and Loss Account for the Year Ended
December 31, 2000 and 1999
(Amounts in millions of ROL in terms of purchasing power as of December 31, 2000 unless otherwise
indicated)
December 31, December 31,

Note
2000 1999
Interest income
Interest income on loans 4,527,921 15,737,523
Interest on interest bearing deposits 1,714,368 1,046,210
Interest on trading securities 783,095 763,505
Total interest income 28 7,025,384 7,547,238
Interest expense
Interest for deposits (4,216,092) (4,597,969)
Interest for funds borrowed (144,540) (105,648)
Total interest expense 29 (4,360,632) (4,703,617)
Net interest income 2,664,752 2,843,621
Provisions for losses 30 (371,716) (782,809)
Net results related to loans written-off 27
Net interest income after provisions for losses 2,293,036 2,060,812
Non-interest income
Foreign exchange income, net 32 937,318 937,870
Service charges and commissions, net 31 1,062,521 971,854
Income on investments 33 54,679 81,334
Other income 34 56,130 86,223
Total non-interest income 2,110,648 2,077,281
Income before non-interest expense 4,403,684 4,138,093
Non-interest expense
Salaries and related expenses 35 (1,167,826) (1,060,524)
Operating expenses 36 (734,092) (401,116)
Other expenses 37 (761,028) (649,264)
Provision expenses for impairment of assets 13 (20,653) -
Total non-interest expense (2,683,599) (2,110,904)
Net operating profit 1,720,085 2,027,189
Hyperinflation adjustment 38 (415,711) (935,441)
Profit before income taxes 1,304,374 1,091,748
Current income tax expense (253,480) (445,383)
Deferred income tax expense (258,279) (160,119)
Income taxes 21 (511,759) (605,502)
Net profit 792,615 486,246
Earnings per share (348,450,670 equivalent shares as
46 0.00227 0.00140
of December 31, 2000)
Earnings per share (60,929,768 equivalent shares as of
46
December 31, 1999) - 0.00798
Net profit 792,615 486,246
Distributed dividends * 39 (752,173) (639,979)
Net retained profit (deficit) 40,442 (153,733)
* Dividends are distributed from statutory net profits (1,354,824 and 766,596 nominal as of December 31, 2000
and 1999 respectively).
Source: Annual Report 2000
The Banking System in England
THE BANKING
SYSTEM
IN ENGLAND
D Objectives:
After studying this chapter you should be able to understand:
2.1 The evolution of the Bank of England
The hub of the banking system;
The establishment of the bank;
The nationalisation of the bank;
2.2 Functions of the Bank of England
Government’s bank;
Bankers' bank;
Lender of last resort;
Carrying out the government’s monetary policy;
Control of the currency issue;
2.3 Present - day role of the Bank of England
2.4 Banking today
2.1 The evolution of the Bank of England
The hub of the banking system

In every country where there is a developed banking system, the main bank,
the hub of the system, is the Central Bank.
In the United Kingdom, the central bank is the Bank of England, which was
established in 1694.
Most of the central bank’s functions are quite different from those of the
commercial and other banks’ and, being the Government’s bank and the
bankers’ bank, it has a controlling influence over all the other banks as a
whole.
The history of the Bank is naturally one of interest, but also of continuing
relevance to the Bank today. Events and circumstances over the past three
hundred or so years have shaped and influenced the role and responsibilities
of the Bank. They have moulded the culture and traditions, as well as the
expertise, of the Bank, which are relevant to its reputation and effectiveness
as a central bank in the early years of the 21st century. At the same time,
much of the history of the Bank runs parallel to the economic and financial
history, and often the political history in a broader sense, of the United
Kingdom.
In the 19th Century the Bank took on the role of lender of last resort,
providing stability during several financial crises.
World War I: 1914 - 1918 - During World War I the National Debt jumped
to £7 billion. The Bank helped manage Government borrowings and resist
inflationary pressures.
Gold - In 1931 the United Kingdom left the gold standard; its gold and
foreign exchange reserves were transferred to the Treasury. But their
management was still handled by the Bank and this remains the case today.
The establishment of the Bank of England

The Bank of England was established under charter with the very privileged
position of being the first joint-stock banking company.1
1
D.P. Whiting - Elements of banking, Macdonald & Evans Ltd., London 1985, p. 42
This meant that it could have a large number of shareholders and was not
restricted to being a partnership, as were the other banks.
From the beginning, the Bank of England accepted money on deposit,
issued its own notes and made loans in the same way that the other banks
did and was able to increase its business more rapidly than them.
Because many banks had to close their doors, confidence in the banking
system and in the system of credit creation was greatly affected, and
legislation was introduced, especially, to encourage the establishment of
larger banking units on the one hand and to control the note issue on the
other.
Its law2, had three provisions:
a) To divide the Bank of England into two separate departments, the
Banking Department and the Issue Department.
b) To permit the Bank to make a fiduciary issue of £14 million of notes to
be backed by Government securities.
c) Ultimately to centralise the note issue in the hands of the Bank of
England by gradually extinguishing private note issues as the private
banks became bankrupt or amalgamated with other banks.
Thus, the Bank of England gradually assumed responsibility for the
currency supply and as the holder of the country’s gold reserves, apart from
the relatively small fiduciary issue, it had to hold gold as backing for the
note issue.
The Bank of England started in 1694 as a commercial bank and then in the
second half of the nineteenth century gradually stopped competing with the
other banks and concentrated on its new role as the first central bank in the
world.
Nationalisation of the Bank of England
The Bank was nationalised in 1946, when the conduct of the Bank was
placed in the hands of a Court of Directors headed by the Governor of the
Bank of England. The Crown appoints the Directors and the Governor and
senior officer’s work in close liaison with the Treasury.
2
The Bank Charter Act 1844
Operational independence May 1997

In May 1997 the Government gave the Bank responsibility for setting
interest rates to meet the Government's stated inflation target.
Managing the modern bank

The 1998 Bank of England Act made changes to the Bank's governing body
too. The Court of Directors, as it's known, is now made up of the Bank's
Governor and 2 Deputy Governors, and 16 Non-Executive Directors.
Channels of communication.
There are regular channels of communication between the Bank of England
and the other financial institutions in London, and through these, it is able to
discuss problems as they arise and seek compliance with its wishes. These
channels include the two Committees of the London Clearing Bankers, the
Accepting Houses Association, the Discount Market Association, the
Finance Houses Association and a number of other groups representing
financial institutions.
The Bank today
The Bank of England is the central bank of the United Kingdom. Sometimes
known as the 'Old Lady' of Thread needle Street, the Bank was founded in
1694, nationalised in 1946, and gained operational independence in 1997.
Standing at the centre of the UK's financial system, the Bank is committed
to promoting and maintaining a stable and efficient monetary and financial
framework as its contribution to a healthy economy.
The Bank's roles and functions have evolved and changed over its three
hundred-year history. Since its foundation, it has been the Government's
banker and, since the late 18th century, it has been banker to the banking
system more generally - the bankers' bank. As well as providing banking
services to its customers, the Bank of England manages the UK's foreign
exchange and gold reserves and the Government's stock register.
Interest rates decisions are taken by the Bank's Monetary Policy Committee.
The Monetary Policy Committee has to judge what interest rate is necessary
to meet a target for overall inflation in the economy.
The Bank is also responsible for maintaining stability in the financial
system - a healthy financial system is vital to the proper functioning of the
economy. The Bank analyses and promotes initiatives to strengthen the
financial system, and monitors financial developments in trying to identify
potential threats to financial stability. It also undertakes work on the

arrangements for handling financial crises should they occur, and is the
financial system's 'lender of last resort' in exceptional circumstances. In this
task, the Bank co-operates closely with the Treasury and the Financial
Services Authority, the regulator of banks and other financial institutions in
the United Kingdom.
Much of the Bank's work involves liaison and co-operation with the
Government institutions and other central banks. Given London's position as
a large international financial centre, the Bank's work addresses
international as well as domestic developments. The Bank participates in
many international forums involved in promoting the health of the world
economy and global financial system.
The Bank also works to ensure that the UK financial system provides
effective support to the rest of the UK economy and that the UK remains an
attractive location for the conduct of international financial business. This
involves work on issues such as firms' access to finance and, over recent
years, the introduction of the Euro and the evolution of the Euro financial
markets and infrastructure.
2.2 Functions of the Bank of England
The main functions3 of the Bank of England are:
The Government’s bank
The Bank of England is responsible for running accounts for all of the
Government Departments and it has been the Bank’s general policy not to
maintain accounts for individuals and firms in the private sector (the non-
Government sector of the community).
The bankers’ bank
By maintaining accounts with the Bank of England, the other banks are able
to settle transactions with one another and with the institutions in the public
sector, and also to maintain current account balances, which form part of
their liquid reserves.
Being able to draw cheques on the Bank or being able to pay with cheques
that have been drawn on the Bank facilitates the day-to-day settlement of
transactions through the London and Provincial Clearing Houses.
3
D.P. Whiting - Elements of banking, Macdonald & Evans Ltd., London, 1985, p.47
Lender of last resort

If the London Money Market is short of funds, the Bank of England must
always come to its aid, through it will do so at its own price, i.e. it will
determine the rate of interest at which it is prepared to lend.
The Bank may choose to give either direct or indirect assistance in the
market or may force the Discount Houses to borrow at the Bank of
England’s Minimum Lending Rate for a period of seven days.
If the Bank decides to give direct assistance it will buy bills or Government
stocks from the Discount Houses.
Indirect assistance to the Discount Houses occurs when the Bank of
England buys the bills or stocks from the banks and thus enables them to
increase their lending to the Discount Houses.
Carrying out the Government’s monetary policy
The Bank of England is the principal agent for the Government in pursuing
its monetary policy. Not only is it responsible for the fiduciary issue, but
also through its control and influence over the banks and other financial
institutions, it is able to restrain or increase the total money supply.
The main devices used by the Bank in carrying out the monetary policy are:
a) Varying its minimum rate of interest;
b) Open Market operations;
c) Special Deposits;
d) Adjustments to the reserve ratios of the banks and other financial
institutions;
e) Directives to the Banks.
A) The minimum rate of interest. Since the early nineteenth century the
Bank of England has been able to influence the level of interest rates in
the money market by changing the minimum rate of interest at which it
is willing to lend. Until recently, this minimum rate was known as Bank
Rate and changes in it had strong psychological effects upon not only
the money market but upon the community as a whole. A reduction in
the Bank Rate was regarded as signal that restraints upon economic
expansion were to be relaxed whereas a rise in Bank Rate heralded a
period of credit restriction. If interest rates are raised then borrowing is
discouraged and thus the credit creation process is slowed down. If
interest rates are reduced then borrowing becomes more worthwhile and
this stimulates the creation of new deposits.
B) Open Market operations. These amounts to the deliberate selling or
buying of Treasury bills and Government stocks in order to “mop up”
excess purchasing power on the one hand, or to increase purchasing
power on the other. By selling securities in the open market the
Government receives payment for them by cheques drawn by
individuals, firms and institutions in the private sector.
These cheques reduce the level of bank deposits and, as the deposits form
the major part of the money supply, the latter is reduced. Conversely, if the
Government buys securities cheques drawn on the Bank of England pay for
its purchases, and these are paid in as deposits with the commercial banking
system, thus increasing the money supply.
When the Government sells securities and bank deposits are reduced, so are
the cash holdings of the banks. They thus find it difficult to maintain their
cash and liquidity ratios and may have to reduce their lending by way of
loans and overdrafts, which will reduce bank deposits still further. Open
Market operations can therefore be very effective in reducing the
availability of credit to the community.
C) Special Deposits. Since 1960 the Bank of England has used the device
of Special Deposits in order to reduce the ability of the banks to lend by
way of loans and overdrafts. A call for Special Deposits takes the form
of a directive to the banks and some other financial institutions to pay
over a set proportion of their eligible liabilities in cash, to be frozen as
deposits with the Bank of England until such time as the bank decides to
repay them. A call for, say, 2 per cent Special Deposits may cause the
banks to reduce their less liquid assets in order to maintain their reserve
ratios. When Special Deposits are repaid they have the opposite effect
upon the liquidity of the banks, and upon their ability to create new
deposits.
D) Reserve ratios - Since the 70s, all banking institutions have had to keep,
day by day, a minimum of 12 per cent of eligible liabilities in the form
of eligible reserve assets. These assets are mainly those whose supply
can be regulated by the Authorities and comprise balances with the Bank
of England commercial bills, call money with the London Money
Market, Treasury bills, Government stocks with less than a year to
maturity, local authority bills and company tax certificates.
E) Control of the currency issue - In conjunction with the Treasury, the

Bank of England determines the size of the fiduciary issue and is
responsible for the coinage. The note issue must be increased to meet
seasonal demands, e.g. at Christmas and during the summer holiday
period.
2.3 Present - day role of The Bank of England
The Bank of England is the national bank and central bank for Great Britain.
In these capacities the Bank has the functions described:
1. Banker to Government;
2. Sole note issuing bank in England and Wales;
3. It is the bankers’ bank;
4. Lender of last resort to the London money market;
5. Administers Government monetary policy;
6. Supervises other banks and associated financial institutions;
7. Management of the national Debt.
The Bank is organised into three main operational areas - Monetary
Analysis and Statistics, Financial Market Operations and Financial Stability,
supported by a Central Services area. This structure was introduced in June
1998 to reflect the Bank's new responsibilities in the light of the 1998 Bank
of England Act. In addition, the Co-ordination Unit for Europe is
responsible for co-ordinating the Bank's work on Europe, specifically in
relation to the Euro. The Centre for Central Banking Studies offers teaching
and technical assistance to other Central Banks and the Printing Works is
responsible for the printing of all Banks of England banknotes.
Monetary Analysis and Statistics
This area is made up of the following Divisions:
International Economic Analysis
Structural Economic Analysis
Monetary Instruments and Markets
Monetary Assessment and Strategy
Conjectural Assessment and Projections
Monetary and Financial Statistics Regional Agencies.
The Monetary Analysis divisions are responsible for providing the Bank
with the economic analysis it needs to discharge its monetary policy
responsibilities. Its economists conduct research and analysis of current and
prospective developments in the UK and international economies.
The Monetary and Financial Statistics Division compiles, publishes and
briefs on financial statistics; in particular the monetary aggregates and
banking statistics. Special studies directed at international harmonisation
and improvements to the statistics are also a feature of their work.
Financial Market Operations
Gilt-Edged and Money Markets
Foreign Exchange
Banking Services
Market Services
Risk Analysis and Monitoring
Registrar's Department
The Market Operations divisions - Gilt-Edged and Money Markets and
Foreign Exchange - plan and conduct the Bank's operations in the core
financial markets, in particular the money market in order to establish short-
term interest rates at the level required by monetary policy. They also
manage the UK's foreign exchange and gold reserves as agent for HM
Treasury and they conduct the current programme of Government gold
auctions. They contribute market analysis and intelligence to the Monetary
Policy Committee and the Financial Stability Committee from their
operational presence in the markets and, in line with the Bank's core
purpose; they seek to promote efficient structures in these markets.
The Banking and Market Services divisions provide banking services to the
Government and other customers, principally banks and other central banks.
They manage the note issue. They also play a key role in the provision of
safe and efficient payment and settlement services for the UK markets and
for the country as a whole.
The Risk Analysis and Monitoring division is responsible for integrating
management information on the risks arising from the Bank's operation in
the financial markets and for analysing the balance sheet implications of
those operations.
The Registrar's Department provides the principal stock registration service
for the Government and an execution-only postal brokerage service for
retail gilt investors.
Financial Stability
Domestic Finance
Financial Intermediaries
International Finance
Market Infrastructure
Regulatory Policy
The Financial Stability divisions have the main responsibility for
discharging the Banks remittal to maintain the stability of the financial
system as a whole. The Financial Stability Committee acts as a focus for the
Bank's work in this area. The Governor chairs the Committee.
The work of the Financial Stability divisions covers both UK and overseas
financial systems and markets, and the functioning of the international
financial system. The divisions identify, analyse and carry out research into
developments relevant to the structure and functioning of the financial
system domestically and internationally, make policy proposals and
encourage changes designed to increase its safety and effectiveness.
The divisions also contribute to the monetary policy process, for example
through the Bank's Deputy Governor for Financial Stability as a member of
the Monetary Policy Committee. The divisions' analysis is used to promote
public understanding of issues in financial stability through, for instance, the
regular Financial Stability Review.
Co-ordination Unit for Europe
The Co-ordination Unit for Europe is responsible for co-ordinating the
Bank's work on Europe, specifically in relation to the Euro. It monitors the
evolution of the Euro financial markets and supporting infrastructure; and
provides information on this (and other Euro-related matters) in the biannual
Practical Issues report. It leads the Bank's involvement in HMT's National
Changeover Plan work, focusing on the financial sector preparations. It co-
ordinates the Bank's involvement in the main official and private sector
Euro for; and provides a body of expertise on the European Central Bank.
Working with the Agents, it also monitors the use of the Euro in the UK.
Central Services
Personnel
Secretary's Department
Legal Unit
Finance and Resource Planning
Investment Unit
Management Services
Property Services and Security
The Central Services divisions encompass a range of support functions that
underpin the Bank's activities and help to ensure that the Bank's reputation
is maintained. These include finance, IT, personnel, the Governors' private
offices, and media and public relations, legal and information services.
Printing Works
The Bank of England Printing Works is located on a purposely-built high
security site in Debden, Essex. It employs over 450 people and is
responsible for the printing of over 1 billion notes annually, together with
the manufacture of its own inks, printing plates and threads. In addition the
Printing Works provides technical and specialised security advice to a
number of central banks worldwide.
The notes are produced in a highly developed printing process which
combines high technology and quality craftsmanship, making the Bank one
of the most cost effective note producers world-wide.
The Printing Work's expertise has led to commercial sales in overseas
markets through Debden Security Printing Limited, the Bank's wholly
owned commercial subsidiary.
Audit
Internal Audit is an independent function authorised by the Court of
Directors to review the adequacy of the internal control systems within the
Bank and to test compliance with agreed procedures. It aims to provide an
independent view for senior management, to assist in the effective discharge
of their responsibilities and to provide a service to the organisation as a
whole.
Centre for Central Banking Studies
The Bank of England's Centre for Central Banking Studies offers technical
assistance, courses, workshops, seminars and comparative research on and
for central banks throughout the world. Its primary aims are to foster
monetary and financial stability worldwide, to promote the Bank's core
activities, and to provide opportunities for Bank of England staff to obtain
broader perspectives on their own areas of expertise. Its goal is to be
recognised internationally as a leading centre of intellectual excellence for
the study of practical central banking.
Governance of the Bank
The Bank of England Act 1998 provides for the appointment by the Crown
of the Governor, two Deputy Governors and 16 Non-Executive Directors of
the Bank who collectively make up what is know as the Court of Directors.
The Governor and Deputy Governors are appointed for five years and the
Directors for three years.
Under the Act, the responsibilities of Court are to manage the Bank's affairs
other than the formulation of monetary policy, which is the responsibility of
the Monetary Policy Committee. This includes determining the Bank's
objectives and strategy, and aiming to ensure the effective discharge of the
Bank's functions and the most effective use of the Bank's resources.
The Monetary Policy Committee
The Act establishes the Monetary Policy Committee as a Committee of the
Bank sets a framework for its operations. The Act provides that the Bank's
objectives in relation to monetary policy shall be to maintain price stability
and, subject to that, to support the Government's economic policies,
including its objectives for growth and employment. At least once a year,
the Government specifies the price stability target and its growth and
employment objectives in conformity with the Act.
Audit Committee
The functions of the Audit Committee are to:

• Keep under review the internal financial controls in the Bank.
• Receive reports from, and review the work of, the internal and
external auditors.
• The Committee also considers and makes recommendations on the
appointment of the external auditors, and their fees, reviews the
annual financial statements prior to their submission to Court,
including consideration of the appropriateness of the accounting
policies and procedures adopted. The Committee reports its
conclusions to Court.
Management structure
Under the Court of Directors, the Bank's senior policy-making body is the
Governor's Committee, comprising the Governors and Executive Directors.
The internal management of the Bank is the responsibility of the
Management Committee, comprising the Deputy Governor (Financial
Stability), the Deputy Directors, the Finance Director and the Director of
Personnel.
2.4 Banking today
The banking sector in the United Kingdom has traditionally been highly
segmented. In its February issue of the Bank of England Quarterly Bulletin
every year the Bank of England lists all those banking institutions to which
it has granted a licence to operate as a bank in the United Kingdom. The list
(of over 450) is divided into seven sections, distinguished sometimes by
function and sometimes by nationality of ownership. As regards functions,
the major distinctions are between retail banks, British merchant banks,
other British banks and discount houses.
The first group provides deposit and loan facilities to the household or
personal sector, together with small and un-incorporated businesses. The
retail banks own the various payment mechanisms, and money transfer is a
major part of retail bank operations. In recent years, they have offered an
increasing range of financial services, based on the marketing idea of “one-
stop shopping” so that it is now possible, within an individual branch, to
buy and sell foreign currency, buy an insurance policy, open a personal
pension fund, invest in units trusts, and buy executor and other services.
British merchant banks provide a complete range of corporate financial
services. These range from accepting deposits and making loans, to advising
on alternative forms of finance, advising on risk management strategies,

handling new securities issues and “accepting” bills issued by firms.
Other British banks are banks, which offer a range of banking services, but
usually limited in some way. Although they may be subsidiaries of retail
banks, they do not usually deal directly with the retail sector.
Discount houses perform a highly specialized and unique role in the UK
financial system. They deal almost exclusively with other banks and with
the Bank of England. They accept surplus funds on a very short-term, often
on an overnight basis, from banks and use the funds to buy and hold
treasury and commercial bills. They thus provide the first source of liquid
assets to the rest of the banking sector, so that any shortage or surplus funds
are immediately reflected in discount houses’ ability to buy bills, or need to
sell them.
At the centre of Britain’s banking and financial structure is the Bank of
England (see Annex no. 1).
The commercial banks, sometimes referred to as “the high street banks”
or “the clearing banks”, are large public limited companies having many
shareholders throughout Britain and in some cases in countries outside
Britain.
These banks operate through a network of branches covering the whole
England and Wales. All commercial banks are profit-seeking companies and
in order to earn money they provide various services to their clients.
Another major group of banks is that of merchant banks sometimes called
“accepting houses” or “issuing houses”. These banks are placed in the
City of London, though some have branch offices in other cities and also
some have offices in important overseas financial centres. The activities
these banks perform are very diversified including trading activities,
accepting financial commitments in exchange for a commission fee,
company financial advice.
Savings and lending institutions – By the term of savings, we mean
refraining from spending. Any money, which we have saved and set aside
for use in the future, we refer to as our savings. Money is saved if it is not
spent, and it does not necessarily have to be placed in a bank, a building
society or any other financial institution or used to purchase stocks and
shares in order to justify the use of the term.
Sources of savings. In the United Kingdom, each individual saves on

average 8 per cent of his income. This may seem a very high proportion, but
it is not always realised that an individual saves not only by depositing
money and buying securities but also by paying premiums on an insurance
policy or by contributing to a superannuating scheme.
National savings. This term is used to identify or to name the part of
personal savings which is deposited with the National Savings Bank and
Trustee Savings Bank or is used to buy National Savings Certificates,
Premium Savings Bonds, or British Savings Bonds or is saved through the
Save as You Earn Scheme.
Functions of a savings bank. A savings bank accepts deposits and pays
interest on them. It may also provide payments mechanism, though this is
not essential function. For instance, on request, the National Savings Bank
will provide a depositor with a draft, which can be used in the same way a
cheque to settle a transaction, and the Trustee Savings Banks now provide
their customers with chequebooks.
The National Savings Bank provides two types of account facilities:
ordinary accounts and investment accounts. Ordinary accounts may be
opened for or by anyone over seven years of age with a maximum deposit of
10000 pounds.
The Co-operative and Trustee Savings Bank (mutual funds) offer a
complete service for personal customers and a limited service to smaller
business customers. These banks are primarily non-profit seeking
organisations, being concerned with providing a service for their customers
and seeking to cover only the costs of providing these services through the
fees they charge. In a similar way to the National Savings Bank, the Trustee
Savings Bank operates with two types of accounts, ordinary accounts and
special investment accounts, but in addition, an ordinary account holder
may also open a current account. Ordinary department depositors may open
a special investment account if they have a minimum of 50 pounds on
ordinary account. Whereas they receive a modest 4 per cent on ordinary
account, considerably higher rates are paid on investment accounts
depending upon the particular bank they are in account with and the yield
earned on the securities in which deposits are invested. Ordinary account
holders may have current account facilities if they wish, which involves
opening a separate account and being provided with a chequebook. Cheques
drawn for cash are free of charge but for others a charge may be made.
Building societies. A building society, like other financial institutions,

borrows money and lends it out at higher rates of interest than it pays for it.
It accepts funds in the form of shares and deposits. Shareholders actually
participate in the affairs of the societies as much that in the event of
financial difficulties the power to return their share capital would be
restricted whereas depositors are creditors and, as such, have a prior claim
over the shareholders in the event of liquidation. The rate of interest on
deposits is usually ½ per cent below that on shares and as there is
comparatively little difference in practice in the ability to withdraw fairly
sizeable sums on demand, the majority of money is on share account to
attract the higher rate of interest. The shareholders are the owners of the
societies but they are paid interest as mentioned above, not dividends. The
societies are in effect mutual societies in as much many of the shareholders
are also borrowers on mortgage.
Commercial banks
Types of deposits. In a similar way to the savings banks, the commercial
banks accept deposits from their customers, but unlike the savings banks,
the majority of the total sum deposited with them is from industrial and
commercial depositors. This does not mean that the commercial banks have
few private customers, but sums of money involved are much greater for
firms than for individuals.
Commercial banks offer two main types of account to depositors: current
accounts and deposit accounts. Current account holders receive no interest
on their accounts, but they can draw cheques on them and use the credit giro
service, and they can withdraw some or all of their balances on demand.
Deposit account holders, on the other hand, do receive interest on their
accounts but do not normally draw cheques on the accounts or use the credit
giro system for paying in credits, and technically, they are required to give
seven days’ notice of their intention to make withdrawals from their
accounts.
Present - day commercial banks offer a wide range of services from those
suitable for individual customers who have modest expectations and
requirements of their bankers, through to the complicated requirements of
the large multi-national companies with banking operations on a worldwide
basis.
Annex No. 2 illustrates the broad areas of operations and services offered by
a large, modern banking company and its associated companies and
subsidiary companies.
Progress test
1) When was the Bank of England established?

2) What were the provisions of the Bank Charter Act 1844?
3) Was the Bank of England always a Central Bank?
4) When was the Bank of England nationalised?
5) What are the channels of communication between the Bank of England
and the other financial institutions?
6) List of functions of Bank of England.
7) What is meant by the term Lender of Last Resort?
8) Define (a) Direct and (b) Indirect assistance to the Discount
Houses.
9) Which tools can the Bank of England use in carrying out the
Government’s monetary policy?
10) Define Open Market Operations.
11) What are Special Deposits?
12) What is the minimum reserve ratio?
13) What does savings mean?
14) In what ways does an individual save?
15) What are National Savings?
16) What are the functions of a savings bank?
12) What is a Trustee Savings Bank?
ANNEX No 1
BUILDING COMMERCIAL
MERCHANT BANKS
SOCIETIES BANKS
Members of Building Members of Accepting Barclays, Lloyds,
Societies Association Houses Committee Midland, National
Examples: Halifax, Examples: Rothschid's, Westminster
Abbey National Hambros, Baring Wiliams and Glyn's
Nationwide, Provincial Brothers. and Scottish banks
Members of Finance
Houses Association.
NATIONALIZED National Savings Bank THE BANK OF FINANCE
Examples: Forward
BANKS and National Girobank ENGLAND COMPANIES
Trust, UDT,
Mercantile Credit.
Bank of Japan, Bank of

Grindlays Bank,
Co-operative Bank and America, Royal Bank of
Standard and
Trustee Savings Bank Canada, and around 300
Chartered Bank etc.
other foreign bank offices
BRITSH BASED
BRIT. OFFICES FOR
MUTUAL BANKS OVERSEAS
FRGN. BANKS
BANKS
Types of financial organizations in Britain
ANNEX No 2
General
management
team at
Head Office
Merchant and
Installment Related financial
Domestic International wholesale
credit services services
banking
Bank branches Includes any Specialized bank Most banks now Banks are now active
throughout overseas branches companies own a finance in such areas as:
Britain including or subsidiary created to be able company which insurance services
any subsidiary foreign banks to operate in this will offer both unit trust sales
bank companies owned by the highly specialized personal and computer services
British clearing area company finance executor & trustee
bank arrangements appointments
The broad areas of operations in a modern banking group

Other Banking Systems in the World
OTHER BANKING
SYSTEMS
IN THE WORLD
D Objectives:
After studying this chapter you should understand:
3.1 The United States of America banking system
3.1.1 Formal structure of the Federal Reserve System
3.1.2 The realities of power
3.1.3 The instruments of Central Banking
3.1.3.1 Reserve requirements
3.1.3.2 Discounting and the discount rate
3.1.3.3 Open Market operations
3.1.4 Financial institutions
3.1.5 The regulation and structure of depository institutions
3.1.5.1 The dual banking system
3.1.5.2 Multiple federal authorities
3.1.5.3 Deposit insurance and the FDIC
3.1.5.4 Bank size distribution and the McFadden Act
3.1.5.5 Savings banks and savings and loan associations
3.1.5.6 Mortgage-related financial institutions
3.1.6.7 Credit unions
3.2 The European System of Central Banks
3.2.1 Organisation of the European System of Central Banks
(ESCB)
3.2.2 Objectives and tasks of the European System of Central Banks
3.2.3 The European Central Bank (ECB)
3.1 The United States of America banking system

3.1.1 Formal structure of the Federal Reserve System
The statutory organisation of the Federal Reserve System is a case study in
those currently popular concepts: decentralisation and the blending of public
and private authority. A deliberate attempt was made in the enabling
congressional legislation, the 1913 Federal Reserve Act, to diffuse power
over a broad base – geographically, between the private and public sectors,
and even within the government – so that no person, group, or sector, either
inside or outside the government, could exert enough leverage to dominate
the direction of monetary policy.
12 Federal
Board of Appoint 3 Reserve
Governors Directors 5,000 Member
Banks Elect 6
7 Members Directors
Commercial
Each Bank with 9
appointed by Banks
Directors who
the President
appoint
and confirmed
the President of
by the Senate
the F. R. Bank Select
Federal Open
Market Committee
Board of Governors Federal
plus 5 Federal Advisory
Reserve Bank Council
Presidents 12
Members
Direct
Set
(within
limits)
Open
Review and Establish
Market
Determine
Operatio
Reserve Discount
Requirements Rate
Figure 1: The Formal Structure and Policy Organisation of the Federal

Reserve System
As the above figure shows, the Board of Governors of the Federal Reserve
System consists of seven members, appointed by the President with the
advice and consent of the Senate. To prevent presidential board packing,
each member is appointed for a term of fourteen years, with one board
member’s term expiring at the end of January of each even-numbered year.
Furthermore, no two board members may come from the same Federal
Reserve district. The Chairman of the Board of Governors, chosen from
among the seven by the President, serves a four-year term. However, the
Chairman’s term does not coincide with the presidential term, so an
incoming President is usually saddled with an already appointed Chairman
at the beginning of the new administration. The Board is independent of the
congressional appropriations process and partly exempt from audit by the
government’s watchdog the General Accounting Office, because its
operating funds come from the earnings of the twelve regional Federal
Reserve Banks.
The regional Federal Reserve Banks, one in each Federal Reserve District,
are geographically dispersed throughout the country:
New York Chicago

Boston Kansas City
St. Louis Richmond
San Francisco Dallas
Philadelphia Minneapolis
Atlanta Cleveland
Technically, the member banks in its district privately own each Federal
Reserve Bank, every bank is charged with supervising and regulating. Each
member bank is required to buy stock in its district Federal Reserve Bank
equal to 6 percent of its own capital and surplus. Of this 6 percent, 3 percent
must be paid in and 3 percent is subject to call by the Board of Governors.
However, law to a 6 percent annual dividend on paid-in capital stock limits
the profits accruing to ownership. The member bank stockholders elect six
of the nine directors of their district Federal Reserve Bank and the
remaining three are appointed from Washington by the Board of Governors.
These nine directors, in turn, choose the president of their Federal Reserve
Bank, subject to the approval of the Board of Governors.
The directors of each Federal Reserve Bank also select a person, always a
commercial banker, to serve on the Federal Advisory Council, a statutory
body consisting of a member from each of the twelve Federal Reserve
Districts. The Federal Advisory Council consults quarterly with the Board
of Governors in Washington and makes recommendations regarding the
monetary policy.
Legal authority is similarly diffused with respect to the execution of

monetary policy, as Figure 1 indicates. The Board of Governors has the
power to set reserve requirements on bank time and demand deposits, for
example, but it cannot set them outside the bounds of the specific limits
imposed by the Congress.
A body known as the Federal Open Market Committee (FOMC), composed

of the seven-member Board of Governors plus five of the Reserve Bank
presidents directs open market operations. Although open market operations
are directed by the FOMC, a person who appears to be simultaneously an
employee of the FOMC and of the Federal Reserve Bank of New York
executes them at the trading desk of the Federal Reserve Bank of New
York.
Legal authority over discount rates is even more confusing. Discount rates
are “established” every two weeks by the directors of each regional Federal
Reserve Bank, but they are subject to “review and determination “ by the
Board of Governors. The difference between “establishing” discount rates
and “ determining” them is a fine line indeed, and it is not surprising that
confusion arises as to precisely where the final authority and responsibility
lie.
3.1.2 The realities of power
Actually, the facts of life are rather different, as the more realistic Figure 2
illustrates.
Chairman of the
Board of Governors President of FRB of
New York
Other Members Federal Open
Other Federal
Of the Board of Board Market
Reserve
Governors Staff Committee
Bank Presidents
Set Set
(within Advisory Direct
limits)
Discount
Rate Trading desk
At FRB of NY
Execute
Reserve
Requirements
Open
Market
Operations
Figure 2. The realities of power within the Federal Reserve System
By all odds, the dominant figure in the formation and execution of monetary
policy is the Chairman of the Board of Governors of the Federal Reserve
System. The Chairman is the most prominent member of the Board itself
and the most influential member of the FOMC and is generally recognised
by both Congress and the public at large as the voice of the Federal Reserve
System. Although the Federal Reserve act appears to put all seven members
of the Board of Governors on more or less equal footing, over the past fifty
years strong personalities, outstanding abilities, and determined devotion to
purpose have made the chairmen rather more equal than others. As adviser
to the President, negotiator with Congress, and final authority on
appointments throughout the system, with influence over all aspects of
monetary policy as Chairman of both the Board of Governors and the
FOMC, the Chairman for all practical purposes is the embodiment of the
central bank in the United States.
The other six members of the Board of Governors also exercise a substantial
amount of authority, more so is indicated in the formal paper structure of the
system, because with the passage of time primary responsibility for
monetary policy has become more centralised and concentrated in
Washington. When the Federal Reserve Act was passed in 1913, it was
though that the Federal Reserve System would be mainly a passive service
agency, supplying currency when needed, clearing checks, and providing a
discount facility for the convenience of the private commercial member
banks. At that time there was no conceptual monetary policy as an active
counter cyclical force.
Since then, the central bank has shifted from passive accommodation to
active regulation, from the performance of regional service functions to the
implementation of national economic policy. This shift has been
accompanied, naturally enough, by the rise in the power of the centralised
Board of Governors in Washington and a corresponding decline in the role
of the regional Federal Reserve Banks and their “owners”, the commercial
banks.
It would not be unrealistic to describe the central bank today as

headquartered in Washington, with twelve field offices throughout the
nation. These field offices may be known by the rather imposing name of
Federal Reserve Banks, and they do indeed retain considerable authority in
expressing their views on the wisdom of various policies. But even so, they
essentially amount to little more than branches of the Washington
headquarters.
Aside from the Board of Governors, its Chairman, and its staff, the only
other body playing a major role in the Federal Reserve policy-making is the
FOMC, which meets about every five or six weeks in Washington. Of the
twelve members on the FOMC, a majority of seven is the Board of
Governors themselves. The other five are Reserve Bank presidents. The
President of the Federal Reserve Bank of New York is a permanent member
of the FOMC, and the other eleven Federal Reserve Bank presidents rotate
the remaining four seats among themselves.
3.1.3 The instruments of Central Banking
The Federal Reserve exercises control over the bank lending and the money
supply by altering the reserves of commercial banks and of other deposit-
type institutions and by influencing the deposit creation multiplier. The Fed
accomplishes these objectives by changing reserve requirements relative to
deposits and by changing the actual amount of reserves that financial
institutions hold. The Fed varies the actual amount of reserves through the
discount rate and open market operations.
3.1.3.1 Reserve requirements
Within limits established by the Congress, the Federal Reserve can specify
the reserve requirements that banks and other deposit-type institutions must
hold against deposits. Congressional limits for bank reserves were first
established in the Federal Reserve Act of 1913 and have been reset a
number of times since, most recently in the Banking Act of 1980 and the
Garn-St. German Depository Institutions Act of 1982. This most recent
legislation provides that all depository institutions – savings banks, savings
and loans, and credit unions, as well as all commercial banks, whether
members of the Federal Reserve System or not – are subject to the Fed’s
reserve requirements. As of 1993 each depository institution had to hold
reserves (in the form of vault cash or deposits in a regional Federal Reserve
Bank) as follows:
1. Against demand deposits and similar checking-type accounts, reserves

equal to 3 percent of its first $46.8 million of demand deposits.
2. Against business-owned time and savings deposits.
3. Reserve requirements against personal time and savings deposits, which

used to exist, have been eliminated.
Lowering the required reserve ratio for demand deposits – e.g. from 12 to 10
percent – does two things. First, it instantly and automatically increases
banks’ excess reserves, sine fewer reserves are now required against any
given volume of demand deposits. More excess reserves, of course, enable
banks to make more loans, buy more securities, and expand demand
deposits.
In addition, lowering the required reserve ratio also increases the demand
deposit expansion multiplier for the entire banking system. The multiplier is
the reciprocal of the required reserve ratio; the smaller the ratio, the larger
it’s reciprocal. Thus a decrease in the required reserve ratio from 12 (or
about 1/8) to 10 percent (1/10) would raise the deposit expansion multiplier
from about eight to ten.
Raising the required reserve ratio – for example, from 10 to 12 percent –

would have the opposite effects. It would create reserve deficiencies, or at
least reduce excesses, and lower the potential for multiple expansion.
Putting banks into a deficit reserve position would force them to call in
loans and sell securities, bringing about a reduction in demand deposits,
while smaller excesses would at least restrain lending and deposit creation.
How crucial are reserve requirements for monetary policy? What would
happen if the Federal Reserve eliminated reserve requirements entirely in
order to increase bank profits?
Actually, even without formal reserve requirement the Fed would still be in
business. Financial institutions would still need both cash to meet customer
withdrawals and balances in the Fed to clear checks. As long as they have a
demand for claims against the central bank, and as long as the central bank
controls the supply of such claims, monetary policy can still work. While
the Fed would lose one tool of monetary policy if it could no longer change
reserve requirements, it could still influence the behaviour of financial
institutions.
3.1.3.2 Discounting and the discount rate
The Federal Reserve can also alter the excess reserves of banks and other
depository institutions by changing the actual amount of reserves that
financial institutions hold. One way this is accomplished is through the
discount mechanism, by which the Fed lends reserves, temporarily, to the
banks. The Fed charges an interest rate, called the discount rate, on such
loans. In other words, banks faced with reserve deficits can temporarily
borrow reserves from their regional Federal Reserve Bank at a price (the
discount rate).
When a manufacturer borrows from a bank, he receives a brand-new deposit

at the bank. A bank is in the same position relative to the Federal Reserve:
when it borrows from its district Reserve Bank, it receives a brand-new
deposit at the Fed, which increases its legal reserves. The ability to borrow
these reserves – to discount from the Fed – means that when a bank is faced
with reserve deficiency, the bank does not have to call in loans or sell
securities an thus the money supply can remain unchanged.
The Federal Reserve tries to influence the willingness of banks to borrow

reserves by changing the interest rate it charges on such loans (the discount
rate). A lower discount rate will make the borrowing of reserves more
attractive to banks, and a higher discount rate will make it less attractive.
The effectiveness of the discount mechanism as a means of injecting or

withdrawing reserves is limited by the fact that the initiative of borrowing
from the Fed rests not with the Fed but with the banks. Banks will want to
borrow reserves only when they need them. If they already have ample
reserves, there is no need for them to borrow more, no matter how low the
discount rate.
It has been recognised for a long time that discount policy has two
dimensions: the first is price, the discount rate, the rate of interest the
Federal Reserve charges financial institutions when they borrow from the
Fed. The second dimension has to do with the quantity of the Federal
Reserve lending, including Fed surveillance over the amount that each
institution borrows and the reasons why it borrows. Let us examine quantity
first and price second.
Historically, the primary function of a central bank has been to stand ready
to supply funds –promptly and in abundance – whenever the economy is in
danger of coming apart because of cash storage. While that is no longer its
sole function, it is still one of its most important. The central bank is the
ultimate source of liquidity in the economy, because with its power over
bank reserves it can increase (or decrease) the ability of the banking system
to create money. Since no one else can do the job, it is the central bank that
must be responsible for supplying funds promptly on those rare but crucial
occasions when liquidity shortages threaten economic stability: “financial
panic”, the history books call them. Because of this responsibility, the
central bank has traditionally been called the “lender of last resort”.
The discount facilities instituted by the passage of the Federal Reserve Act
in 1913 were supposed to provide a vehicle through which the Federal
Reserve could quickly inject funds precisely where needed in order to stop a
panic from spreading. Banks threatened with cash drains could borrow what
they needed from the Fed – the lender of the last resort. Thus they could get
more reserves without any other bank losing them and thereby prevent an
infection from becoming a plague.
In the ordinary course of events, however, bank use of the discount facility
is rather routine, not at all panic-oriented, with banks borrowing here and
there to make short-run adjustments in their reserves. The Fed has always
stresses that ordinary borrowing of this sort should not be used too often to
get banks out of reserve difficulties. Banks should run their affairs so they
do not have to rely on the Fed to bail them out every few weeks. Or, as the
Federal Reserve usually puts it, discounting is considered a privilege, not a
right, and privileges should not be abused. Federal Reserve surveillance
enforces the “privilege, not a right” concept by checking up on banks that
borrow too much or too frequently. A bank is supposed to borrow only
because of need, and not go out and make a profit on the deal.
One Fed method of preventing “abuse” of the discounting facility is to

tighten surveillance procedures: it checks up on why banks are borrowing
and what they are doing with the money. Another way is simply to raise the
price of borrowing – which brings us to the discount rate itself.
3.1.3.3 Open Market Operations
The most important way the Federal Reserve alters the actual amount of
reserves the banks hold is not by discounting, but buying and selling
government securities – technically known as open market operations.
Undertaken at the Fed’s own initiative, open market operations are the
mainstay of the Federal Reserve policy.
When the Federal Reserve buys $1,000 of government securities, much as

you might buy a stock or a bond on one of the stock exchanges, it pays with
a check drawn on itself. If the Fed buys the securities directly from a
commercial bank, that bank sends the Fed’s check to its regional Federal
Reserve Bank and has its deposit at the Fed – its reserves – increased by
$1,000. The bank excess reserves rise by the full amount of the transaction,
and with more excess reserves it can make more loans and increase its
demand deposits.
But what the central bank gives, the central bank can take away. When the
Federal Reserve sells government securities out of its portfolio, it gets paid
for them, and everything is reversed. The Fed takes payment by deducting
that sum from the buying bank’s deposit at the Federal Reserve, thus
diminishing its reserves.
Of course, when the Federal Reserve buys (or sells) government securities,
it has no assurance that a bank will be the other party of the transaction. But
it doesn’t matter whether the securities someone else is selling by a bank or
the Fed buys. In either case, when the Fed buys, bank reserves go up, and
when the Fed sells, bank reserves go down.
Commercial banks are unable to do anything to offset these measures. If the

Fed wants to reduce bank reserves by open market sales, there is nothing
banks can do about it. By lowering its selling price, the Fed can always
unearth a buyer. Since it is not in business to make a profit, the Fed is free
to alter its selling price as it wishes.
And while any single commercial bank can replenish its own reserves by
selling securities to other banks – or to individuals who keep their accounts
in other banks – the reserves of the other banks will then decline. Another
loses reserves replenished by one bank. Total bank reserves must fall by the
value of the securities sold by the Federal Reserve.
There are three types of Interest Rates, as follows:

- The prime rate, the discount rate, and the federal funds rate are referred
to in newspapers so often that they deserve special mention, particularly
since they are frequently confused with each other.
The prime rate is the interest rate that commercial banks charge on loans
to their most creditworthy business customers, most creditworthy
meaning financially strongest and therefor most likely to repay on time.
Banks charge higher rates then the prime for loans to corporations
without such strong credit ratings. The prime rate is an administered rate
in that banks set it and it stays there until they decide to raise or lower it;
thus the prime rate typically stays the same for weeks or even months at
a time.
- The discount rate is the interest rate that the Federal Reserve, the
government’s central bank, charges on loans to commercial banks. The
Federal Reserve makes short-terms loans to banks when the banks need
funds for relatively brief periods of time. Thus the prime rate involves a
payment commercial banks receive, while the discount rate is a cost,
something they pay out. Like the prime rate, the discount rate is also an
administered rate, set in this case by the Federal Reserve and often
staying unchanged for months.
- Finally, the federal funds rate – often called just the “funds rate” – is
the interest rate that banks charge each other on very short-terms loans
among themselves. Usually the loans are “overnight” – made on one
day and paid back the next. Unlike the prime rate and the discount rate,
the federal funds rate is not an administered rate; rather, it is a market-
determined rate, fluctuating continuously depending on the relationship
between the demand for loans (by banks who need to borrow) and the
supply (from banks who want to lend).
3.1.4 Financial institutions
Financial institutions – such as banks, insurance companies, and pension

funds – are called by a special name: financial intermediaries. They
dominate the financial scene at home and abroad. It is virtually impossible
to spend or save or lend or invest money nowadays without getting involved
with some kind of financial intermediary in one way or another.
Financial Institutions in Profile
Although financial institutions have a lot in common, there are also

substantial differences among them. Ranked in terms of asset size,
commercial banks are easily the largest. In addition to sheer size, the
composition of liabilities and assets also differs significantly from one type
of financial institution to another.
Commercial banks are the most prominent of all financial institutions. There
are about 12,000 of them, ranking from Citibank, with hundreds of billions
of dollars in assets, to thousands of small banks scattered throughout the
country, many of which have less that a hundred million dollars.
Commercial banks are also the most widely diversified in terms of both
liabilities and assets. Their major source of funds used to be demand
deposits (checking accounts), but in the past few decades savings and time
deposits – including certificates of deposits – have become even more
important than demand deposits. With these funds, commercial banks buy a
wide variety of assets, ranging from short-term government securities to
long-term business loans and home mortgages.
Life insurance companies rank third in asset size. They insure people
against the financial consequences of death, receiving their funds in the
form of periodic payments (called premiums) that are based on mortality
statistics. They can predict with a high degree of actuarial probability how
much money they will have to pay out in benefits over the next years. They
invest accordingly, aiming for the highest yield consistent with safety over
the long run. Thus a high percentage of their assets are in the form of long-
term corporate bonds and long-term mortgages, although the mortgages are
typically on commercial rather than residential properties.
Pension and retirement funds are similar to life insurance companies in that
they are mainly concerned with the long rather than the short run. Their
inflow of money comes from working people building a nest egg for their
retirement years. They are able to predict amounts they will have to pay out
in pensions (called annuities) for the next years. Since they face few short-
term uncertainties, they invest mainly in long-term corporate bonds and
high-grade stocks.
Mutual funds are frequently stock market related institutions but there are
also mutual funds specialising in bonds of all kinds and in mortgages as
well. Pooling the funds of many people of moderate means, the fund’s
management invests the money in a wide variety of stocks or bonds, thereby
obtaining diversification those individuals acting alone might not be able to
achieve. Buying shares in a mutual fund is more risky than buying a savings
deposit or a money market instrument such as a Treasury bill, butt it is less
risky than buying stocks or bonds on your own.
Money market mutual funds are like the old-fashioned kind of mutual fund.
However, the fund’s management does not invest the money in the stock
market or in corporate or municipal bonds. Instead, it purchases highly
liquid short-term money market instruments, such as large-size bank
negotiable CDs, Treasury bills, and high-grade commercial paper.
Savings and loan associations (S&Ls) have traditionally acquired almost all
their funds through savings deposits – usually called shares instead of
deposits – and used them to make home mortgage loans. This was their
original purpose – to encourage family thrift and home ownership. The
Banking Act of 1980 granted them the power to issue checking accounts
(NOW – negotiable order of withdrawal) and also to make consumer loans.
Sales and consumer finance companies specialise in leading money for

people to buy cars and take vacations and for business firms to finance their
inventories. Many of them are owned by a manufacturing firm and lend
money mainly to help retailers and customers buy that firm’s products. They
get their funds by selling their own short-term promissory notes (called
commercial paper) to business firms with funds to invest for a short while,
as well as by selling their own long-term bonds.
Property and casualty insurance companies insure homeowners against

burglary and fire, car owners against theft and collision, doctors against
malpractice suits, and business firms against negligence lawsuits, among
other things. The premiums they receive they buy high-grade municipal and
corporate bonds, high-grade stock and short-term money market instruments
such as Treasury bills (for liquidity).
Credit unions (about 13,000) are organised as co-operatives for people with
some sort of common interest, such as employees of a particular company or
members of a labour union. Credit union members buy shares, which are the
same as deposits, and thereby become eligible to borrow from the credit
union.
Mutual savings banks are practically identical with savings and loan
associations except that there are only about 500 of them. They are legally
structured as “mutual” or “co-operatives”, with the depositors or
shareholders owning the institution. Savings banks have traditionally
obtained most of their funds in the form of savings deposits and used the
money mainly to make home mortgages. The Banking Act of 1980 also
gave them the power to issue demand deposits (NOW accounts) and to
make consumer and some business loans.
3.1.5 The regulation and structure of depository institutions
3.1.5.1 The dual banking system
The American commercial banking system is known as a dual banking

system because its main feature is side-by-side federal and state chartering
(and supervision) of commercial banks. It has no counterpart in any other
country. Indeed, it arose quite by accident in the United States, the
unexpected result of legislation in the 1860s that was intended to shift the
authority to charter banks from the various state governments to the federal
government.
Thus today the USA has a dual banking system: federally chartered banks,
under the aegis of the Comptroller of the currency, and state-chartered
banks, under the supervision of each of the various states.
A unique feature of the system is that the regulated can choose their
regulator: state banks can shift to national charters and vice versa, state
member banks can shift to non-member status and vice versa.
The justification for the dual banking system – side-by-side federal and state
bank regulation – is that it is supposed to foster change and innovation by
providing alternative routes through which banks can seek charters and do
business. It is claimed that a dual banking system is more responsive to the
evolving banking need of the economy than a single system would be. The
validity of these arguments is difficult to assess, but whatever their merits
no one has been marching in the streets demanding change in the status quo.
The dual banking system seems to be working tolerably well, regardless of
its logic.
3.1.5.2 Multiple federal authorities
The dual banking system has aroused considerably less controversy than the
existence of multiple and sometimes opposing supervisory authorities at the
federal level. In 1960s the Federal Reserve and the Comptroller clashed
frequently over the interpretation of certain laws. Relations between the
FDIC and the Comptroller were also strained, although the Comptroller is
one of the three members of the FDIC’s Board of Directors.
Different interpretations of the same statuses and intermittent dissension

that has punctuated relations among the federal supervisory agencies have
led many to recommend that all federal chartering, examination, and
supervisory responsibilities be combined in a single agency. The proposal
has always foundered, however, on lack of consensus as to which agency –
The Federal Reserve, the FDIC, or the Comptroller of the Currency – is
most appropriate. Notice that consolidation at the federal level would not
affect the dual banking system, since state chartering and supervision would
continue to exist.
The present system is defended by some on the grounds that divided federal
authority, like the dual banking system, provides an element of flexibility,
fostering innovation and change that would be lacking if all federal banking
powers were concentrated in one agency. On the other hand, if there is to be
federal supervision of banking at all, it would appear axiomatic and
operated at minimum cost – which implies that one supervisory body is
preferable to disagree fairly often among themselves.
It has to be admitted, however, as an argument in favour of the status quo,

the federal regulatory agencies, in general, have not compiled a particularly
outstanding record for imaginative leadership, for stimulating innovation, or
even for protecting (not to mention furthering) the public interest. While a
forward-looking, able, and conscientious federal banking authority would
undoubtedly be an improvement over present arrangements, lack of these
qualities in a consolidated agency might only make matters worse.
3.1.5.3 Deposit insurance and the FDIC
During the 1920s bank failures averaged about 600 a year, and during the
years 1930-1933 over 2,000 a year! At the end of 1933 there were fewer
than 15,000 commercial banks remaining out of 30,000 that had been in
existence in 1920. It is not surprising, therefore, that the Congress
established the Federal Deposit Insurance Corporation (FDIC) in response
to this historic debacle.
The Banking Act of 1993 to insure deposits at commercial and mutual

savings banks created the FIDC. Companion legislation created the Federal
Savings and Loan Insurance Corporation to do the same for savings and
loan associations, and in 1970 the National Credit Union Administration
initiated deposit insurance for federally chartered credit unions. FDIC
deposit insurance became effective on January 1, 1934, with coverage

limited to $2,500 per depositor per bank. This was raised to $5,000 in mid-
1934, $10,000 in 1950, $15,000 in 1966, $20,000 in 1969, $40,000 in 1974,
and $100,000 in 1980.
According to FDIC survey data, the present coverage provides full

insurance for about 99 percent of the depositors in the insured banks. With
respect of the dollar volume, however, the 1 percent of the depositors not
fully covered holds uninsured balances that constitute a fourth of the dollar
value of total deposits. In other words, although almost all depositors are
fully insured (that is, they have less than $100,000 in their accounts in any
single bank), a fourth of the deposits in term of dollar value are not insured.
Although nominal insurance coverage is $100,000 per depositor per bank, in

fact actual coverage may be greater (never less), depending on the
procedure used by the FDIC in taking over a failed bank. The FDIC may
allow the bank to go into receivership, the so-called payoff method. In such
cases the FDIC sends its agents to the bank verifies the deposit records, and
then pays out funds directly to each depositor up to a limit of $100,000.
Alternatively, the FDIC may succeed in merging the failed bank with a
healthy one, the so-called assumption method. The deposits of the failed
bank are assumed by another bank into which the distressed one is merged
and are made available in full to the depositors. The FDIC usually assists in
this procedure, either by making payments to the bank taking over and/or by
relieving it of some of the weaker assets of the failed bank. The assumption
method has been the one most often used in the recent years; in such cases
the FDIC has in effect completely insured all depositors to the full amount
of their deposits, regardless of the technical insurance coverage limit. In
addition, in a few cases the FDIC has extended loans to a bank in difficulty
and allowed it to continue in business.
The explanation for the success of the FIDC does not involve calculations of
actuarial probability, but rather rests on the premise that the very existence
of federal deposit insurance eliminated the possibility large-scale bank
failure. By insuring deposits under the auspices of the federal government,
backed by the implied support of the United States Treasury to whatever
extent necessary, the FDIC has successfully eliminated the old-fashioned
“run on the bank” by frightened depositors that formerly heralded another
bank failure. If people hear their bank is “in trouble” now, they hardly pay
attention. They’re insured, so who cares?
Where does the FDIC get the money it uses to pay off depositors of failed
banks? It gets it from premiums it assesses on the banks it insures. Until
recently these were flat premiums, unadjusted for risk, but since 1993 this
has been changed: banks now pay annual premiums to the FDIC equal to 23
cents for every hundred dollars of insured deposits, with premiums rising to
as much as 31 cents per $100 of insured deposits for banks considered more
risky with respect to possible failure. The FDIC measures a bank’s risk of
failure by the amount of capital the bank has and by an assessment of the
quality of its loans and investments.
In 1989, the FDIC was given additional powers when the government
agency that insured deposits at savings and loan associations – the Federal
Savings and Loan Insurance Corporation (FSLIC) – was abolished after it
ran out of money. As a result, the FDIC now has two departments:
1. The Savings Association Insurance Fund (SAIF), which took over
responsibility from the defunct FSLIC for the insurance of deposits at
savings and loans, and
2. The Bank Insurance Fund (BIF), which insures deposits at commercial

banks and most savings banks, which is what the FDIC has always
done.
But in 1991 the Bank Insurance Fund part of the FDIC also ran out of
money. The FDIC had a working balance of over $18 billion in 1987, but
the flood of subsequent bank failures wiped that out in less than four years.
What happens now? If banks continue to fail at the peace of the late eighties
and early nineties, current insurance premiums that banks pay to the FDIC
will be insufficient to pay off all the insured depositors and the FDIC will
have no other choice but to borrow the remainder from the federal
government. This brings us to the heart of the matter: it is the government’s
commitment to stand behind the FDIC that is important, not whether the
FDIC has actually got enough money on hand to cover all contingencies. So
long as that commitment is honoured, depositors need not worry about the
safety of their money.
3.1.5.4 Bank size distribution and the McFadden Act
The objectives of bank supervision, regulation, and insurance are to protect

the safety of depositors’ funds and promote a viable and smoothly
functioning banking system – one that will encourage saving channels funds
from savers to borrowers, enable borrowers to get funds on reasonable
terms, and foster economic stability and growth. All of this means that the
objectives of bank supervision, regulation, and insurance are to make sure
that banks are both safe and competitive. The FDIC and bank examinations
are design to ensure safety, while other aspects of supervision are intended
to promote competition. In down-to-earth terms, competitive conditions
mean that customers can shop around, that they have alternatives. For
example, are the opportunities open to depositors sufficiently varied to give
them an array of choices with respect to deposit terms and yields, so they
can pick those that best suit their particular need? Similarly, do borrowers
who are refused a loan at one bank have alternatives open to them – other
banks to which they can turn? Do banks actively seek customers, either
depositors or borrowers, by offering more service or better terms than rival
banks are offering?
With so many commercial banks in the United States, there would appear to
be, on the face of it, a high degree of robust competition in banking.
However, as Table 2 indicates, a large percentage of banks are very small
institutions, with less that $50 million of assets per bank.
Size Distribution of Insured Commercial Banks (end of 1990)
Asset size No. of banks % of total banks % of total assets

Less that $25 million 3,330 27 2
$25 – 50 million 3,145 25 3
$50 – 100 million 2,782 23 6
$100 – 500 million 2,461 20 14
$500 – 1 billion 253 2 5
over $1 billion 374 3 70
TOTALS 12,345 100 100
Indeed, almost 6,500 of the banks in the country – 52 percent of them – are
that small (see lines 1 and 2 in the table). These 6,500 banks have only 5
percent of the aggregate assets in the banking system. Most of them are in
small, one-bank towns. At the other end of the scale, about 600 large banks
(the last two line of Table 2), only 5 percent of the total have 75 percent of
all bank assets.
If the large number of very small were the product of natural evolution, it
would indicate that the optimum (low-cost) size bank is probably a very
small size institution. Their large numbers would attest to their competitive
viability. In fact, the reason for so many very small banks in this country
does not have much to do with their successful adaptation to changing
economic needs or their innovative capabilities. It is that most of them are
sheltered from competition by state anti-branching statutes, to which the
federal banking authorities defer. Many very small banks would be unable
to remain in business if a large bank opened up a branch next door. The fact
that in many states the large bank is legally prohibited from doing so is what
permits many small banks to survive.
The McFadden Act of 1927 (a) prohibits banks from branching across state
lines and (b) permits national banks to branch within a state only to the state
extent as state-chartered banks. The result is that the McFadden Act and
state anti-branching statute not economic circumstances are the principal
determinants of the number of banks in the United States.
However, there are many straws in the wind indicating that the prohibition
against interstate branching is on its last legs: mergers between banks
located in different states, acquisitions by parent holding companies,
enacting of legislation permitting reciprocal interstate banking, establishing
by both national and state banks of bank-related subsidiaries and affiliates.
Everything considered, a number of steps toward nation-wide branch
banking appear to have been taken. Most observers believe that it will be
commonplace by the turn of the century.
3.1.5.5 Savings banks and savings and loan associations
Savings banks were the first thrift institutions in the country. The Provident
Institution for Saving in Boston and the Savings Fund Society in
Philadelphia was not organised until fifteen years later. Nowadays, though,
for all practical purposes savings banks and savings and loans are hard to
tell apart except by their names.
The 400 or so savings banks, mostly on the eastern seaboard, are almost all
state chartered; federal chartering of savings banks was not begun until
1978. Because most are state chartered, they are state regulate and state
supervised.
Savings and loan associations may be federally or state chartered. Of the

roughly 2,000 S&L in existence, slightly more than half is chartered by the
states in which they operate and the rest by the federal government. Prior to
1989, virtually all of them were members of a system that was to S&Ls
what that Federal Reserve System is to commercial banks: the Federal
Home Loan Bank System, like the Federal Reserve System, consisted of
twelve regional banks plus a supervisory board in Washington. The Federal
Home Loan Bank Board (FHLBB) regulated S&Ls by chartering them,
conducting examinations, and reviewing applications for branches and
mergers.
Under the Depository Institutions Deregulation and Monetary Control Act

of 1980, otherwise known as the Banking Act of 1980, both S&Ls and
savings banks must hold reserves against their checking accounts and
business time deposit liabilities, as specified by the Federal Reserve; as a
quid pro quo, they have full access to temporary borrowing from the Federal
Reserve when needed.
Most savings banks are insured by the Bank Insurance Fund of the FDIC, up
to the standard $100,000 per depositor, just likes commercial banks. S&Ls,
on the other hand, used to be insured by the Federal Savings and Loan
Insurance Corporation (FSLIC), also up to $100,000 per depositor. While
the FDIC is an independent agency, the FSLIC was a subsidiary of the
Federal Home Loan Banking System, and the Federal Home Loan Bank
Board determined its policies. Because of the large number of savings and
loan failures, the FSLIC ran out of money in the late eighties and was
abolished in 1989. Today, the Saving Association Insurance Fund (SAIF), a
branch of the FDIC, insures deposits in savings and loans.
3.1.5.6 Mortgage-related financial institutions
It should be noted that there are a number of government – sponsored efforts

to support the activities of mortgage – related financial institutions. Perhaps
the most popular is the Federal National Mortgage Association, also known
as Fannie Mae, established by Congress in 1938. It later became part of the
Department of Housing and Urban Development (HUD) and in 1968
became a privately owned corporation with certain ties to the government.
Fannie Mae buys mortgages from S&Ls and other institutions that no longer
wish to hold them as investments and finances these so-called secondary-
market operations primarily by issuing bonds to the public.
Fannie Mae’s performance in the mortgage market is complemented by the

work of Ginnie Mae, more properly called the Government National
Mortgage Association. A relative newcomer to the mortgage market scene,
Ginnie Mae has a name in connection with the “pass-through” program.
Instead of buying mortgages and financing these acquisitions by issuing her
own securities, Ginnie Mae guarantees the timely payment of interest and
principal on packages of pools of mortgages that are insured by the Federal
Housing Administration (FHA) or the Veterans Administration (VA).
Private mortgage originators such as savings and loan associations or
mortgage bankers put these pools of mortgage together. GNMA pass-
through securities are attractive to such investors as pension funds and
insurance companies because of their government guarantee and liquidity.
The pass-through program has made mortgages look very mush like bonds
to some investors, thereby broadening the source of mortgage funds.
In 1970, Congress established the Federal Home Loan Mortgage

Corporation (FHLMC). Dubbed Freddie Mac by the investment community,
this latest creation does just about what Ginnie Mae does, except that
instead of FHA-VA mortgage-backed securities, Freddie Mac creates
participation certificates in conventional mortgages and sells them to
ultimate investors. As with Ginnie Mae, the objective is to attract non-
traditional funds into the mortgage market by packaging individual
mortgage loans into a bond like instrument.
All these government and government-sponsored agencies are very active,

especially during periods of tight money, in helping to finance mortgage
activity. They have, in fact, let to concern in the capital market over the
“federalisation of the mortgage market”.
3.1.5.7 Credit unions
The first credit union in the country was established in Manchester, New
Hampshire in 1909. Credit unions now number 14,000, making the most
numerous of the thrift institutions. They have not been subject to the same
problems as S&Ls and mutual savings banks, because the bulk of their
lending has historically taken the form of relatively short-term consumer’s
loans. They may encounter similar problems if they don’t watch out,
though, because credit unions now engage in mortgage lending as one of
their activities.
Credit unions may be federally or state chartered, but the majority has
federal charters. State-chartered institutions are regulated and supervised by
the states in which they operate and the federally chartered ones by the
National Credit Union Administration in Washington. The National Credit
Union Share Insurance Fund, run by the National Credit Union
Administration, provides deposit insurance (up to $100,000 per depositor)
for both state and federally chartered credit unions.
The Current Federal Regulatory Structure In Brief
Federal Reserves (Fed). Established as an independent agency in 1913,

supervises and examines state-chartered banks that are members of the
FR System and regulates all bank holding companies, regardless of
charter.
Comptroller of the currency. Established in 1863 as an office within the
US Treasury Department. Charters, regulates, examines, and supervises
nationally chartered banks.
Office of thrift Supervision (OTS). Established in 1989 and, like the
Comptroller of the Currency, a department within the US Treasury.
Charters, regulates, examines, and supervises savings and loan
associations. (Until 1989 these functions were performed by the Federal
Home Loan Bank Board.)
Federal Deposit Insurance Corporation (FDIC). Established as an
independent agency by the Banking Act of 1933. Has historically
insured deposits at virtually all commercial banks and most savings
banks. Examines and supervises state-chartered banks that are not
members of the Federal Reserve System. Given additional Insurance
powers in 1989, it now administers:
(a) the Bank Insurance Fund (BIF), which insures deposits at
commercial and most savings banks, and
(b) the Savings Association Insurance Fund (SAIF), which insures
deposits at savings and loan associations.
(In 1689, the SAIF replaced the FSLIC, the Federal Savings and Loan
Insurance Corporation.)
Resolution Trust Corporation (RTC). Managers the closing and/or

merging of insolvent savings and loan associations.
Federal Housing Finance Board (FHFB). Oversees the twelve regional
Federal Home Loan Banks, a role that until 1989 was performed by the
Federal Home Loan Banks Board.
National Credit Unit Administration (NCUA). Established in 1970 as an
independent agency to charter, regulate, examine and supervise federal
credit unions.
National Credit Union Share Insurance Fund (NCUSIF). Created in
1970 under management of NCUA. Insures deposits at federal credit
unions and insured state-chartered credit unions.
US Department of Justice. May review proposed mergers, acquisitions,
and related changes in the structure of the financial industry and sue to
block those believed to be anti-competitive.
Securities and Exchange Commission (SEC). Established under 1933
and 1934 legislation to regulate securities brokers and dealers and
securities markets. Mutual funds, including money market funds, are
now also under its jurisdiction. Specifies and enforces public disclosure
requirements and regulates “insider” trading. Involved with banks
particularly with respect to bank holding companies and public
disclosure regarding such matters as problem loans.
3.2 The European System of Central Banks
3.2.1 Organisation of the European System of Central Banks (ESCB)
The ESCB is composed of the European Central Bank (ECB) and the EU
national central banks (NCBs). The NCBs of the Member States which do
not participate in the Euro area, however, are members of the ESCB with a
special status: while they are allowed to conduct their respective national
monetary policies, they do not take part in the decision-making regarding
the single monetary policy for the Euro area and the implementation of such
decisions.
In accordance with the Treaty establishing the European Community and

the Statute of the European System of Central Banks and of the European
Central Bank (ESCB Statute), the primary objective of the ESCB is to

maintain price stability. Without prejudice to this objective, it shall support
the general economic policies in the Community and act in accordance with
the principles of an open market economy.
The basic tasks to be carried out by the ESCB are:

• to define and implement the monetary policy of the Community;
• to conduct foreign exchange operations;
• to hold and manage the official foreign reserves of the Member States;
and
• to promote the smooth operation of payment systems.
In addition, the ESCB contributes to the smooth conduct of policies pursued

by the competent authorities relating to the prudential supervision of credit
institutions and the stability of the financial system, while it also has an
advisory role vis-à-vis the Community and national authorities on matters
which fall within its field of competence, particularly where Community or
national legislation is concerned. Finally, in order to undertake the tasks of
the ESCB, the ECB, assisted by the NCBs, shall collect the necessary
statistical information either from the competent national authorities or
directly from economic agents.
The decision-making bodies of the ECB govern the ESCB: the Governing
Council, the Executive Board and the General Council.
The Governing Council comprises all the members of the Executive Board
and the governors of the Member States without derogation, i.e. those
NCBs, which fully participate in the Monetary Union.
The main responsibilities of the Governing Council are:
• to adopt the guidelines and make the decisions necessary to ensure the
performance of the tasks entrusted to the ESCB; and
• to formulate the monetary policy of the Community, including, as
appropriate, decisions relating to intermediate monetary objectives, key
interest rates and the supply of reserves in the ESCB, and to establish the
necessary guidelines for their implementation.
The Executive Board comprises the President, the Vice-President and four
other members; all chosen from among persons of recognised standing and
professional experience in monetary or banking matters. They are appointed
by common accord of the governments of the Member States at the level of
the Heads of State or Government, on a recommendation from the European
Council after it has consulted the European Parliament and the Governing
Council of the ECB (i.e. the Council of the European Monetary Institute for
the first appointments).
The main responsibilities of the Executive Board are:
• to implement monetary policy in accordance with the guidelines and
decisions laid down by the Governing Council of the ECB and, in doing
so, to give the necessary instructions to the NCBs; and
• to execute those powers which have been delegated to it by the
Governing Council of the ECB.
The General Council comprises the President and the Vice-President and
the governors of all the NCBs, i.e. of both those Member States with as well
as those without a derogation. The General Council performs the tasks,
which the ECB took over from the European Monetary Institute (EMI) and
which, owing to the derogation of one or more Member States, still have to
be performed in the third stage.
The General Council also contributes to:
• the ESCB’s advisory functions (see above);
• the collection of statistical information;
• the preparation of the ECB’s quarterly and annual reports and weekly
consolidated financial statements;
• the establishment of the necessary rules for standardising the accounting
and reporting of operations undertaken by the NCBs;
• the taking of measures relating to the establishment of the key for the
ECB’s capital subscription other than those already laid down in the
Treaty;
• the laying-down of the conditions of employment of the ECB’s staff; and
• the necessary preparations for irrevocably fixing the exchange rates of
the currencies of the Member States with a derogation against the Euro.
The ESCB is an independent system. When performing ESCB-related tasks,

neither the ECB, nor an NCB, nor any member of their decision-making
bodies may seek or take instructions from any external body. The
Community institutions and bodies and the governments of the Member
States may not seek to influence the members of the decision-making bodies
of the ECB or of the NCBs in the performance of their tasks.
The ESCB Statute makes provision for the following measures to ensure
security of tenure for NCB governors and members of the Executive Board:
• a minimum renewable term of office for governors of five years;
• a minimum non-renewable term of office for members of the Executive
Board of eight years (it should be noted that a system of staggered
appointments is foreseen for the first Executive Board for members other
than the President in order to ensure continuity);
• removal from office is only possible in the event of incapacity or serious
misconduct; and
• the European Court of Justice is competent to settle any disputes.
The ECB’s capital is 5,000 million. The NCBs are the sole subscribers to
and holders of the capital of the ECB. The subscription of capital is based
on a key established on the basis of the EU Member States’ respective
shares in the GDP and population of the Community. The NCBs of the
eleven Member States participating in the Euro area in proportion and up to
their shares will pay up the capital of the ECB.
In addition, the NCBs will provide the ECB with foreign reserve assets
other than the Member States’ currencies, Euro, IMF reserve positions and
SDRs, up to an amount equivalent to 50,000 million. The contributions of
each NCB are fixed in proportion to its share in the ECB’s subscribed
capital, while in return each NCB is credited by the ECB with a claim
equivalent to its contribution. The ECB has the full right to hold and
manage the foreign reserves that are transferred to it and to use them for the
purpose set out in the ESCB Statute. The Statute contains specific rules with
regard to the calculation of those amounts, which will ultimately determine
the profit distributed to the ECB’s shareholders.
3.2.2 Objectives and tasks of the European System of Central Banks
The primary objective of the European System of Central Banks (ESCB), as

defined in Article 2 of the Statute of the European System of Central Banks
and of the European Central Bank (ESCB Statute) is to maintain price
stability. Without prejudice to the primary objective of price stability, the
ESCB shall support the general economic policies in the Community with a
view to contributing to the achievement of the objectives of the Community.
In pursuing its objectives, the ESCB shall act in accordance with the
principle of an open market economy with free competition, favouring an
efficient allocation of resources.
The basic tasks to be carried out by the ESCB are defined in Article 3 of the
ESCB Statute. These tasks include:
• to define and implement the monetary policy of the Community;
• to conduct foreign exchange operations;
• to hold and manage the official foreign reserves of the participating
Member States;
• to promote the smooth operation of payment systems; and
• to contribute to the smooth conduct of policies pursued by the competent
authorities relating to the prudential supervision of credit institutions and
the stability of the financial system.
Monetary functions and operations of the ESCB:
The ESCB Statute (Articles 17 to 24) specifies the monetary functions and
operations of the ESCB. On the basis of these provisions, the European
Monetary Institute (EMI) prepared an operational framework for the
ESCB’s monetary policy. The Governing Council of the European Central
Bank (ECB) will take the final decision on the operational framework. The
Governing Council of the ECB may decide not to use all the available
options or may change certain features of the instruments and procedures
presented below. Further detailed information on these issues can be found
in the EMI publications entitled “The single monetary policy in Stage
Three - Specification of the operational framework” (January 1997) and
“The single monetary policy in Stage Three - General documentation on
ESCB monetary policy instruments and procedures” (September 1997).
Monetary policy instruments
The operational framework consists of a set of instruments; the ESCB will

conduct open market operations, it will offer standing facilities and it may
require credit institutions to hold minimum reserves on accounts with the
ESCB.
Open market operations
Open market operations will play an important role in the monetary policy
of the ESCB for the purpose of steering interest rates, managing the
liquidity situation in the market and signalling the stance of monetary
policy. Five types of instruments will be available to the ESCB for the
conduct of open market operations. The most important instrument will be
reverse transactions (applicable on the basis of repurchase agreements or
collateralised loans). The ESCB may also use outright transactions, the
issuance of debt certificates, foreign exchange swaps and the collection of
fixed-term deposits. Open market operations will be initiated by the ECB,
which will also decide on the instrument to be used and the terms and
conditions for the execution of such operations. It will be possible to
execute open market operations on the basis of standard tenders, quick
tenders or bilateral procedures. With regard to their aim, regularity and
procedures, the ESCB open market operations can be divided into the
following four categories:
• The main refinancing operations are regular liquidity-providing reverse

transactions with a weekly frequency and maturity of two weeks. They
will be executed by the national central banks on the basis of standard
tenders and according to a pre-specified calendar. The main refinancing
operations will play a pivotal role in pursuing the purposes of ESCB
open market operations and provide the bulk of refinancing to the
financial sector.
• The longer-term refinancing operations are liquidity providing reverse

transactions with a monthly frequency and a maturity of three months.
They will be executed by the national central banks on the basis of
standard tenders and according to a pre-specified calendar. These
operations aim to provide counterparts with additional longer-term
refinancing. As a rule, the ESCB will not intend to send signals to the
market by means of these operations and will therefore normally act as a
rate taker.
• Fine-tuning operations can be executed on an ad hoc basis with the aim

both of managing the liquidity situation in the market and of steering
interest rates, in particular in order to smooth the effects on interest rates
caused by unexpected liquidity fluctuations. Fine-tuning operations will
primarily be executed as reverse transactions, but may also take the form
of outright transactions, foreign exchange swaps and the collection of
fixed-term deposits. The instruments and procedures applied in the
conduct of fine-tuning operations will be adapted to the types of
transactions and the specific objectives pursued in performing the
operations. Fine-tuning operations will normally be executed by the
national central banks through quick tenders or bilateral procedures. The
Governing Council of the ECB will decide whether, under exceptional
circumstances, fine-tuning bilateral operations may be executed by the
ECB itself.
• In addition, the ESCB may carry out structural operations through the
issuance of debt certificates, reverse transactions and outright
transactions. These operations will be executed whenever the ECB
wishes to adjust the structural position of the ESCB vis-à-vis the
financial sector (on a regular or non-regular basis). Structural operations
in the form of reverse transactions and the issuance of debt instruments
will be carried out by the national central banks through standard
tenders. Structural operations in the form of outright transactions will be
executed through bilateral procedures.
Standing facilities
Standing facilities aim to provide and absorb overnight liquidity, signal the
general stance of monetary policy and bound overnight market interest
rates. Two standing facilities, which will be administered in a decentralised
manner by the national central banks, will be available to eligible
counterparts on their own initiative:
• Counterparts will be able to use the marginal lending facility to obtain
overnight liquidity from the national central banks against eligible assets.
The interest rate on the marginal lending facility will normally provide a
ceiling for the overnight market interest rate.
• Counterparts will be able to use the deposit facility to make overnight
deposits with the national central banks. The interest rate on the deposit
facility will normally provide a floor for the overnight market interest
rate.
Minimum reserves
Preparatory work has been carried out with a view of enabling the ESCB to
impose minimum reserves as from the start of Stage Three. It will be up to
the Governing Council of the ECB to decide whether minimum reserves
will actually be applied. Any minimum reserves system would be intended
to pursue the aims of stabilising money market interest rates, creating (or
enlarging) a structural liquidity shortage and possibly contributing to the
control of monetary expansion. The reserve requirement of each institution
would be determined in relation to elements of its balance sheet. In order to
pursue the aim of stabilising interest rates, the ESCB’s minimum reserves
system would enable institutions to make use of averaging provisions. This
implies that compliance with the reserve requirement would be determined
on the basis of the institutions’ average daily reserve holdings over a one-
month maintenance period.
Counterparts
The ESCB monetary policy framework is formulated with a view of

ensuring the participation of a broad range of counterparts. If minimum
reserves are applied, only institutions subject to minimum reserves may
access the standing facilities and participate in open market operations
based on standard tenders. If no minimum reserves are applied, the range of
counterparts will broadly correspond to credit institutions in the Euro area.
The ESCB may select a limited number of counterparts to participate in
fine-tuning operations. For outright transactions, no restrictions will be
placed a priori on the range of counterparts. Active players in the foreign
exchange market will be used for foreign exchange swaps conducted for
monetary policy purposes.
Underlying assets
Pursuant to Article 18.1 of the ESCB Statute, all ESCB credit operations
have to be based on adequate collateral. The ESCB will allow a wide range
of assets to underlie its operations. A distinction is made, essentially for
purposes internal to the ESCB, between two categories of eligible assets:
“tier one” and “tier two” respectively. Tier one consists of marketable debt
instruments, which fulfil uniform Monetary Union-wide eligibility criteria
specified by the ECB. Tier two consists of additional assets, marketable and
non-marketable, which are of particular importance for national financial
markets and banking systems and for which eligibility criteria are
established by the national central banks, subject to ECB approval. No
distinction will be made between the two tiers with regard to the quality of
the assets and their eligibility for the various types of ESCB monetary
policy operations (except for the fact that tier two assets are normally not
used in outright transactions). The eligibility criteria for underlying assets to
ESCB monetary policy operations are the same as those applied by the
ESCB for underlying assets to intra-day credit. Furthermore, ESCB
counterparts may use eligible assets on a cross-border basis, i.e. they may
borrow from the central bank of the Member State in which they are
established by making use of assets located in another Member State.
Key for the ECB’s capital
1 December 1999
Following the notification issued by the Commission of the European
Communities of revised GDP statistical data, it was decided to adjust the
shares of the national central banks in the key for the capital of the
European Central Bank (ECB) to the following percentage rates:
Nationale Bank van Belgie/Banque Nationale de Belgique 2.8658%
Danmarks Nationalbank 1.6709%
Deutsche Bundesbank 24.4935%
Bank of Greece 2.0564%
Banco de España 8.8935%
Banque de France 16.8337%
Central Bank of Ireland 0.8496%
Banca d’Italia 14.8950%
Banque centrale du Luxembourg 0.1492%
De Nederlandsche Bank 4.2780%
Oesterreichische Nationalbank 2.3594%
Banco de Portugal 1.9232%
Suomen Pankki 1.3970%
Sveriges Riksbank 2.6537%
Bank of England 14.6811%
3.2.3 The European Central Bank (ECB)
The European Central Bank was established in June 1st, 1998. Thus, this is
one of the world’s youngest central banks. The legal basis for the European
Central Bank and the European System of Central Banks is the Treaty
establishing the European-Community.
In May 1998 the European Council invited the large majority of countries
(11) which were able to meet the Maastricht convergence conditions to join
the European Monetary Union (EMU). The four non-members were the
United Kingdom, Denmark, Sweden, which all opted out, and Greece,
which alone failed to meet the convergence conditions.
The European Central Bankor Eurofed ensures a common monetary policy,

and governments had to follow precise targets on public debt and the way in
which public deficits were financed. Ceding financial power to a new
central financial body was seen to be more effective and efficient than
continuing weakly co-ordinated policies by existing National Central Banks.
The European System of Central Banks involves the National Central Banks
(NCBs) and the European Central Bank. The European Central Bank is
dominant in policy-making and has exclusive authorisation and control of
currency issue. Most monetary operations are decentralised to the National
Central Banks. The ESCB’s main instrument of control is open-market
operations plus other instruments undertaken at the initiative of the
European Central Bank.
The European Central Bank has in its statutes the goal of price stability,
whereas the US Federal Reserve Bank also has to consider output and
employment as well as inflation. For inflation, no numerical target is set,
whereas the European Central Bank had set a tight limit at less than 2 per
cent per annum. There are also concerns about the undemocratic nature of
the European Central Bank in setting the targets and implementing them. In
the United Kingdom, for example, the Chancellor of the Exchequer sets the
inflation targets, leaving the implementation to the Bank of England – the
latter is also more in publishing its minutes.
The legal basis for the ECB and the European System of Central Banks
(ESCB) is the Treaty establishing the European Community. According to
this Treaty, the ESCB is composed of the ECB and the national central
banks of all 15 EU Member States. The Statute of the European System of
Central Banks and of the European Central Bank was attached to the Treaty
as a protocol.
The highest decision-making body of the ECB is the Governing Council. It

consists of the six members of the Executive Board and the 11 governors of
the national central banks of the Euro area. The President of the ECB chairs
both the Governing Council and the Executive Board.
The key task of the Governing Council is to formulate the monetary policy
of the Euro area. Specifically, it has the power to determine the interest rates
at which commercial banks may obtain liquidity from the central bank. Thus
the Governing Council indirectly influences interest rates throughout the
Euro area economy, including the rates that commercial banks charged their
customers for loans and those that savers earn on their deposits.
The Executive Board of the ECB consists of the President, the Vice-
President and four other members. All are appointed by common accord of
the Heads of State or Government of the 11 countries, which form the Euro
area.
The Executive Board is responsible for implementing the monetary policy

as formulated by the Governing Council and gives the necessary
instructions to the national central banks for this purpose.
The third decision-making body on the ECB is the General Council. It

comprises the President and the Vice-President of the ECB and the
governors of all 15 national central banks of the EU Member States. The
General Council contributes to the advisory and co-ordinating functions of
the ECB and to the preparation for the possible enlargement of the Euro
area.
The working units of the ECB are grouped in Directorates General,

Directorates and Divisions, overall responsibility for which lies with
individual members of the Executive Board.
Independence is vital to the operational success of any central bank. Thus,

the ECB has its own budget, independent of that of the European
Community. This keeps the administration of the ECB separate from the
financial interests of the Community.
The capital of the ECB does not come from the European Community but
has been subscribed and paid up by the national central banks.
At an international level, arrangements exist for the ECB to be represented

at the International Monetary Fund (IMF), one of the key elements of the
international monetary system, and at the Organisation for Economic Co-
operation and Development (OECD). The ECB participates in meetings of
these international organisations with the sole aim of exchanging
information. The independence of the ECB is thus fully respected.
Progress test
1. Describe the structure of the Federal Reserve System.

2. What are the instruments of Central Banking?
3. Explain how the discount rate influences the American financial
market.
4. Describe the Open market operations.
5. Describe the activity of the FDIC.
6. What are the savings banks?
7. What are mortgage-related financial institutions?
8. What are credit unions?
9. Describe the organisation of the ESCB.
10. What are the main tasks carried out by the ESCB?
11. What are the main responsibilities of the Governing Council?
12. What are the main responsibilities of the General Council?
13. What are the main monetary policy instruments of the ESCB?
14. What is the ECB?
15. Describe the ESCB’s structure and its main tasks.
ANNEX No 1
ECBS General Council

(responsible for ERM II)
ECB
Central Banks of the EU
President
Central banks: Gouverners
England of the central
Denmark banks in the Gouverning Council President
Sweden EMU
Greece (Euro Area) President
ANNEX No 2
TASKS OF THE ECB:
• IMPLEMENT THE MONETARY POLICY

- Price stability
- Sustainable economic growth
• SUPPORT THE GENERAL ECONOMIC POLICIES OF THE EU
• CONDUCT THE FOREX EXCHANGE OPERATIONS
• HOLD AND MANAGE THE OFFICIAL FOREIGN RESERVES OF
THE MEMBER STATES
• PROMOTE SMOOTH OPERATION OF THE PAYMENT SYSTEMS
(ADOPTING TARGET)
Money Services
MONEY SERVICES
D Objectives
4.1 Cash and cash instruments
4.2 Cheque – definition, parties involved, endorsement, types of
endorsement
4.3 Remittance by post:
4.3.1 Cheque
4.3.2 Banker’s draft
4.3.3 International Money Order
4.3.4 International Payment Order
4.4 Remittance telegraphically / electronically
4.4.1 Telegraphic transfer
4.4.2 Girobank/post office
4.4.3 Standing orders
4.5 Electronic Banking Services
4.6 SWIFT
4.7 The process of the Romanian cheque under the Law no. 59/1934
concerning the cheque, with the subsequent amendments
4.7.1 Introduction
4.7.2 The transmission of the cheque
4.7.3 The payment of the cheque
4.7.4 Types of cheques
4.7.5 The circulation of a cheque
Money Services
4.1 Cash and cash instruments

The cashier’s work consists in receiving cash and cash instruments such as
cheques and other instruments (“documents of title to cash”) in order to
credit the customers’ accounts.
Cash consists of:
Banknotes;
Coins;
Cash instruments such as cheques.
In modern banking practice, the name of the customer and his computer
account number are pre-printed in the pay-in books to eliminate any error
and to speed up transactions at the counter.
Procedure1 used by the Romanian banks:
• The cashier has to make sure that the name and account number of the
customer are clearly indicated;
• Where counter pay-in slip is used by the customer (or non-customer),
the cashier should check the correctness of the name and account
number of the customer whose account is credited;
• The cashier must count the currency notes presented and sort them into
different denominations;
• The cashier ticks against each item on the pay-in slip with a coloured
pen or pencil and places the notes in his till.
Cash instruments (“documents of title to cash”):
¾ Banker’s drafts;
¾ Conditional orders;
¾ Dividend and interest warrants;
¾ Bearer bonds;
¾ Postal orders;
¾ Unused traveller’s cheques.
1
Internal norms of each Romanian bank
Money Services
4.2 Cheque – definition, parties involved, endorsement, types of

endorsement
A cheque2 represents an unconditional order in writing addressed by one
person to another who must be a banker, signed by the person giving the
order, requiring the banker on whom it is drawn to pay on demand a certain
sum in money to or to the order of a specified person or to the bearer.
More clarifications:
The person who draws the cheque is called the drawer;
The bank through the cheque is drawn, is the drawee bank (paying
bank);
The person to whom the cheque is drawn payable is called the payee or
beneficiary;
When the drawer draws a cheque payable to himself, both the drawer
and the payee are the same person.
The following items need to be verified by the receiving cashier:
If the Date is correct: Is the cheque post-dated or stale?
Post-dated: it means the cheque has been presented before the cheque
date.
Stale: it means the cheque has been presented after six months of its
date.
In both situation the cheque should not be cashed.
Payee (beneficiary):
When the cheque is crossed “A/C payee” or crossed to a particular
account, such instructions must be implemented.
Content of the instruments:
When there are differences between the amount written in words and the
amount written in figures, the amount payable is the one mentioned in
words. Anyway, the bank is entitled to return the unpaid cheque marked
“words and figures differ”. The paying bank has the right to ask its
clients that their cheques are filled in clear and unambiguous terms.
2
Kiriţescu Costin - Relaţii valutar-financiare internaţionale, Ed. Ştiinţifică şi
Enciclopedică, Bucureşti, 1978, p. 237
Money Services
Signature of the drawer:
The signature should be verified to ensure that it is complying with the

copy of the signature card which is kept in the banker’s safe. The
signature is a genuine one.
Endorsement3:
The endorsement of an instrument is the placing of a signature thereon

by a person who thereby becomes a party to the instrument.
There are two types of endorsement:
1. Blank endorsement: no endorsee is indicated. Such blank

endorsement converts the order cheque into a bearer cheque;
2. Special endorsement: the endorser specifies the person to whom the

cheque is endorsed.
Usually, endorsements are written on the backside of the order cheque.

Endorsement of part of the sum indicated on the cheque is irregular and
invalid. An endorser can endorse the cheque payable to the order of more
than one person.
4.3 Remittance by post
4.3.1 Cheque
The simplest and most obvious method is merely to send a cheque to the
beneficiary in the other country. This has advantages for the drawer of the
cheque who only incurs the postage costs and bank charges when the
cheque is debited.
However, if the cheque is used in payment for goods, their delivery may be
delayed while the payee of the cheque waits for it to be cleared. It is
possible to issue a cheque in the relevant currency if the drawer maintains
an account in that currency.
3
Palfreman David – Banking: the legal environment, Pitman Publishing, London, 1994,
p.242
Money Services
Now let’s try to be in the position of the payee who suffers the following:
The cheque will often be drawn in the drawer’s currency, thereby

imposing an exchange risk on the payee;
The payee’s bank may insist on collecting the proceeds of the cheque
before crediting the bank account, thereby delaying the receipt of the
funds by as much as a month. This delay, of course, favours the drawer;
The payee will also incur some, if not all, of the expenses of the
collection process;
The cheque may not be paid.
The process of a cheque is represented in the Annex no 1.

In order to avoid some of these problems, beneficiaries can insist that:
• Cheques are drawn in their own currency. This transfers the exchange
risk back to the drawer but does not really solve any of the other
problems highlighted;
• Payment be made by means of Banker’s draft.
4.3.2 Banker’s draft
This requires4 the remitter to give instructions to a bank to issue a draft,

which is a type of cheque, drawn in the appropriate currency on a bank
abroad. So, a bank draft is in effect a cheque drawn by one bank on another.
This may be one of its own subsidiaries or associates or a correspondent
bank. For the payee this method solves the exchange risk problem,
guarantees payment as the draft is drawn on a bank, and removes the delay
in the collection process.
Consider the following example that illustrates the process of a draft:
“Mrs. Roberts wishes to send FF 100,000 to a property developer in the

Dordogne as a deposit on a holiday cottage she wishes to purchase. She
4
Davies Audrey & Kearns Martin – Banking Operations, Pitman Publishing, London
1994, p. 35
Money Services
banks with the North Bank, whose correspondent bank is the Left Bank in
Paris. The developer banks with the Perpignan branch of the Bastille Bank.
1. Mrs. Roberts gives instructions to the North Bank and requests the issue
of a draft.
2. North Bank draws a draft for FF 100,000 on the Left Bank in Paris.
3. North Bank debits Mrs. Roberts’ account with the sterling equivalent of
FF 100,000 plus charges, accounts to Left Bank for FF 100,000, and
hands the draft to Mrs. Roberts.
4. Mrs. Roberts sends the draft to the developers who pay it into their
account with the Bastille Bank.
5. Bastille Bank collects the proceeds by remitting the draft to the Left
Bank for payment.
This process is represented in the Annex no. 2.
Despite the obvious benefits, drafts are relatively expensive and can be
delayed or lost in the post, causing considerable inconveniences and
additional costs to all concerned, particularly as the customer will be
required to give an indemnity to the bank. It is because of such
problems that quicker, more efficient and less costly ways of
transferring funds internationally have been developed.
Analysing the process of the bank drafts, we consider that there are major
disadvantages in using the drafts for large transfers, such as the following:
The remitter is debited at the time the draft is issued, but there is a delay
before the beneficiary can pay the draft into his bank account and obtain
cleared funds.
If the beneficiary does not bank at the bank on which the draft is drawn,
the funds will be treated as unclear.
The draft could be lost or stolen, and banks are reluctant to “stop” a
bank draft because it amounts to dishonour of the bank’s own paper.
Money Services
4.3.3 International Money Order
One of the most popular alternatives to the cheque or banker’s draft is the
International Money Order (IMO). It has the advantage of being
immediately available once the customer has completed the application
form and is often the cheapest method of sending money abroad. The bank
draws the International Money Order on itself and the payment is,
therefore, guaranteed.
In the United Kingdom, International money orders are usually issued either
in sterling pounds or US dollar and are used for relatively small amounts
e.g. GBP 1,000 or USD 2,500, but can be used for as much as GBP
5,000/USD 7,500. As they can be encased throughout the world they
represent a simple and effective way of remitting funds abroad, particularly
as the beneficiaries can obtain the funds immediately on presentation to
their own bankers.
You can see in the Annex no. 3, the process for an International Money
Order.
If the remitter wishes to meet a commitment for an amount greater than the
limit imposed by the bank for an International Money Order, then more
than one International Money Order can be purchased, although it is likely
to become impractical to use more than two. For the larger amounts it may
be better to use an alternative method and particularly an international
payment order.
4.3.4 International Payment Order
An International Payment Order (IPO)5, also known as an Airmail Transfer,

is simply an authority by a customer or non-customer to a bank to remit
funds abroad in any available currency, by airmail.
Banks recommend its use for non-urgent transfers where the amount that
requires remitting is above the limit of I International Payment Orders or
the currency required is one other than sterling pounds or US dollars. For
example, if a customer wishes to send to Spain the equivalent of GBP
5
Davies Audrey & Kearns Martin – Banking Operations, Pitman Publishing, London
1994, p.25
Money Services
10,000 as a stage payment in respect of the building of a villa, and there is

no urgency, then an International Payment Order is the best method.
The relevant instructions on a pre-printed form will be given to the bank in

the United Kingdom. These instructions will be then sent to the bank in
Spain nominated by the remitter or, failing this, chosen by the remitting
bank. The Spanish bank will ensure that the beneficiary receives the funds
as instructed and in the nominated currency.
The way the funds are transferred between the banks will depend upon
which currency the payment is in.
You can see in the Annex no.4, the process of an International Payment
Order.
An International Payment Order is a relatively cheap method of sending

funds abroad but generally should be used for non-urgent payments. It is
possible that some payments will be received if the SWIFT system is used,
but a more normal period would be three to four weeks, instructions being
sent by airmail.
There are several ways in which the beneficiary can receive payment.
Instructions can be given as follows:
(a) Notify and pay – used if the beneficiary’s bankers are not known. The
beneficiary, once advised, will have to call the bank to collect the
money.
(b) Advise and credit the beneficiary’s account.
(c) Pay the beneficiary upon application – used when the beneficiary
wishes to collect the funds personally from a specified branch of a bank
abroad.
(d) Place to the credit of a new account to be opened in the beneficiary’s
name – used when the beneficiary wishes to have a new account opened.
In this case references and a specimen signature may be required by the
bank abroad.
Whether the remitter or the beneficiary pays the costs involved will depend
on the agreement between them. If the beneficiary pays some or all of the
costs, then they will be normally deducted from the amount received.
Money Services
4.4 Remittance telegraphically / electronically
4.4.1 Telegraphic Transfer
A Telegraphic Transfer (TT) is the quickest way of sending money abroad

and as such will often be used where the payment is urgent.
As with International Money Orders and International Payment Orders, an

order form is completed with the remitter’s instructions, enabling the bank
to authorise the bank abroad to make the funds available to the beneficiary.
The beneficiary can receive the funds in most of the ways described for
International Payment Orders, i.e.
• Notify and pay
• Advise and credit the account
• Pay on application
The exception is the opening of an account, which is unlikely to be urgent.

Furthermore, because instructions are sent by cable or telex it is not possible
to send references or specimen signatures.
It normally takes two working days for the processing of TTs from receipt
of instructions to payment to the beneficiary, unless payment is being sent
to a remote part of the world, in which case it may take a little longer. The
speed of payment is achieved by using cable or telex to transmit the
payment instructions rather than sending them by airmail as with
International Payment Orders. The disadvantage is that this method makes
the TT more expensive.
Payment can be made in sterling pounds or most foreign currencies, and

TTs are particularly appropriate where large sums need to be transferred
quickly to reduce interest charges or improve interest income.
4.4.2 Girobank / post office
Girobank offers several ways of sending money abroad, some of which are
similar to those, described already. Not all the services are available to all
countries, but if you wish to send money to a country not on the Girobank
Money Services
list, payment will be made by means of a bank cheque in US dollars,

sterling, or an appropriate alternative currency at Girobank’s discretion. The
three main methods are:
1) Payment by cheque;
2) Payment in cash;
3) Payment direct to a Giro account overseas;
There is a fixed charge for each method, but if the remitter has a Girobank
account and the beneficiary overseas has a Giro account, then a transfer can
be made between the two, free of charge.
Finally, it is also possible to remit funds overseas by means of a postal order

but there is a limited number of countries to which the system is applicable.
4.4.3 Standing orders
There are certain payments, which have to be made regularly. Missing a

payment for an essential item or service could cause problems.
A Standing Order service provided by the banks is a way of ensuring that

specific payments are made to certain people or organisations on the date
that are due (The payments can be once a year, quarterly, monthly –
whenever required).
This means that the customer only has to arrange essential regular payment
once. The customer has to inform the bank the necessary details concerning
who the payment is to, the amount of money to be paid out –when and how
often the payment is to be made.
After that, the bank will take on the responsibility of ensuring that the
payments are made:
Out of the customer’s account;
Into the account of the person/organisation named.
Because standing order payments are made automatically through the
banking system, the customer is saved the bother and potential cost of
writing and sending off cheques.
Money Services
The customer can make as many payments as he likes through standing

orders. Details of each standing order payment will appear in the customer’s
bank statement.
In order to make a standing order arrangement the customer just fills in a

form –which in England can be obtained by asking the “Enquiries” counter
of any bank. The main information that the customer has to fill in is:
Details of the customer’s account;
Details of bank account of the person/organisation the customer is
paying;
Name of the person/organisation the customer is paying;
Amount of each regular payment, etc
Table 1 summarises the advantages and disadvantages of the methods we

have covered so far.
Advantages and disadvantages of different forms of payment:
METHOD ADVANTAGES DISADVANTAGES

Impractical and expensive if in
Cash
Small amounts can be sent in large amounts.
note form very easily.
Can be lost or stolen.
Exchange risks unless issued on
Remittance is quick and appropriate currency account.
simple.
Delay in receipt of proceeds by
Can be inexpensive for the beneficiary where bank insists
Cheque
remitter where recipient on collection.
covers collection costs.
Collection costs.
Attachments are possible.
Cheque may not be paid.
Issue process is straight-
forward. Remittance is quick
and simple. Relatively expensive to
Available in most major purchase.
currencies – exchange risks Can be lost or stolen – involves
Banker’s draft for recipient can be avoided. lengthy formalities including
No limit on amount. giving an indemnity to the bank.
Payment is guaranteed and Encasement overseas may be
quick if drawn on a bank in costly.
beneficiary’s country.
Attachments are possible.
Money Services
METHOD ADVANTAGES DISADVANTAGES

Cheapest method, widely Only appropriate for smaller
available and accepted. amounts up to GBP 1,000 or
International Issue process is quick and USD 2,500, say, but possible up
Money Order straightforward. to GBP 5,000/USD 7,500.
Refunds/replacements Only available in sterling or
available with little formality. USD.
Instructions can be given in

most currencies – exchange
risk for recipient can be
avoided.
International No limit on amount. Not appropriate for urgent
Payment Documents can be attached, transfers.
Order e.g. specimen signatures. Relatively expensive.
Several payment instructions
available.
Payment is inter-bank, there-
fore secure.
Quickest method of transfer.

Interest income on large sums
can be saved – interest
charges reduced.
Telegraphic
Transfer No limit on amount. Most expensive method.
Instructions can be given in
most currencies – exchange
risk for recipient can be
avoided.
Relatively inexpensive.
Issue process is straight- Possible collection costs.
Giro cheque forward.
Can be lost or stolen.
Remittance is quick and
simple.
Simple and quick. Recipient has to have a Giro

Giro transfer Free if from one Giro account account.
to another. Number of countries limited.
Purchase is simple and Exchange risk for the recipient.

Postal order inexpensive. Can be lost or stolen.
Attachments are possible. Number of countries limited.
Money Services
4.5 Electronic Banking Services

Electronic banking (see Chapters 6 and 7 for more information) –
essentially automated payment by computer – will increase in importance
and volume. The main forms of electronic banking services are:
Telephone Banking
Such a service represents a competitive area and it may be either voice-
activated (i.e. the computer is expected to react to customer's voice and
comply with his or her instructions accordingly), or electronically activated
(i.e. the client speaks over the microphone of their telephone and dials
certain numbers meaning a certain transaction). The telephone banking can
offer transfers of funds, payments of regular bills, applications for loans and
overdrafts etc.
Bankers Automated Clearing System

This system is especially used for funds transfers between the participating
members and essentially operates standing orders, direct debits, payment of
wages, salaries, rentals, trade debts, etc. Bankers Automated Clearing
System is supplied with a magnetic tape containing the details of the
accounts to be debited or credited. It sorts them into bank orders and, then,
it provides each paying bank with the relevant details, a printout being also
available.
Electronic and Internet -Based Payments

Internet banking is a banking product, which follows the older solutions
like e banking. E-banking represents a solutions which is technologically
obsolete, supposing at the client level of that service a phone line and a
computer dedicated for such an operation, able to fulfil technical needs
requested by the bank and to run (execute) a software program necessary
for the optimal communication with the client’s bank. In that way, the
person which will handle the e-banking application have to work only from
that computer which it is not very good for someone with a dynamical job
and with many physical places of work even in different localities or
countries.
Despite e banking, the I-banking (Internet-banking) supposes the usage of a

computer from wide world on which is installed a browser and an Internet
Money Services
connection. The performances of such a solution are far away better also for
the bank and for the end user (the client).
The costs are calculated to a number of 100 banks from the United States of
America which are using all the channels, but the costs are represented at a
world wide level because they are common to all the banks that promote the
electronic payments.
World tendencies
63 % from the great banks6 are offering Internet banking services and 59 %
are offering electronic banking services. Not all Internet banking
institutions are charging the services, but most of those, which do, are
starting to use a monthly subscription for the base services an
supplementary charges for some services. 61 % from the firsts 150-th banks
from the United States of America are offering on-line banking services, 15
% don’t have included in their strategies for the future the offer of on-line
banking service and 19 % already announced their intention to provide such
services until the end of 2001.
In May 2000, Forrester Research estimated that by the end of the year 2003
will exist over 20 million of home users in the United States of America
which will use the I-banking services, that means around 30 % from the
profits obtained from retail.
At the end of 2000, the specialists from Data monitor estimated that at the
end of the year 2005, around 20% from the world population would be
connected at the Internet.
Regarding Europe, since March 19, 2001 the British group Vodafone has
announced that the first transaction pilot project that will use the digital
signature using the mobile phone will start in April 2001 together with the
Radio Communications Agency. That announcement was made at a short
period of time after the British Government announced that it intended to
allow all physical persons to pay their taxes throw an electronic
environment, using digital signatures.
On July 19, 2001, expired the cut-off time until which all the member states
of the European Union had to implement the Directive regarding digital
signature. The ending of that period will lead inevitably to a new beginning
6
Booz Allen & Hamilton – April 2001
Money Services
in the development of electronic transactions field and in the e-business

area.
As a consequence of that, the banks renounced at their territorially
development instead they are concentrating on the new products which are
based on new technologies and the Internet development. So, the banks are
reorienting their investment politics to new technologies. That supposes the
reconsideration of the concept of territorial network of a bank, which is
about to become an informational network. At the end, the new
technologies allow the banks to be closer to their clients and in the same
time to provide them more comfort and a depersonalisation of the services
due to the elimination of the classical physical direct relation between the
account officer and the bank’s customer.
4.6 SWIFT
These initials stand for the Society for Worldwide Interbank Financial
Telecommunication, which is an international organisation whose members
consist of several hundred of the largest international banks. The society,
which was created under Belgian Law and located in Brussels, was formed
to accelerate the transfer of funds and other messages between the member
banks.
The system works by means of a telecommunication link between the

computer systems of the banks, which allows the rapid transmission of
messages. The system is used to execute telegraphic transfers previously
sent by cable or telegraph and may also be used for international payment
orders/airmail transfers at the discretion of the bank, making for a much
faster execution of a customer’s instructions. When instructions are
transmitted in this way the bank is said to be sending a SWIFT message and
for telegraphic transfers the phrase used is urgent SWIFT message.
SWIFT7 processes information (i.e. data, text, or commands) in the form of

messages. From the user’s point of view, messages are sent either:
From one user to another (e.g. Normal banking messages such as a
customer transfer); or
From a user to the system (e.g. Requests for information such as a
retrieval request); or
7
Watson A. – Finance of international trade, 4th edition. Chartered Institute of Bankers,
London 1992
Money Services
From the system to a user (e.g. Responses to requests, such as a

retrieved message).
A message can consist of one or more headers, which contain reference

information for the message, a body which contains the text of the message,
and one or more trailers, which are added for control purposes.
Messages are seen from the point of view of the SWIFT system. All
messages introduced into the system by a user are referred to as input
messages; all messages, which the system delivers, to a user are referred to
as output messages. A three-digit number, e.g. MT 100 represents messages,
where the first digit defines the message category, indicating the general
usage of the message. There are nine categories of user-to-user messages,
identified as categories 1-9, and a separate category for messages exchanged
between a user and the system, identified as category 0.
Security at SWIFT meets four objectives:

Confidentiality – information is only disclosed to authorised persons at
authorised locations;
Integrity – information can be relied upon to be complete, accurate and
valid;
Availability – information and associated services are accessible and
usable when needed;
Accountability – every individual authorised to use the system is
accountable.
Confidentiality and integrity are ensured by means of security of

transmission, delivery and message storage; by validation of messages;
and by user-to-user authentication.
The various system functions of SWIFT are separated into a well-defined

hierarchy, with each level of the hierarchy controlled by a particular
computer. A global communications network links all of Swift’s computers
so that they are in constant communication with each other. All processors
have at least one standby processor.
An unique ISO Bank Identifier Code (BIC) identifies financial institutions.

BIC’s are published in the SWIFT BIC Directory. The first 8 characters of
Money Services
the BIC, when used for addressing purposes, are called the destination; it is
made up as follows:
Bank (Financial Institution) Code 4 characters
Country Code 2 characters
Location Code 2 characters
The bank code, country code and location code are mandatory components
of a BIC. In addition, an optional branch code of 3 characters can be used to
identify any branch of a user institution. If no branch code is defined, the
default of “XXX” is used for addressing purposes.
There are three main types of SWIFT message8:
• System Messages (MT category 0) – which may relate to either the
sending and receiving of messages (e.g. User-to-SWIFT message,
Delivery Notification, Retrievals), or to some aspect of an user’s logical
terminal (LT) or destination;
• User-to-User Messages (MT categories 1-9) – which enable users to
perform financial transactions;
• Service Messages (or Control Messages) –,,which relate either to
system commands or to acknowledgements”.
The SWIFT system normally processes user-to-user messages on a First-In-
First-Out basis.
User-to-user messages fall into distinct categories to be used for different
types of financial transactions. A 3-digit number identifies individual types
of messages (MTs). The first digit identifies the category of the message.
There are 9 categories9 of financial messages. Each category referring to a
different general usage:
Category 1 Customer transfers

Cheques
Category 2 Financial institution transfers
Category 3 Treasury markets & Derivatives

Foreign exchange, Forward rate agreement etc
8
SWIFT User Handbook Network Acces Guide, August 1998
9
SWIFT User Handbook Network Acces Guide, August 1998
Money Services
Category 4 Collections
Cash letters
Category 5 Securities
Category 6 Precious metals & Syndication’s
Category 7 Documentary credits
Guarantees
Category 8 Traveller’s cheques
Category 9 Statements, Reports etc.
All SWIFT messages conform to a defined block structure. Each block of

messages contains data of a particular type and is used for a particular
purpose.
A typical SWIFT user-to user message may consist of:
{1: BASIC HEADER BLOCK}

{2: APPLICATION HEADER BLOCK}
{3: USER HEADER BLOCK}
{4: TEXT BLOCK}
{5: TRAILER BLOCK}
Block 1, 2 and 3 relate to header information, block 4 contains the text of

the message, and block 5 contains trailer information.
Only block 1 is mandatory for all messages. Block 2-5 are optional and
depend upon the nature of the message and on the application in which the
message is being sent or received. All user-to-user messages contain blocks
2, 4, and 5.
SWIFT offers round the world, round the clock expert support to its
customers, covering administrative, operational and technical matters.
Support is available 24 hours a day, seven days a week and in many
languages.
Money Services
4.7 The process of the Romanian cheque under the Law no. 59/1934
concerning the cheque, with the subsequent amendments
4.7.1 Introduction
The cheque is an instrument of payment used by the banking accounts
holder with available funds into these accounts. The available funds are a
result of a bank deposit, collecting proceeds or a credit.
The cheque is an instrument of payment, which connects three persons:
- the drawer; It is the person who makes out the instrument, being the
holder of the banking account.
- the drawee; It is always the bank where the drawer has an account
opened with. It will pay the presented cheque only if the drawer has
enough availability in his account.
- the beneficiary (payee). It is the person who will receive the money.
This person can be a third person or the drawer himself.
The instrument is made out by the drawer, who by virtue of a deposit in a
bank, gives an unconditionally order to that bank (the drawee) to pay a
determined sum of money to a third party (or to the drawer himself), who is
the beneficiary.
In the process of the cheque the drawer issues the cheque, the legal owner
cashes it and the drawee pays the cheque.
In order for the drawer to issue cheques, the bank must deliver to its client a
blank passbook.
The owner of the cheques fills in the blank cheque, signs and delivers it to
the beneficiary, who will present it to his bank for cashing it.
In order to be valid, the cheque has to contain the following compulsory
mentions10 (see Annex No 5):
the name “Cheque” written in the text of the instrument;
the unconditional order to pay a certain amount of money;
the name of the drawee, respectively the bank where the drawer has an
account opened with;
10
Cheque Act, 1934, with the subsequent amendments
Money Services
the place of the payment, respectively the locality and the address of the
bank where the payment is made;
the date and the place of the issue of the instrument, respectively the
day, month, year, as well as the name of the locality;
the signature of the drawer.
4.7.2 The transmission of the cheque
The transmission of a cheque can be:
a) by simple remittance; it is the case of the cheque payable to the bearer,

which in the moment of issue doesn’t show exactly the beneficiary and
bears the mention “ cheque payable to bearer”. This kind of cheque is
payable to the beneficiary, or to the bearer of the cheque.
b) by ordinary transfer of debts; it is the case when the cheque is issued for
a specified person and it has the mention “not to order”; only the
authorised person can enact the cheque.
c) by endorsement - it is the operation by which all the rights of the cheque

are sent with the remittance. It has a special mention on the backside of
the cheque in the favour of somebody, including the drawer. The new
beneficiary can, on his turn, endorse the cheque.
4.7.3 The payment of the cheque
The cheque is payable only at sight/at presentation.
In Romania, the cheques are issued and payable at the following terms:
- 8 days, for the cheque payable in the same place it was issued;
- 15 days, in any other cases.
These terms are calculated from de subsequent day of the issuing date of the
cheque.
The presentation of the cheque after the expiring of the legal term will cause
the loss of the right for a legal action against the previous endorsers if the
cheque wouldn’t be paid.
Money Services
All the persons who obliged themselves in any way by the cheque
(drawer, endorsers) are jointly and severally responsible for paying
that cheque, although the obligations had been assumed at different
moments.
4.7.4 Types of cheques
The main types of cheques used in Romania are:
a) the cheque payable to bearer. It is the instrument, which has in the text
the special mention “to bearer” or “ payable to bearer” or is has no
mentions.
b) the crossed cheque - the drawer or the owner of a cheque can make a
cross by drawing two horizontal or crossed parallel lines on the side of
the cheque; meaning that the beneficiary has to ask for a bank’s services
in order to cash the sum written on the cheque.
The cross can be:
• general - there is no special mention between the two lines;
• special - between the two lines is specified the name of the bank.
The general cross can be transformed into a special cross.
c) certificate cheque - by this kind of cheque the bank (the drawee)

confirms on the cheque the existence of the necessary fund for payment
and the person who issued the cheque (the drawer) can not withdraw
funds from his account until the end of the submitting period.
d) Traveller’s cheque – in this case, the drawer can condition the payment
of this cheque upon the identity between the signature of the person who
got the cheque (the possessor) and the signature of the person who cashes
it at submitting. In fact, the possessor puts his first signature on the
cheque in the moment he buys it; the second time, he signs it in the
moment of cashing the cheque, in the presence of the banking clerk, or in
the moment of the payment in the presence of the beneficiary. This kind
of cheque is an easy and safe mean of payment.
Money Services
In Annex No 6 you can see different types of cheques.
4.7.5 The circulation of a cheque
The Company “Atlas” Inc. purchases from the store of The Company “Star”
Inc. electronics, amounting to ROL 5,000,000.
The Company “Atlas” Inc. has a current account opened with The Bank
“X”, and The Company “Star” Inc. has a current account opened with the
Bank “Y”.
Under the available funds in the current account, The Bank “X” gives a
passbook to the Company “Atlas” Inc.
When the representative of the Company “Atlas” Inc. purchases the goods,
he fills in a file of the pass book with the necessary dates and the sum which
represents the equivalent value of the electronics bought, he signs that file
and hands it to the representative of the store.
Since that moment, the Company “Atlas” Inc. has become the drawer, the
Bank “X” the drawee, and the Company “Star” Inc. the beneficiary.
The Company “Star” Inc. submits the cheque to the Bank “Y”, and sends it
to The Bank “X” in order to cash it.
The Bank “X” pats the cheque to the Bank “Y”.

In this way, the obligation of the Company “Atlas” Inc. towards the
Company “Star” Inc. is cleared, as you can see in the Annex no 7.
The role of the banks

When the clients of a bank (drawers) issue cheques, these have to be
presented to the bank (the payee bank) to be paid. The bank has the
obligation to pay the cheques in favour of its clients in the following
conditions:
• the client has enough money in his account;
• the cheque was drawn correctly and signed by the client (the drawer);
• there is no any other legal reason for the bank not to pay.
The beneficiary bank has the obligation to collect the cheques from its own
clients for encasement. The bank will remit the cheques to payment.
Money Services
Progress test
1. Enumerate some cash instruments.

2. What is a cheque?
3. What are the items verified by the receiving cashier?
4. Describe the process of a cheque.
5. Define the banker’s draft and its process.
6. List some disadvantages of using Banker’s draft.
7. Explain the process for an International Money Order.
8. Define the International Payment Order and its process.
9. List a few ways in which the beneficiary can receive payment.
10. What is a Telegraphic Transfer?
11. What is a Standing Order service?
12. List the main electronic banking services.
13. In what consists a SWIFT message?
14. List the three types of SWIFT messages.
15. List at least five categories of financial messages.
16. What does SWIFT represent?
17. Describe the transmission of the cheque under the Romanian law of the
cheque.
18. List and define the main types of cheques under the Romanian law of
the cheque.
19. A customer wishes to send a birthday present of 50 pounds to her
daughter in Canada. Her birthday is not for two months. Which payment
method would you suggest?
20. A retiring customer has decided to spend 6 months of the year in Spain
and wishes to open an account there prior to departure. What method of
transferring the funds would be the most appropriate?
ANNEX No 1
THE PROCESS OF A CHEQUE
Drawer Sends personal cheque (1)

Beneficiary
Debits Takes the Pays Credit

Account (4) cheque to in Account
the bank (6)
(2)
Sends cheque (3)

Drawee Collecting
Bank Bank
Collects proceeds (5)
ANNEX No 2
THE PROCESS OF THE BANKER’S DRAFT
Mrs. Roberts Sends draft Property

(4) Developer
Account
Debited
(3)
Orders
Draft Account
(1) credited
Issues (6)
Draft
(2)
Remits
North draft and Bastille
Credits Left collects
Bank (5) proceeds(7) Bank
Bank
ANNEX No 3
THE PROCESS OF AN INTERNATIONAL MONEY ORDER
Customer Sends IMO Beneficiary

(3)
Orders
IMO Pays in
(1) Account
Issues credited
IMO (4)
(2)
Remits IMO (5)

Issuing Collecting
Bank Bank
Collects proceeds (6)
ANNEX No 4
THE PROCESS OF AN INTERNATIONAL PAYMENT ORDER
Customer Beneficiary
Issues
Instructions (4) Notifies and pays
(1) or advises and credits
Debits or pays on application
Customer or opens new account
(2)
Remitting Overseas
Sends Instructions (3)
Bank Bank
ANNEX No 5
THE COMPULSORY MENTIONS OF THE CHEQUES
Money Services
Money Services
Money Services
Money Services
Money Services
Money Services
ANNEX No 6
TYPES OF CHEQUES
Romanian crossed cheque:

Money Services
International types of cheques:

Money Services
ANNEX No 7
THE CIRCULATION OF A CHEQUE
The Trading Company 2 The Trading Company

“Atlas” Inc 4 “Star” Inc
- drawer - 8 - beneficiary -
1 3 5
The “X” Bank 6 The “Y” Bank

-drawee- 7 -beneficiary’s bank-
Explanation:
1. The issuance of the cheque book;
2. The sales contract is concluded;
3. The “Atlas” Inc. draws a cheque against the “X”
Bank;
4. It remits the cheque drawn against the “X” Bank;
5. It submits the cheque to the “Y” Bank;
6. It submits the cheque for paying;
7. The debt is liquidated;
8. It pays the cheque.
Electronic Banking Services
ELECTRONIC
BANKING
SERVICES
D Objectives
5.1 Introduction into e banking services
5.2 Concepts’ definition regarding e-banking
5.2.1 Development of electronic money in the Euro area;
electronic money oversight, supervision and the Community
regulatory framework
5.2.2 Services of e banking in Romania
5.3 The legal framework in the e-services field
5.3.1 The EU’ s on-line Financial Services legal framework
5.3.2 The ‘E’ regulating provisions in Romania
5.4 The risk management for e-banking activities and e-money
5.4.1 Risk identification and risks analysis
5.5 Advantages and disadvantages of Internet banking
5.1 Introduction into e banking services
The evolution into the Internet and electronic banking era is set to be the
most fundamental transformation that the industry would have ever had to
undergo. Yet, when we arrive on the ‘other side’ we should not envisage
being greeted by an era dictated by geeks and impersonal switches, but by
the level of human interaction and use of information that kept eluding us
all through the industrial revolution.
Starting the 80s, analysts1 of financial transactions stated that Electronic

Banking services for physical persons will become a common way of
effecting from home the banking transactions. In the same period, banks
from all over the world invested in developing software solutions,
equipment like servers, modems and the development of information
departments.
Electronic Banking is a service provided by many of the largest banks to

enable the ordinary customer to transfer funds from one person to another
and to remit funds to a named beneficiary.
This kind of service was firstly accepted by the small savings bank in the
United States of America, where in a small town the customers are well
known and the relationships between the banking clerks and the customers
are close and stable. In this environment, the operations solicited by phone
have appeared.
The sphere of asked services was also restricted and the bank initially
agreed to pay only some usual phone bills, with small values. The ‘bank by
phone’ was called like this due to the fact that the operations were solicited
based on human voice, by telephone.
1
Source: ‘Piaţa Financiară’ magazine, November, 2000
The communication in both ways raised some problems regarding:

- The presentation and identification of the account holder that solicits
access to the banking services and the possibilities of fraud;
- The ways of communicating the information, especially the receiving by
the computer and the coherent answer to be given.
The identification possibilities were varied, but it should be mentioned a

few:
- The phone tone, with the help of an emitting pill included in the
customer’ s phone;
- The password;
- The personal identification number (PIN).
For an increased safety, some banks have installed a small card reader at the
customer location.
A computer having the following characteristics facilitated the

communication possibilities:
- It asks and answers to the customer, partially based on pre-recorded
messages;
- It recognises the human voice (the words ‘yes’ and ‘no’, the figures,
some key words, etc.).
So, based on some precise orders and some key words, the computer may
receive the customers’ orders and may give some significant answers to
him.
The diversity of the solutions adopted by bank to solve these problems and
facilitate the communications is shown in the following table:
Nation-
wide
Bank of England
The offer Lloyds TSB
Scotland BS Royal
Bank of
Scotland
Automatic Automatic
Automatic
Automatic answer answer
answer
teletext (human (human
(human
through the voice) voice)
voice)
The type phone through the through the
through a
(keypad, phone and phone and
phone and a
home using a using a
special
computer) recognition recognition
terminal
tone tone
Password and
The access account Special PIN
PIN using a Password
to the number and account
special card Special PIN
system Password and number
special PIN
Fixed tariffs Fixed
Costs are monthly and Quarterly
(besides established additional subscription
Free
the phone monthly tariffs of L2.50 for
circuit) according to according to each account
its use its use
Source: Basno C., Dardac N.- ‘Moneda. Credit. Banci’, Ed. Didactică şi
Pedagogica RA, Bucureşti. 1999
The table shows that many banks use video equipment in order to give the
customer access to a larger range of services.
Technological characteristics
The Videotext system is based on video, a telecommunication procedure that
enables the visualisation of alphanumerical images on a screen.
The Videotext system is a video system with telephone transmission, hence
it is a videography where the transmission is done through a
telecommunication network (the phone line).
There are three entities that take part in this system: the user, the
transmission network and the service performer (that is a database and a
processor of information in the same time).
The user will be equipped with a terminal and a phone line. He will be
connected to the network through a phone call, after he was identified and
recognised (through the above-mentioned procedures).
The transmission network initially implies the phone contact through the
telephone and after the identification it enables the connection with the
performer through the video access point (WAP).
The functional characteristics of the Videotext System
The system has several functional characteristics that reveal its superior
qualities:
- It ensures the fast transmission of information;
- It allows a continuous updating of data;
- It has an unlimited stocking capacity, so all the specific elements may be
included in the database;
- It has a permanent availability. Hence, it may be accessed from different
places and without any time restrictions;
- The system presents a specific accessibility through:
- The use of a communication mean, a simplified language;
- The easy orientation in the system, within a tree structure;
- The multi-criteria access, that enables the information to be selected
based on more criteria and hence the use of the same information on
more objectives (a simple example is that the operations recorded in an
account may be structured as credit operations, debit operations, balances
at different dates, etc.)
- The system implies the interaction between two parts.
The Techniques of the Banking Operations Performed through the Videotext

System
The payment from distance
The payment from distance is possible only when the bank gives the holder
of the payment card a purchase power. In this case, the memory of the card
records this ability that may be interpreted as a credit limit.
Under the above-mentioned circumstances, the holder of the payment card

connects through the Videotext system with the seller. The operations are
performed in the following order:
1. The order regarding the goods or services solicited is given;
2. The decision to pay is expressed;
3. The PIN is typed (this operation is juridical equivalent to signing a
cheque);
4. The amount is typed (this operation is equivalent to filling this mention
on the cheque).
Consequently, the operation is recorded simultaneously in the memory of

the payment card and in the performer.
In order to finalise the operation in the seller account; the performer

periodically asks the bank for payment. The bank validates the operation
and covers the amount by debiting the holder’ s account.
On the other hand, the payment card keeps in its memory all data regarding
the payments made (the day, the amount, and the beneficiary). So, we may
say that this memory acts as an archive. The credit limit may be renewed
monthly.
The Teletransfer
The holder of the payment card may use this system to make payments on
behalf of some natural or legal persons. These operations are recorded in the
card memory, but do not affect the purchasing power. Consequently, this
operation does not have the same execution guarantee, meaning that it may
be performed only if the holder has enough money in his account.
If not, the bank notifies the holder that the operation is not possible.
Usually, this operation is used for the treasury management of the holder.
He operates for the transfer of funds to special accounts: savings accounts,
term deposits, etc.
Payments regarding electronic bills
The user of the Videotext System establishes with the bank a regime of
automatic payments for the bills that have specific payment terms (usually
the monthly bills).
Based on these agreements, the payments are automatically made at the
established dates. The user has the right to cheque if the payments to be
made are right. When he thinks he is entitled he may cancel the payment by
addressing a special order to the bank, also by using the Videotext system.
The teleconsultancy
This denomination refers to the dialogue between the holder of the payment
card and the bank. It concerns the situation of the holder’ s account and is
done through the system.
The most frequent questions refer to:

- the balance of the account at the bank or the balance of the purchasing
power (the credit);
- the last operations recorded in the account;
- the interest amounts to be received or paid.
The request of a cheque card
The cheques are used on a large scale, sometimes in parallel with the credit
card. Th request for a new cheque card usually requires the holder to go to
the bank.
But the user of the Videotext system has the advantage to request this by
means of a Videotext message. The operation is quite simple. The bank will
honour the customer request and will mail him a new cheque card.
The local consultancy
The local consultancy is a very natural and sometimes useful service. It

consists of reading of the credit card memory.
The expenses ordered according to their succession, the suppliers etc. will
appear on the screen and they may be retained. This ensures the
clarifications asked by the holder.
The offer of e-banking services of the well known types- m-banking, ITV
and PC based on Internet - will permit the bank, in the first place to attract
sophisticated clients, that are using many platforms for effecting
transactions, managing, in the same time to access a larger base of potential
customers.
ITV-Banking represents a channel that implies small costs; in the same

time, data confidentiality during transactions effected using the
infrastructure of cable TV is reduced.
M-Banking offers the clients the possibility to effect transactions

everywhere in the world and at any time; the size of the phone terminal, as
well as the fact that the mobile phone is a personal object gives maximum
confidentiality assurance to this e-banking service.
M-banking services2 will attract an increasing number of active users on the

near future and the volume of the transactions for m-banking users will be
bigger than the volume of transactions through ITV and even through PC-
based e-banking.
Nowadays, the PC-based Internet Banking users represent the most

important category of e-banking users, the situation will change; a bank
should develop strategies for new banking services offered on a different
platform, by adding a new presentation form in a shorter period of time and
at small costs.
5.2 Concepts’definition regarding e-banking
The Banking Supervision Committee from Basle defines the e-banking

activity as ‘the retail banking services and products distribution of different
values through electronic channels’.
2
Source: ‘E-Finance’, supplement of ‘Piaţa Financiară’ magazine, December, 2000
These banking products and services can include: attracting banking

deposits, granting loans, the accounting management, as well as providing
other products and services for electronic payment as e-money.
Usually, the more accessible procedures by which it is possible to distribute

to the consumers e-banking products and services are: POs (point of sale
terminal), ATMs (automatic teller machine), mobile phones, personal
computers, distance terminal, Video Kiosk, Internet, and others. Through
the Internet, a person can have access 24 hours a day/ 7 days per week to
her/his accounts and can make transactions, for this operation needing only
a PC connected to the Internet and a browser. The Internet banking services
can be accessed also through the mobile telephone and with the help of
WAP. This way, because of its rapid extension, the Internet brings new
opportunities to the banking industry.
The Internet Banking number of users3 is increasing. In Europe, from

2.8 million users in 1999, Forester Research estimates that the number will
reach the value of 10 million by the year 2002. In the United States of
America, the Internet ‘home country’, from 7 million Internet Banking users
in 1999, it is estimated that in 2002, there will be 24.2 million.
From the banks’ point of view, clients segments to which these services
address are: individual clients market (it is estimated that till the end of the
year 2003, there will exist in the United States of America about
18.5 million home users); institutional clients market (corporate clients).
It is estimated that by the end of 2003, there will be over 18.5 million
Internet banking home users, in the USA. These clients’ segment will
probably represent 30% of banks’ retail activity profits. It is estimated that
Internet banking will be the leader of the Home Banking American market.
Electronic money is a payment instrument whereby monetary value is

electronically stored on a technical device in the possession of a customer.
The amount of stored monetary value is decreased or increased, as
appropriate, whenever the owner of the device uses it to make a purchase,
sale, loading or unloading transaction.
3
According to ‘E-Finance’, supplement of ‘Piaţa Financiară’ magazine, March, 2001
A distinguishing feature of transactions carried out with electronic money is

that they do not necessarily involve a bank account. This is a fundamental
difference between electronic money and access products. With access
products, such as debit cards, payments are settled by means of transfers
between bank accounts.
Electronic money represent deposited money through electronic means with

the scope of making payments via POs terminal, direct transfers, or through
computers network, like the Internet. The product of stored value includes
‘hardware’ or mechanisms based on card (the so called ‘electronic
wallets’) and ‘software’ or mechanisms based on the network (named
‘digital cash’). The stored value cards can have only ‘one destination’
(‘single purpose’), like the phone card, and can be used for buying one
single type of merchandise or service from one single vendor; cards with
‘more destinations’ (‘multi-purpose’) which can be used for more buying
from more vendors.
The banks can participate in the electronic money circuit in the quality of
issuer, but can fulfil also other functions like: distribution of electronic
money issued by other entities, processing and transaction discount made
with the help of electronic money, as well as the registration in accounting
of the corresponding transactions.
According to the Report on electronic money published by ECB in August

1998, Electronic money is broadly defined as an electronic store of
monetary value on a technical device that may be widely used for making
payments to undertakings other than the issuer without necessarily
involving bank accounts in the transaction, but acting as a prepaid bearer
instrument4.
A legal definition of electronic money has recently been provided in Article

1 of the European Parliament and Council Directive 2000/46/EC on the
taking-up, pursuit and prudential supervision of the business of electronic
money institutions. According to this definition, electronic money shall
mean monetary value as represented by a claim on the issuer which is:
(i) stored on an electronic device;
(ii) issued on receipt of funds of an amount not less in value than the
monetary value issued;
4
ECB Monthly Bulletin – November 2000.
(iii) accepted as mean of payment by undertakings other than the issuer.
The legal definition set out in Directive 2000/46/EC introduces the concept
of a claim on the electronic money issuer. This clarifies the concept of the
issuer, i.e. the undertaking that has ultimate financial responsibility towards
the holders of electronic money. This distinction is necessary because in
some electronic schemes the tasks of issuing and administering electronic
money are the responsibility of different entities.
Technological features
On a technological level, electronic money products can be further divided

into hardware-based and software-based products, depending upon the
storage device. In the case of hardware-based product, purchasing power
resides in a device containing hardware-based security features (generally a
chip, which is usually embedded in a plastic card). By contrast, software-
based products employ specialised software on a personal computer,
typically allowing electronic value to be transferred via telecommunications
networks, such as the Internet.
Hardware-based products have the potential to be used not only for face-to-
face payments, but also for payments via telecommunications networks, for
example by means of a card-reading machine and a personal computer
connected to the Internet. Whenever electronic money is transferred via
telecommunications networks, the term “network money” is used,
regardless of whether the electronic money is hardware-based or software-
based.
In addition, the following characteristics of electronic money should be

emphasised. First, at the present juncture, electronic money received by the
beneficiary cannot, in most cases, be used again, but has to be forwarded to
the issuer for redemption (closed circulation of electronic money). With
open circulation, electronic money functions in much the same way as
banknotes and coins, which allow for a number of transactions to be carried
out without the involvement of the issuer.
Second, electronic money can provide varying degrees of anonymity, from

total anonymity to full disclosure of the identity of the user, depending on
the technical features of the individual scheme. By contrast, with access
products such as debit cards, the processing of payments requires the
identification of both parties to the transaction, since their bank accounts

need to be debited and credited.
The Electronic money are represented by many forms5, such as:
1. ‘Debit cards’ – by using these, the consumer is empowered to buy

merchandise through effecting an electronic transfer of funds from their
personal accounts from the bank in the merchant’s account.
2. ‘Stored-value card’ – they are cards similar to the debit and credit
cards, but they distinguish by the fact that they contain a fix amount of
‘digital cash’. A sophisticated stored-value card is represented by the
‘smart card’.
3. ‘Electronic cash’ represents an example from the real world of the

electronic systems of payment, using e-mail or Web. ‘E-cash’ is used on
the Internet for buying products and services. A consumer can obtain ‘e-
cash’ by opening a bank account at a bank connected to the Internet.
Then, ‘e-cash’ is transferred to his computer. When a client wishes to
buy a merchandise with e-cash, then he navigates on the net, looks for a
shop and selects the option of buying a named article, after which e-cash
is transferred automatically from the client’s computer into merchant’s
computer.
4. ‘Electronic cheque’ – these permit the users of the Internet to pay the
bills directly through Internet without transmitting the check paper. The
user of the computer writes the equivalent value of the check, after
which he transmits the electronic check to the other party, which, in its
turn, transmits it to his bank.
Advantages6 of Internet Banking Services -analysed from banks and also

from clients’ perspective are:
5
Source: ‘Net Report’ magazine, February, 2001
6
According to Piaţa Financiară, September, 2000
good image on the market;

reduced costs of transactions;
BANK rapid answer to the market demands;
increase of revenues;
increase in the clients’ number.
reduced costs for the access and use of different
products;
INDIVIDUAL ease;
CLIENT
rapidity;
funds’ administration;
INSTITUTIONA reduced costs for accessing and use of products;
L CLIENT liquidity administration.
5.2.1 Development of electronic money in the Euro area; electronic money

oversight, supervision and the community regulatory framework
The role of electronic money in the economy derives from its function as a
retail payment instrument. In this regard, electronic money is analogous to
banknotes and coins, cheques, bank transfers or credit and debit cards. Each
of the existing retail payment instruments offers certain specific services
which make that payment instrument particularly attractive to certain
customers or for certain types of transactions. Nonetheless, there is scope
for competition between them. For example, following their introduction,
credit and debit cards competed with cheques. Apart from the range of
services offered by retail payment systems, the key factor in determining
competitive outcomes is the cost associated with the use of each retail
payment instrument. For banknotes and coins, as well as for cheques,
handling costs are sizeable. For credit and debit cards, the main costs arise
from the bookkeeping in relation to bank accounts, including the
verification of accounts and transfers between accounts.
With electronic money, transaction costs can be lower than with banknotes
and coins. For example, when payments at vending machines are made with
electronic money, there is no need for the merchant to handle banknotes and
coins stored in the machine and to spend resources on the physical safety of
the vending machine. Furthermore, with electronic money, transaction costs
may also be lower than with debit cards, because the settlement process
generally requires fewer data exchanges and there is usually no need for any
online authorisation of electronic money transactions.
The development of electronic money will depend on the decisions made by

customers and merchants as to whether or not to use electronic money as a
payment instrument.
From the point of view of the merchant, it is useful to distinguish between

the fixed costs and the marginal costs of using payment instruments at a
particular point of sale. In the case of electronic money, fixed costs include
the costs associated with the purchase and maintenance of electronic money
cards and software or dedicated merchant terminals. By contrast, the
marginal costs are those relating to the processing of a single transaction,
including in particular the costs incurred for telecommunications. To the
extent that electronic money systems need to rely on new technologies or
new standards, which may remain relatively expensive in the early stages of
their development, fixed costs are likely to be relatively high, at least during
an initial phase. However, the marginal costs of using electronic money may
be lower than those of using alternative payment instruments.
Electronic money and monetary policy
The impact of electronic money on the monetary policy has been a widely
debated issue since the developments in technology made the widespread
use of electronic money a feasible scenario. The primary objective of the
monetary policy is to maintain price stability. With regard to this objective,
the development of electronic money raises three different issues:
First, there is need to safeguard the role of money as the unit of account
for economic transactions. Society reaps substantial benefits from using
a single well-defined and stable unit of account, for conducting
transactions, irrespective of the issuer or the form in which money is
issued.
Second, the effectiveness of monetary policy instruments might be
affected by a widespread adoption of electronic money. This relates
mainly to effects on central bank balance sheets and the ability of central
banks to steer short-term interest rates.
Third, the emergence of electronic money might have repercussions on

the information content of monetary indicator variables with regard to
the primary objective of price stability.
The Eurosystem’s policy on electronic money
The Eurosystem’s policy on electronic money is explained in the ECB’s7

Report on electronic money (August 1998) and further elaborated in the
official opinion of the ECB on draft Community legislation on electronic
money8. On the basis of monetary policy, payment systems policy and
supervisory concerns, the report sets out seven minimum requirements for
electronic money schemes to fulfil, as well as two desirable objectives.
The requirements are as follows:

(i) issuers of electronic money must be subject to prudential supervision;
(ii) electronic money schemes must have solid and transparent legal
arrangements;
(iii) electronic money schemes must maintain adequate technical,
organisational and procedural safeguard to prevent, contain and detect
threats to the security of the scheme, particularly the threat of
counterfeits;
(iv) protection against criminal abuse must be taken into account when
designing and implementing electronic money schemes;
(v) electronic money schemes must supply the central bank with whatever
information may be required for the purpose of monetary policy;
(vi) issuers of electronic money must be legally obliged to redeem it at par
value;
(vii) the possibility must exist for the ECB to impose reserve requirements
on all issuers of electronic money.
The desirable objectives, which relate mainly to the smooth functioning of

payment system, the prudential supervision of credit institutions and the
stability of the financial system, are:
i) the interaction of electronic money schemes;
7
European Central Bank
8
ECB Monthly Bulletin – November 2000
ii) the adoption of adequate guarantee, insurance or loss-sharing

schemes.
Hence a framework is needed to ensure that electronic money schemes are

safe and efficient and that electronic money issuers are sound.
The new regulatory framework for electronic money institutions (ELMIs) is

defined in two recently adopted Directives: European Parliament and
Council Directive 2000/46/EC on the taking-up, pursuit of and prudential
supervision of the business of electronic money institutions and European
Parliament and Council Directive 2000/28/EC amending Directive
2000/12/EC relating to the taking-up and pursuit of the business of credit
institutions.
According to European Parliament and Council Directive 2000/46/EC on

the taking-up, pursuit of and prudential supervision of the business of
electronic money institutions, the main elements of the new regulatory
framework for ELMIs include the following:
i) the limitation of activities – article 1 limits the business activities of
ELMIs to the issuance of electronic money, the provision of closely
related financial and non-financial services and the issuance and
administration of other means of payment, but excluding the granting
of any form of credit.
ii) the scope of application of banking Directives – Article 2 stipulates
that only two EU Directives, if not otherwise expressly provided for,
will apply to ELMIs, namely a number of provisions of Directive
2000/12/EC and Directive 91/308/EEC on money laundering.
iii) Redeemability- Article 3 stipulates that the bearer of electronic money
may, during the period of validity, ask the issuer to redeem it at par
value in coins and banknotes or by a transfer to an account free of
charges other than those strictly necessary to carry out that operation.
iv) Initial capital and ongoing own funds requirements - the initial capital
and minimum ongoing capital requirements for ELMIs is Euro
1,000,000, while capital requirements are also set on an ongoing basis.
v) The limitation of investments – Article 5 requires that ELMIs invest an
amount not less than their outstanding financial liabilities related to
electronic money in highly liquid assets which attract a 0% or, subject
to quantitative limitations, a 20% credit risk weighting. Limitations

also apply to ELMIs’ activities in derivatives etc.
The legal and regulatory regime for electronic money in place in the
countries of the European Union (EU) has, until recently been characterised
by a low degree of harmonisation. The recently adopted Community
legislation on electronic money provides a comprehensive and harmonised
regulatory framework for electronic money schemes.
The framework limits the issuance of electronic money to traditional credit

institutions and to a new type of credit institution known as an electronic
money institution (ELMI). ELMIs are institutions, which specialise in the
electronic money business. The particular nature of their activity and of the
risks that they incur has led to the definition of a specific supervisory
framework. In addition, the application of provisions of the Directive
relating to the taking-up and pursuit of the business of credit institutions
will allow ELMIs to benefit from an European passport, which will enable
them to carry out their activities throughout the EU.
As a conclusion, it should be mentioned that electronic money has the

potential to become an important element of the Euro area financial system.
The development of electronic money in the Euro area will be determined
by market forces and reflect competition between electronic money and
existing retail payment instruments, as well as among the various issuers of
electronic money. As a result, it is difficult to predict whether electronic
money will develop in the future, and what form its development will take.
5.2.2 Services of E-Banking in Romania
♦ Bank Austria Credit Anstalt launched on-line banking in March 2001.

Bank Austria Creditanstalt Romania (BA/CA Romania) recently launched
Internet Banking, named ‘ON-LINE BANKING’, through which the
customer saves time and money, and does not have to support the costs
corresponding to this system.
Offering some modern and secure solutions, of high quality coming and
receiving the client, will be the success of BA/CA Romania.
♦ The Commercial Bank “Ion Tiriac” introduced Office2Office electronic

banking
Sine March 1st, 2001, electronic banking service Office2Ofice has been
introduced. It addresses to physical persons mainly and permits a direct link
with the bank through a computer. The new electronic payment system
works under Windows and permits the client to manage directly from his
office the bank accounts. Data can be viewed and printed or imported to his
bookkeeping system. Using his own computer the client can make payments
in Romania and abroad and has access to current account information
related to effected transactions, initial sold, final sold, and Treasury
information. The system is working off-line, this allowing the client to make
a verification of data before the transmission to the bank. The access can be
done based on a user name and unique password, having the possibility of
defining on profiles of different types of users. The system also permits
choosing a set of authorised signatures corresponding to internal policy of
the company and also the approval of different schemes, depending on the
payment nature.
♦ Citibank Announced the Launching of an Internet-Only Banking

Operation
♦ Demirbank Romania is offering Mobile and Internet Banking Services.

DemirBank Romania has been offering since March 2001 M-banking.
Introducing Mobile Banking service (based on WAP technology) represents
a new stage in the development of the bank’ s offer of products and services
on the market. A year ago, the bank launched Electronic Banking services
on the market and after that Internet Banking. Mobile banking represents the
user’s possibility to access his account from where ever he is, with the help
of his own mobile phone. The computer is no longer necessary. The bank
does not have additional fees and commissions for the Mobile-Banking
services, permitting its customers to access their own accounts through the
mobile phone system.
♦ Alpha Bank
Alpha Web Banking was introduced in 1998; it permits clients to effect on-
line elementary banking transactions. In October 2000, share transaction
was introduced. Alpha Bank was one of the first banks that introduced
mobile banking through WAP technology. Alpha Bank was in Romania the
first bank that implemented on-line connection, and executed operations in
real time, it also implemented a multibranch/ multicurrency accounting type.
Alphaline is a very modern, accessible and secure home-banking service,

one of the firsts in its product type. The bank intends to introduce in the near
future the Internet banking.
♦ The Romanian Commercial Bank is Launching Home-Banking

The Romanian Commercial Bank is offering to its clients new facilities of
‘e’-type. The bank is offering on the market two products: multicast-BCR,
addressed to big customers of corporation type and e_BCR, addressed to
small and medium size customers. This new system will function by
creating an interface with the customer. The connection with the bank will
be done through the bank’ s Internet site, with the help of a local browser.
♦ Piraeus Bank
In March 2001, Piraeus Bank launched EXPRESSBank services package.
This comprises four remote banking services: TeleBank, MobilBank,
InfoBank, and DirectBank.
♦ The Commercial Bank of Greece

Starting December 2000, the Commercial Bank of Greece offers Internet
banking services, which permit the clients the access to bank’s products and
services without being necessary the physical presence in the offices.
5.3 The legal framework in the e-services field
5.3.1 The EU’ s on-line Financial Services legal framework

The European Commission launched a new plan of on-line financial
services development, having at its basis the so-called ‘origin country
principle’9, a principle that governs cross border commercial relationships,
applicable to buying and selling financial services. According to an Internal
Market Department official, the plan should become operative till 2005. On
the other hand, another department of the Commission, the one that is
focussing on the legal field and internal affairs is working at a new law
whose provisions are in contradiction with the unique market requirements.
This is stating that the law of the client or consumer’ s country should apply
in other words the destination country principle.
The Commission’s representatives in the legal field already adopted a law

named Bruxelles1; recognising the destination country principle. Rome
9
Source: ‘Piaţa Financiară’ magazine, September, 2000
Document2, which will be soon proposed to Commission’ members

political approval takes, also, into account the same principle.
The lack in the consumer’s trust is the main thing that stops e-commerce
development, a juridical problem spokesperson from the commission,
declared.
The economists in charge of the unique market regulation elaboration are

strongly affirming that consumers’ interests are better served if encouraged
competition exists.
The existing statutes based on the destination country principal include

Broadcasting Directive, Electronic Signature Directive, technical standards
Directive and Copyright for Satellite and Cable Transmission Directive.
The E-Commerce Directive adopted at the EU level must be transposed into

national legislation by the 15 Member States and revised according to
Brussels and Rome.
The EU, in order to regulate and uniform the controversial field of the
electronic signature, recently published a series of directives to be
implemented, for the Member States. Two important objectives are outlined:
firstly, it is provided the fact that from the time of the directive entering into
force, in the EU’ states; the electronic signature10, has the same value as the
written signature, starting from the premise that the electronic signature,
will be able to be certified by a institution specialised in this field. Secondly,
there is the archivation of those documents problem. The question: ‘for how
long the signatures must remain in the computer’ s memory?’ represents an
important aspect of the problem.
The legal provisions will be uniformly submitted to obeisance and this

aspect constitutes an important phase in the ‘dematerialization’ of the
payment system.
About ‘on-line’, ‘off-line’ non-discrimination principle, applicable to

commercial operations, the solution was to keep the existing implemented
legislation regarding the operation system using printed documents, and to
extend it to on-line operations, to the biggest possible extent, exceptions
10
Source: www.europa.eu.int.
being constituted by the particular regulations applicable to specified

situations.
Another important aspect is the jurisdiction problem. In the present, there is
no jurisprudence unanimously accepted, and there are situations in which
the two systems are in contradiction. In such cases, beyond the risks
assumed by the providers, there also intervene a series of complicated and
time- consuming procedures. The advice that can be given in these
conditions is to be attentive, and prudent in the operations performed and
assume for that moment, due to the existent situation, a minimum possible
risk.
5.3.2 The ‘E’ regulating provisions in Romania
In Romania, the trust in ‘e’ sector activities could come only from law. It is
necessary that laws regarding ’e’ world be concluded and adopted by the
Romanian Parliament.
The Law Regarding the Electronic Authentication
The main actors of ‘e’ market can be, for the moment, public institutions
and physical persons. The law of electronic authentication is necessary, and
it should oblige the public institutions to enter the ‘game’.
A good legislation in this field should focus on the participants to the
economic game protection, and non-intervention as long as the participants
have nothing to reproach one to the other.
The Law Regarding the Electronic Signature11
The electronic signature12 represents an information attached to an

electronic document which:
- uniquely identifies the signer, being realised with means placed at user’s
disposal;
- it identifies the document,
- and signals any afterward modification brought to it.
11
The author of the project of law regarding the electronic signature is Varujan V.
Pambuccian, the president of the IT Commission from the Romanian Parliament.
12
Source: www.pambuccian.ro/RlegSign.htm
It is much stronger than the hand written form one (and given this reason it
can have its juridical regime). It is clear that the law on the electronic
signature is at the basis of any regulation referring to an electronic data
needing juridical regime.
The regulating institution should be a recently created one, namely, the

Information and Communication National Agency, having the role of
regulating the certification and e-commerce service providers. The Agency
is under the control of the Romanian Government.
The project of regarding e-commerce
The project of law13 regarding the e-commerce states the juridical aspects
related to business to business operations (with the typical application:
virtual factory) and to those of business to customer type.
The law form proposed by the Romanian Information Communication

National Agency collects all the common regulations from the existent
legislation. The challenged questions are those related to taxes that could be
perceived on e-commerce.
The only way in which these activities can be taxed is the one proposed by
the law project, would be the establishment of an Internet Police
Department having the duty of monitoring every transaction in the network.
For the on-line documents transacted the aspects related to the hour and the
place of the signing of the document and the ways of proving that the
addressed really got the document, these, together with the electronic
signature.
The law defines the electronic exchange of data as a data electronic transfer
from one system to another using a stated standard for information structure.
In the sense of the same law, the informational system is a system used for
generating, transmitting, receiving, stocking or any other similar processing.
The information used under the form of an electronic message, is considered

valid of producing juridical effects, regarding the conditions provided by
law.
13
Source: www.pambuccian.ro/ R-LegEcom.htm
The agency must elaborate regulations regarding electronic data exchange

security in order to protect electronic commerce operations it also realises
reports on multilateral recognition with organism from other states.
The law of non-cash digital payments systems14
An economy’s state of health depends also on the speed at which economic

cycles close up, and, in Romania it appears that the fluidity of the economic
cycles is one of the major problems of the economic decline. So, the non-
cash digital operations must be initialised on a large scale, together with the
legislative framework.
5.4 The risk management for e-banking activities and e-money
When speaking about e banking we refer to on-line delivery of banking

services. The Internet is the main medium of distribution for the on-line
services, therefore the services offered are mainly subject to the risks related
to the Internet, without forgetting the traditional risks related to the banking
activity.
On-line security must be a fundamental component for any E-Banking

strategy. During the time when managers create networks opened to new
applications and to many users, the network is exposed to bigger risks. The
complex networks nowadays are frequently vulnerable to different types of
attacks like information steal, denial-of-service attacks, and unauthorised
breakthroughs.
Risk establishment is a continuous process, which supposes the realisation

of the following three stages:
- the bank engages in a process of risk identification and where it is
possible, of measurement. When risks can not be measured, the
management establishes the potential risks that might appear, the steps to
be taken and establishes the impact that these can have on the bank.
- Risk establishment means for a bank determining the bank’ s risk
tolerance, thing that implies losses establishment that bank permits in the
case of some unforeseen events.
14
According to Piaţa Financiară, July,2000
- The management can compare risk tolerance with the magnitude

established for a certain risk, for establishing if the respective risk enters
in the tolerance limits.
Risk Control and Administration
After establishing the risks and tolerances, the management must administer
and control them. This stage of risk administration includes such activities
as: internal communication co-ordination, supplementing protection
measurements against external risks, clients’ instruction as to services’ use,
a.s.o. Banks increase the ability in the inherent risk control and
administration in any activity when all these are established through
procedures and they are accessible to the whole staff. The risk’ management
and control process include:
- Security measures and policies. Security represents a combination of

systems; practical applications and internal control used for putting in a
safe place the integrity, authentication, data confidentiality and operating
proceeds. The security policy states the intentions of the firm’s
management of sustaining the information security regarding the bank
security planning. The policy shapes the responsibilities for modelling,
implementing and strengthening information security measures
strengthen: it can also establish the procedures for the bank’s results
evaluation, for the of disciplinary measures and for security violation
reporting. The security measures include encrypt, password protection,
viruses scan.
- Internal communication. The supreme management must inform the key

personnel the way in which e-banking and e-money system provisions
intend to sustain the general objectives of the bank. In the same time, the
technical personnel must clearly inform the management about the way
in which the systems are projected to function, which are the fort and
weak points of the system. For assuring an adequate internal
communication, all the procedures must be previewed in writing. In the
scope of operational risk limitation, the management must adopt a
common policy of continuing teaching the personnel the new
technologies.
- Products and services evaluation before they are introduced on a large
scale can limit the operational and reputation risks. Testing validates the
fact that equipment and systems function and produce the desired results.
Pilot programs or prototypes can be also of help to the development of

new informational applications.
Having as objective the enumerated risks’ reduction, the regulation of all ‘e’
activities, the establishment of an adequate infrastructure are necessary
things to be done, as well as providing those entitled to authorise and
supervise these activities.
As any other commercial operation, electronic commerce needs a specific

infrastructure. In this case, this comprises three elements: technical
infrastructure, the interface with the classical commercial components and
the specific juridical regime.
The technical infrastructure is constituted of hardware systems, the

corresponding software and communication network. This constitutes in
fact, the component, which determined the apparition and development of
electronic commerce. It is necessary, also, a major interface with the
classical systems of commerce. The bank represents the key element,
because any commercial operation is possible with the use of money. A
bank’ s insertion in the electronic banking system supposes a securitized
connection between the bank and the user through which to be able to effect
operations in real time.
5.4.1 Risk identification and risks analysis
Thanks to the rapid changes interfered in the information technology; banks

confront risks specific to e-banking activities and e-money, risks presented
in the annexes. At this level, it appears that the operational risk, the
reputation risk, and the juridical risk represent the most important categories
of risks, especially for the international banks.
Operational risk appears from a potential loss due to some

significant deficiencies in the integrity and viability of the system. Security
issues are supreme, if banks are subjects to external or internal attack
against their products and systems. Operational risk can appear as a
consequence of the incorrect use of e money or e-banking systems, as well
as of the inadequate realisation and implementation of those systems.
¾ Security risk. The access control to the bank’s systems became
more and more complex because of the developed capacities of the
computer, geographic dispersion of access points and use of various
communication ways including public networks like the Internet. The

unauthorised access to the network could lead to direct losses, adding some
duties to clients, a.s.o. here could, also, appear a variety of authentication
problems and specific access. For example, the inadequate controls could
lead to successful attacks of hackers operating on the Internet, which could
access, save and use confidential information about clients. If an adequate
control lacks, a pier could have access to the information system of the bank
and could virus it. Close to the external attacks against the electronic
banking and money systems, banks are exposed to the operational risk
concerning the employees’ fraud. The employees could get, in a clandestine
way; data related to the authentication with a view to access the client’s
accounts or steal the stored value cards. The errors due to employees could
also, compromise banks’ systems. Of an increased importance for the
supervising authorities is the risk of e-money counterfeits, activity, which,
according to the Criminal Code represents an offence. This risk can be
increased if banks fail to incorporate adequate measures for discovery and
prevention of counterfeits. A bank confronting operational risk from
forgeries and becoming liable for the sum of the forged e-money’ account.
There can also appear costs due to repairmen of a compromised system.
¾ Risks related to the projection, implementation and maintenance

of systems. Thus, a bank is exposed to the risk of an interruption or
slowness of its systems’ functioning if the e-bank or e-money chosen by the
bank is not compatible to the user’ s requirements.
¾ Risk which appear due to unproper use by clients of banking

products and services. The risk is increased when a bank does not instruct in
a corresponding manner its clients in what it concerns the security
precautions. More than that, the lack of proper transactions’ verification,
clients could reject transactions already authorised, this way creating
numerous financial losses. Clients that use personal information
(authentication information, number of credit cards, a.s.o.) in an unsecured
electronic transmission can permit evil intentioned persons to obtain access
to clients accounts. Following this, the bank can suffer financial losses
caused by unauthorised transactions. Money laundry can be another source
of worry.
Reputation risk is the risk caused by significant negative public

opinion, which consists of a critical loss of funds or bank’ s clients.
Reputation risk can appear when bank’ s actions produce a major loss of
people’ s trust in the bank’ s ability to fulfil its critical functions in order to
continue its activity. Reputation risk is important not only for a single bank,
but also for the entire banking system.
Legal risk appears by violation or non-observance of laws, rules,

regulations or prescribed practices, or when the legal rights and obligations
of the participating parties to a transaction are not correctly established.
Banks engaged in e banking and e-money activities can confront juridical
risks referring to the release of information regarding clients and protection
of banking secrecy.
Other risks. Traditional banking risks like credit risk, liquidity

risk, interest rate risk and market risk are risks that can appear also in the
electronic banking activity. Credit risk represents the risk that appears due
to a partial payment of a credit obligation, at the established term or in any
other established moment after that. Banks that perform e-banking activities
can extend credit by untraditional channels and extend their market beyond
traditional geographical boundaries. Inadequate procedures, by which
debtors’ credibility asking credit through electronic channels is determined,
can influence credit risks for the respective banks. Liquidity risk represents
the risk that appears due to bank’s incapacity to fulfil its obligations at
maturity term. Interest rate’s risk refers to the bank financial situation
exposure to undesired movements of interest rates. Market risk is the risk of
registered losses in the positions from inside the balance sheet, as well as in
those from outside, losses that appear due to price movements on the
market, including the exchange rates.
Examples of risks:
Credit Risk
Lack of payment of the debtors that have solicited credits through electronic
channels.
Lack of payment from e-money issuers.
Liquidity Risk
Payment incapacity of an e-money issuer
Interest Rate Risk

Sudden changes of the interest rates of the instruments in which an e-money
issuer invests
Market Risk
Foreign Exchange risks coming from the acceptance of foreign coins as a
payment for e-money.
Country Risk
Transfer risk coming from a Foreign Service provider or foreign participants
to an electronic banking project.
Management risk. A process of risks administration that includes

the three basic elements of risk: evaluation, exposure control risk and
monitoring the risks will help banks and supervisors to fulfil these
objectives. It is essential that banks have a transparent risk administration.
And when there are identified new risks in these activities, the Board of
Administration and the executive management must be informed.
As a conclusion, it should be stipulated the following:
Traditional financial service providers must exploit the business solutions

based on the Internet, otherwise running the risk of being taken out of the
market.
In the financial sector rapid changes are happening, and institutions do not
have the opportunity to offer the best services in each category. Pioneers
have the potential to invent and bring on the market new products that the
customers find attractive. For this reason, the banks, being unable to rapidly
adapt the changes, will have to become product distributors or producers of
some of them. In both cases, Internet will be delegated to perform
unimportant functions for the financial institution.
Virtual distribution (on the Internet) has the advantage of lower costs, on the
decreasing costs of electronic data processing and communication expenses.
Banks, insurance societies, and real estate societies will have to work with
the specialised producers of a certain service type and effect cross selling.
Furthermore, there are new opportunities of establishing closer relationships
with the clients, beyond the traditional boundaries.
For successfully maximising, the bank of the future will have to develop the
essential competencies related to distribution or product specialisation. An
institution can not be successful in both directions. A core competence is
essential when directly affecting the competitive advantage of that particular
institution in a market field. Core competitive advantages’ goal is to create a
bigger differentiation and assign the best resources for it.
E-Business and, in the first place e-commerce became a well-known and

generally accepted phenomenon. The evolution from a few innovative firms
(especially from B2C type of commerce) to commerce on a large scale (of
B2B type) was rapid. The motivation would be the accelerated transactions,
reduced costs and an interaction with the client through personalised
solutions. E-business is no longer a tendency, it is an important changes’
generator in the value added.
Vital to this field is the field of electronic banking, which is vital for on-line
transactions.
Ian Greenspan, president of Federal Reserve Board, a key decision maker in

the economic policies establishment, states15 that ‘the prolonged economic
increase and recession stop in the United States of America have at their
basis the increase in productivity due to information technology and e-
business’. The phenomenon became global and had implications in the
entire world.
It is said that the necessary step for entering the 3rd millennium should be
on-line banking16for all the transactions effected in Romania. The new
payment way could revitalise the existent payment mechanism.
The financial services will be on-line or will not be at all. This is the
opinion of the most important players in the financial service field. In
Romania, the Internet represents one of the solutions for making the
financial services field more competitive.
The traditional solutions will not be able to satisfy the modern client’s
demands. No matter how many working points will be opened, the client
will always be at a certain distance from that; no matter for how many hours
the offices will be opened, the client will always work later than the closing
15
Source: ‘E-Finance’ supplement of ‘Piaţa Financiară’, February, 2001
16
Source: ‘‘Piaţa Financiară’, December, 2000
hour. It is sure that a service to which a client can have access 24 hours out
of 24 a day, will be closer to the client’s wishes. From the banks’ point of
view many branches opened represent high costs with the buildings,
employees’ salaries. On the other hand, E-Banking implies investing in
technology, applications that will provide the support for the development
of such activities, assuring the security of transactions, well functioning.
A short overview of the requirements and advantages will include:
In Romania, the analysis of the financial-banking market lead to the

following statements:
• the technological endowment is old and isolated;
• the economic climate needs a serious investment;
• the legislative context continues to be rigid, but steps have been
made – the projects of law regarding the ‘e’ domain are waiting for
the approval of the Romanian Parliament;
• major banks offering e-banking services proved to be successfully in
Romania.
For the establishment of electronic banking service platforms, the basic
requests are:
• the rapid access, a simple connection to a variety of channels,
respecting the security business rules;
• assure secure and rapid transactions;
• the programming of the electronic applications must be simple;
• to contain efficient administration utility programs;
Clients Benefits:
• mobility;
• comfort and cost savings;
• 24 hours per day, every day accessibility;
• security that meets the very highest European standards;
• people can focus their attention on achieving their every day
objectives;
• time saved;
• account management.
In Romania, the electronic payments could be a factor of revitalisation of
the monetary field. But there are still many things to be done.
Although the electronic payments are more efficient and cheaper than a
paper- based payment system, there are certain facts related to the
environment that are not favourable to the passing to the digital economy:
• It appears that, even if steps have been made in order to gradually
adopt the electronic system, even if e-business continues to develop in
Romania and the IT market is increasing, Romania in not entirely
ready to accept the new era of digital economy; this is due to the fiscal
evasion manifested on the market, to the economic agents that are not
acting disciplinary, to the existence of a financial blockage, on one
hand. On the other hand, our monetary unit is not convertible and the
legislation is restrictive in the sense that it imposes a partial foreign
exchange –control of the capital transactions, with implications over
the Romanian balance of payments.
• In Romania, the infrastructure is not corresponding for the
development of e-business; the legislative framework has many gaps.
Recently, the Law of electronic signature was promulgated and this
represents a clear step toward ‘e’ era of digital transactions; other
projects of law with the aim of regulating the electronic domain are in
a project phase: the law of e-commerce, the law regarding the
payment effecting through Internet, the law on the software parks, the
laws regarding e-banking and e-finance, the regulations regarding the
encryption.
• The electronic payments are still in an incipient phase; in order for an
efficient electronic payment to be made, institutions like the National
Bank of Romania and other public institutions adopt electronic
systems, offer in-time and modern services. The clearing system
should be automatically be designed and effected.
• The Romanian system, as a whole, is reticent to changes.
• The electronic system does not benefit of trust.
• In Romania there is no encouragement from authorities to use the
electronic system, there is no project sustaining the electronic system.
• Romanians’ mentality, the conservatory regime is present also in the
field of electronic transactions.
5.5 Advantages and disadvantages of Internet banking
Cynics would say banking is being driven towards the Internet by fear and
greed: fear because everyone is afraid of being left behind and greed
because there is such potential to save money. While there is an element of

truth in this view, it is too glib an explanation of the real drivers and
potential of using the Internet in banking. If used to its full potential,
investment banking across the Internet in conjunction with the related
technologies of intranets and GroupWare could radically change the way
business is conducted to everyone's benefit and could do much to
democratise the finance sector. Banking could be more easily available to
individuals and smaller companies as well as making information accessible
in countries whose infrastructure is yet underdeveloped.
A survey published by management consultancy Booz-Allen & Hamilton in

August 1996[1] supports these arguments. It found that Internet personal
banking costs run at 15-20 per cent of income compared with the average
cost-to-income ratio of 60 per cent. Furthermore, starting an Internet-based
bank could cost as little as US$ one million because all the necessary
software is already available. When compared with the US$ 1.5-2 million
required to set up a single traditional branch and the US$ 350,000-500,000
per year to operate it, Internet banking clearly represents an extremely cost-
effective alternative to traditional branch banking networks. Needless to
say, Internet-based financial organisations could well afford to charge their
customers much less for the services they offer.
Investment banks are also investigating the opportunities offered by the

Internet. More than 70 of the world's top 100 banks already have a presence
on the Web, with the overall number of sites increasing at 90 per cent a
year. By March 1997, there were over 1400 financial servers delivering
information on the Web. Although the majority of such sites are currently
little more than electronic brochures about the banks' services, the race is on
to offer real services from Websites.
"There is no doubt that the Internet will become a fully fledged delivery
channel in a very short period of time," said Michael Berger, a member
of the Booz-Allen & Hamilton financial services team. "Ultimately, all
banks will have a Web presence and most would have advanced Web
sites capable of conducting most traditional banking transactions
within three years." Internet banking: What is it?
Online systems allow customers to plug into a host of banking services from
a personal computer by connecting with the bank's computers over
telephone wires. The convenience can be compelling. Not only is travel
time reduced, but also ATM machines; telephones banking or banking by
mail is often unnecessary. And, technology continues to make online
banking, once attempted only by computer enthusiasts, easier for the

average consumer.
Even that may not be easy enough, though. Many systems that offer greater
financial control also require more work. Online bill payment is an example
of an effort that requires setting up which leads to ultimate convenience.
Banks use a variety of names for online banking services, such as PC
banking, home banking, electronic banking or Internet banking.
Internet Banking: Many advantages
Regardless of the name, these systems offer certain advantages over

traditional banking methods.
• Consumers can use their computers and a telephone modem to dial in
from home or any site where they have access to a computer.
• The services are available seven days a week, 24 hours a day.
• Transactions are executed and confirmed quickly, although not
instantaneously. Processing time is comparable to that of an ATM
transaction.
• And the range of transactions available is fairly broad. Customers can
do everything from simply checking on an account balance to
applying for a mortgage.
Internet Banking: There are disadvantages
There are also disadvantages.

• The most obvious: Technophobes need not apply. You must be
comfortable using a computer.
• Investment of time upfront can be formidable. The data entry is
necessary before the numbers can be massaged and money managed
successfully. Online bill payment is an example of an effort that
requires setting up which leads to ultimate convenience.
Other advantages of Internet banking are:
• Easy 24-hour access to account information and transactions;
• Automatic chequebook balancing;
• Current and accurate account balance;

• No monthly fee for bill paying or account access;
• Electronic transfer of funds between accounts;
• Free bank wires;
• Immediate accesses to statements and cleared checks.
Future
Many experts agree that Internet Banking will revolutionise the World Wide
Web and completely change our perceptions and attitudes of an increasingly
digital society. Others suggest that Internet Banking and electronic
commerce will usher in a new and sinister digital era in which the US
Government will have access to all our PC’s. We must, however, remember
our ancestor’s experience with the introduction of televisions. Many
believed that "Big Brother", otherwise known as the US government, would
be watching us through the television we purchased for our homes. Perhaps
a more realistic concern is the current state of security. With advances in
secure transmission technology, these concerns will be relieved.
Financial institutions will continue to offer PC-based home banking services

to their customers. Estimates of the number of PC home-banking customers
in 2000 range from the single- to double-digit millions. Microsoft now has
58 announced banking partners distributing its Money home-banking
software to customers, while Intuit has racked up 37 bank partners. Dozens
of other financial institutions are turning to bank-brandable software
available from a slew of more traditional banking vendors, such as CFI
ProServices, Online Resources & Communications and CheckFree
(Servants), as well as developing proprietary packages.
One thing is guaranteed the growth in US household PC penetration rates

and constant marketing references to the Internet and the World Wide Web
have increased the awareness of the PC’s capability to communicate with
the world. As a result, interest in Internet Banking has accelerated.
After losing ground to non-banks in credit cards, mutual funds, and
mortgages, bankers hold more effective relationship management among
Internet Backing’s objectives. Financial institutions are hoping that Internet
Banking will assist in retention of their most profitable customers when
those customers relocate.
An important factor in the growth of Internet Banking is the number of

households that own personal computers. The number of households that
own personal computers grew by 16% last year, according to a new survey
by Computer Intelligence Infocorp, which interviewed 11,500 PC users.
That puts the total percentage at 38.5% of U.S. homes that have one or more
PCs. According to a recent Wall Street Journal article, recent buyers tended
to be older and less-affluent Americans. The growth in PC ownership
among households making $10,000 to $30,000 was up nearly 25%, to a
range between 10% and 30% of the total, and about 20% of households
headed by people over 60 now contain a PC.
Advantages
The advantages of Internet Banking are numerous for both financial

institutions and users. For the Financial institutions, the most obvious
advantage is cost. The following table shows the relative costs to the bank
per transaction for the various channels:
Channel - Cost/Transaction
1. Branch Full Service: $ 1.07
2. Telephone Average: $ 0.54
3. ATM-full service: $ 0.27
4. PC banking (3rd party): $ 0.015
5. Internet Banking: $ 0.010
Although other surveys have come up with different figures, there is

consistency in one important sentiment; they all agree there are tremendous
potential cost savings if financial institutions manage to carry out a higher
percentage of their transactions over the Internet.
Another incentive for financial institutions is image. Having been famously

described by Bill Gates as "Dinosaurs", they are now eager to promote
themselves as innovators in order to attract customers and, more
importantly, to retain existing customers. Mr. Gates also commented "give
me a slice of the transaction industry and the banks are history". While he
has since made his peace with the banks, claiming that the Dinosaur
comment was aimed at their systems rather than at financial institutions
themselves, he has managed to incite them into action. They need to
remember that they have no divine right to rule the financial transactions
industry and can no longer afford to be complacent. Luckily, the U.S.
government denied Microsoft the opportunity to acquire Intuit due to
antitrust and monopoly restrictions; however, financial institutions should
still continue to take notice, as the spectre of Bill Gates still looms
ominously over the financial services industry.
Internet banking isn’t just restricted to the country’s largest financial

institutions. Some of the more regional players, such as credit unions, are
also making their mark. The smaller size of these institutions has allowed
them to out-manoeuvre some of their larger competitors. One effect of the
trend towards Internet banking is to level the playing field so that even
smaller financial institutions can offer the type of sophisticated service
customers would normally expect only from a large bank. The increased
competition can benefit both the financial institution and the consumer. The
financial institutions will benefit from the drive to utilise the best
technology available (increased efficiencies, lower incremental transaction
costs). The consumer benefits from greater choices and lower costs. In
addition, Internet banking can be especially appealing to financial
institutions whose "members" are not located near branches (again
benefiting both the institution and consumer). In addition to providing
existing customers with access to banking services, Web sites operated by
financial institutions may also be used to solicit new customers.
For the user, the advantages are more obvious. The ability to pay bills
electronically, check balances, transfer money and do other banking tasks
from the office or a home P.C, saves time and increases efficiency. It also
simplifies account tracking and record-keeping.
Disadvantages
Security issues have always plagued the Internet. Although the Internet will
never be completely secure, the fact is that current fears are in many ways
irrational, fuelled by horror stories rather than fact. Recent advances in
security technology have lead to "more" secure systems. An example is the
development of SET by Microsoft and Visa. Another example is the
development of CSEPS and CSETS by Clay Pigeon Technologies. Perhaps
it is an indication of the power of the message provided by the media that
we worry about internet security but continue to use other insecure
transmission media such as the telephone to transfer confidential

information.
Socialists also suggest that Internet Banking "dehumanises" banking by
taking away social, human contacts. This argument raises two important
points:
1. Those of us think the idea of a great social event is to stand in line
waiting for a teller need not worry. Internet banking is not, at least for
the moment, intended as a replacement to the traditional brick-and-
mortar financial institution, but merely as an additional channel to
provide customer service and efficiency, much like telephone banking,
PC banking, and 'real' banks.
2. Internet banking is up and coming. Although it is important to be aware
of the security issues, there is nothing to prevent it from dramatically
changing the future of financial transactions.
Financial institutions proposing to provide services through the Internet
have to confront a number of legal issues. These include the problems of
authentication, electronic formation of contracts, and issues related to the
creation and protection of content provided on a financial institution’s Web
site.
Regulators are also taking an interest, as foreign financial institutions are
increasingly able to solicit domestic residents. As well, the potential that
electronic cash will be increasingly adopted as a medium of exchange for
transactions conducted across the Internet is raising concerns that existing
forms of regulation may not be adequate.
Pros and cons about Internet banking

Intent banking can provide advantages and disadvantages.
The positive factors are:
Convenience. The services are open 24 hours a day, seven day a week. Bills
can be paid with a few keystrokes, so you do not have to write the check,
address and stamp envelopes.
Financial planning capability. Internet banking can give you fingertip
access to all areas of personal money management such as budgeting and
forecasting.
Low cost. Internet banking operate at an expense much lower than a branch.
Banks can be able to provide services at lower prices.
The possible negative factors may include:
Lack of person-to -person interaction. Since all transactions are executed

via computers, Internet banking is impersonal.
Computer overload. If the system goes down at the same time when you
want to do banking, you may have to fall back on traditional banking
methods.
Growing pains. Some Internet banking services are coming to market

before they are ready. Stories have surfaced about not working PIN numbers
or incompatible modems.
Service limits. You can not deposit online and you can not withdraw cash
from a PC. ("The ABCs of Banking Online", Black Enterprise. 26(8): 45-46.
1996 March).
Disadvantages of Internet banking compared to other systems
What are Internet Backing’s weaknesses compared to other alternative

delivery systems? A discussion of the weaknesses follows:
New developing technology - Internet Banking is the latest form of

technology for banks. Internet Banking is a developing technology
supporting self-service delivery channel. It is extremely customer driven
and responsive to the customer’s needs. Developing technologies such as
Internet Banking, though, run the risk of getting too far of ahead of the
banks; therefore, the banking industry will not be able to sell to the
customer. In reverse, the banking industry can get too far ahead of
technology, and banks will be able to deliver to the customer.
Unknown strategy- the dilemma of the "nervous banker" refers to the
banking industry’s wait and sees approach. Banks are now struggling to
play catch-up. Banks have missed chances to strengthen customer
relationships by not taking full advantage of the Internet’s interactive
capabilities. They have viewed the Internet as a means of providing static
information promoting their products and services. The banking industry’s

biggest challenge is in establishing an electronic banking strategy and fully
understanding its options and implications. The Internet is a new alternative
delivery channel, which requires new thinking and marketing efforts.
Investment cost - The initial cost investment of Internet Banking

technology is higher than the other forms of alternative delivery systems.
Due to inexperience, banks that attempted to establish Web home pages run
up against major problems. They need to invest in their own server, a highly
sophisticated and costly computer to create their Internet presence. The cost
estimated for a Web site ranges up to $60,000. Unlike the other systems, a
Web site costs an additional several thousand dollars per month in
maintenance costs. The complexity and the cost of creating and maintaining
a Web site on the Internet can quickly overwhelm Banks.
Security - Security is perceived as the biggest weakness of the Internet. The

Internet is a security nightmare because of its characteristics: public, open,
network of peer to peer networks, flat and mesh topology, connectionless
datagram routing, no central authority, protocols based on mutual trust, and
naïve users. The banks rely on the secrecy or authenticity of information
and transactions on the Internet. Banks need to establish an infrastructure
that incorporates both security policies and management staff to support
information security.
CONCLUSION
Because the world directions in any field are drowned by the most
developed nation into the world we will report our conclusions to their
statistics. So, first will examine the Internet services situation generally and
after that we will conclude and about the Internet Banking situation. All
that, because this segment of market is already prepared to use the Internet
Banking solutions.
First: the Electronic Commerce (business-to-consumer) is one of engines

that are working for the Internet Banking cause. Forrester Research
estimated in 1997 that residents of five million U.S. households had
shopped for some product using the Internet. The number for 1998 was 10
million and the forecast for 1999 is that 13 million U.S. households will
shop on the Internet. Also IDC estimates the dollar volume of business-to-
consumer sales at $14.9 billion for 1998. The IDC forecast for 1999 is $31
billion. Other IDC predictions are $50.7 billion for 2000, $78 billion for
2001, $116.5 billion for 2002, and $177.7 billion for 2003. (See figure
below).
Source: Forrester Research, Inc.
Second: Electronic Commerce: business-to-business17. International Data

Corp. (IDC) estimates that the dollar volume of business-to-business
electronic commerce in 1998 was $27.4 billion. The projected volume for
1999 is $64.8 billion. IDC forecasts $138.8 billion for 2000, $270.9 billion
for 2001, $526.4 billion for 2002, and $978.4 billion for 2003. (See next
figure)
17
- Internet - http://www.usic.org/papers/stateoftheinternet99.htm
Source: IDC, Inc. (1999)
In Romania the Internet Industry has a great potential and it is continuously

growing. In the year 2001 after a general agreement among all the Internet
Providers, there was implemented a Romanian Backbone that will improve
considerably the quality of the Internet Banking services. The Electronic
Signature Law was adopted by the Romanian Parliament. That low is very
important, because it helps the movement of electronic payments of
confidential data into the Internet with confidentiality and authentication of
sender and receiver (electronic signatures instead of ololgraphic ones).
There are a lot of banks in Romania that are already providing such a
services, such as: the Commercial Bank of Greece Romania, Demir Bank
(also and with a mobile banking – using mobile phones), Bank Austria
Creditanstalt, City Bank Romania, Libra Bank, Banca Unirea, etc. So, we
estimate that soon that kind of banking service will have a great future in
Romania and all over the world.
Progress test
1. What is an e-bank activity?

2. What are the techniques of the banking operations performed through
the Videotext System?
3. List the three entities that take part in the Videotext system.
3. What are the functional characteristics of the Videotext system?
4. List some procedures by which it is possible to distribute electronic
banking products and services.
5. What are the main forms of Electronic Money?
6. List the main definitions.
7. List the main technological features of electronic money.
8. Define the legal framework in the e-services field.
9. Explain the impact of electronic money on monetary policy.
10. List the seven minimum requirements for electronic money schemes.
11. Show the main types of risk for e-banking activities and e-money.
12. What is the Romanian environment and development of e-banking
services
13. List the main elements of the new regulatory framework for ELMIs.
14. List the main elements of the new regulatory framework for Electronic
Money Institutions.
15. What are the advantages of Internet banking services from the bank
point of view?
16. What are the advantages of Internet banking services from the
individual client point of view?
17. What are the advantages of Internet banking services from the
institutional client point of view?
18. List some electronic banking services realised by the Romanian
banks.
19. What is the electronic signature under the provisions of the Romanian
legislation?
20. List the main advantages and disadvantages of Internet banking.
ANNEX No 1
Extract from the European Parliament and European Council

Directive 2000/31, concerning data confidentiality
Directive 2000/31/EC of the European Parliament and of the Council of

June 2000 on concern legal aspects of information society services, in
particular electronic commerce, in the Internal Market. (‘Directive on
electronic commerce’)/ quotation regarding the confidentiality of data and
the definition of the information societies as stated by the Community Law.
(15) The confidentiality of communications is guaranteed by Article 5

Directive 97/66/EC; in accordance with that Directive, Member States
must prohibit any kind of interception or surveillance of such
communications by others than the senders and receivers, except when
legally authorised.
(17) The definition of information society services already exists in

Community law in Directive 98/34/EC of the European Parliament and of
the Council of 22 June 1998 laying down a procedure for the provision of
information in the field of technical standards and regulations and of rules
on information society services (21) and in Directive 98/84/EC of the
European Parliament and of the Council of 20 November 1998 on the legal
protection of services based on, or consisting of, conditional access(22);
this definition covers any service normally provided for remuneration, at a
distance, by means of electronic equipment for the processing (including
digital compression) and storage of data, and at the individual request of a
recipient of a service; those services referred to in the indicative list in
Annex V to Directive 98/34/EC which do not imply data processing and
storage are not covered by this definition.
(18) Information society services span a wide range of economic activities

which take place on-line; these activities can, in particular, consist of
selling goods on-line; activities such as the delivery of goods as such or
the provision of services off-line are not covered; information society
services are not solely restricted to services giving rise to on-line
contracting but also, in so far as they represent an economic activity,
extend to services which are not remunerated by those who receive them,
such as those offering on-line information or commercial communications,
or those providing tools allowing for search, access and retrieval of data;
information society services also include services consisting of the

transmission of information via a communication network, in providing
access to a communication network or in hosting information provided by
a recipient of the service; television broadcasting within the meaning of
Directive EEC/89/552 and radio broadcasting are not information society
services because they are not provided at individual request; by contrast,
services which are transmitted point to point, such as video-on-demand or
the provision of commercial communications by electronic mail are
information society services; the use of electronic mail or equivalent
individual communications for instance by natural persons acting outside
their trade, business or profession including their use for the conclusion of
contracts between such persons is not an information society service; the
contractual relationship between an employee and his employer is not an
information society service; activities which by their very nature cannot be
carried out at a distance and by electronic means, such as the statutory
auditing of company accounts or medical advice requiring the physical
examination of a patient are not information society services.
ANNEX No 2
Extract from the European Directive concerning electronic signature
Directory 1999/93/EC of the European Parliament and of the European

Council of 13 December on Community for electronic signatures gives the
definitions for the notions operating with when speaking about this subject
as follows:
Article 2
Definitions
For the purpose of this Directive:
1. "electronic signature" means data in electronic form which are attached to

or logically associated with other electronic data and which serve as a
method of authentication;
2. "advanced electronic signature" means an electronic signature, which

meets the following requirements:
(a) it is uniquely linked to the signatory;
(b) it is capable of identifying the signatory;
(c) it is created using means that the signatory can maintain under his
sole control; and (d) it is linked to the data to which it relates in such
a manner that any subsequent change of the data is detectable;
3. "signatory" means a person who holds a signature-creation device and

acts either on his own behalf or on behalf of the natural or legal person or
entity he represents;
4. "signature-creation data" means unique data, such as codes or private

cryptographic keys, which are used by the signatory to create an
electronic signature;
5. "signature-creation device" means configured software or hardware used

to implement the signature-creation data;
6. "secure-signature-creation device" means a signature-creation device

which meets the requirements laid down in Annex III;
7. "signature-verification-data" means data, such as codes or public

cryptographic keys, which are used for the purpose of verifying an
electronic signature;
8. "signature-verification device" means configured software or hardware

used to implement the signature-verification-data;
9. "certificate" means an electronic attestation, which links signature-

verification data to a person and confirms the identity of that person;
10. "qualified certificate" means a certificate which meets the requirements

laid down in Annex I and is provided by a certification-service-provider
who fulfils the requirements laid down in Annex II;
11. "certification-service-provider" means an entity or a legal or natural

person who issues certificates or provides other services related to
electronic signatures;
12. "electronic-signature product" means hardware or software, or relevant

components thereof, which are intended to be used by a certification-
service-provider for the provision of electronic-signature services or are
intended to be used for the creation or verification of electronic
signatures;
13. "voluntary accreditation" means any permission, setting out rights and
obligations specific to the provision of certification services, to be
granted upon request by the certification-service-provider concerned, by
the public or private body charged with the elaboration of, and
supervision of compliance with, such rights and obligations, where the
certification-service-provider is not entitled to exercise the rights
stemming from the permission until it has received the decision by the
body.
ANNEX No 3
Extract from the Commission Recommendation 97/489/EC, of July,

1997 concerning transactions by electronic payment instruments and
the relationship between issuer and holder
Text:
COMMISSION RECOMMENDATION of 30 July 1997 concerning
transactions by electronic payment instruments and in particular the
relationship between issuer and holder (Text with EEA relevance)
(97/489/EC)
SECTION I SCOPE AND DEFINITIONS
Article 1
Scope
1. This Recommendation applies to the following transactions: (a) transfers
of funds, other than those ordered and executed by financial institutions,
effected by means of an electronic payment instrument; (b) cash
withdrawals by means of an electronic payment instrument and the
loading (and unloading) of an electronic money instrument, at devices
such as cash dispensing machines and automated teller machines and at
the premises of the issuer or an institution who is under contract to accept
the payment instrument.
2. By way of derogation from paragraph 1, Article 4 (1), the second and third
indents of Article 5 (b), Article 6, Article 7 (2) (c), (d) and the first indent
of (e), Article 8 (1), (2) and (3) and Article 9 (2) do not apply to
transactions effected by means of an electronic money instrument.
However, where the electronic money instrument is used to load (and
unload) value through remote access to the holder’s account, this
Recommendation is applicable in its entirety.
3. This recommendation does not apply to (a) payments by cheques; (b) the
guarantee function of certain cards in relation to payments by cheques.
Article 2
Definitions
For the purpose of this recommendation, the following definitions apply:
(a)electronic payment instrument` means an instrument enabling its holder
to effect transactions of the kind specified in Article 1 (1). This covers both
remote access payment instruments and electronic money instruments;
(b) ‘remote access payment instrument` means an instrument enabling a
holder to access funds held on his/her account at an institution, whereby
payment is allowed to be made to a payee and usually requiring a personal
identification code and/or any other similar proof of identity. This includes
in particular payment cards (whether credit, debit, deferred debit or charge
cards) and phone- and home-banking applications; (c)’electronic money
instrument` means a reloadable payment instrument other than a remote
access payment instrument, whether a stored-value card or a computer
memory, on which value units are stored electronically, enabling its holder
to effect transactions of the kind specified in Article 1 (1); (d) ‘financial
institution` means an institution as defined in Article 4(1) of Council
Regulation (EC) No 3604/93 (5); (e) ‘issuer` means a person who, in the
course of his business, makes available to another person a payment
instrument pursuant to a contract concluded with him/her; (f)’holder` means
a person who, pursuant to a contract concluded between him/her and an
issuer, holds a payment instrument.
SECTION II TRANSPARENCY OF CONDITIONS

FOR TRANSACTIONS
Article 3
Minimum information contained in the terms and conditions governing the
issuing and use of an electronic payment instrument
1. Upon signature of the contract or in any event in good time prior to
delivering an electronic payment instrument, the issuer communicates to
the holder the contractual terms and conditions (hereinafter referred to as
‘the terms`) governing the issue and use of that electronic payment
instrument. The terms indicate the law applicable to the contract.
2. The terms are set out in writing, including where appropriate by
electronic means, in easily understandable words and in a readily
comprehensive form, and are available at least in the official language or
languages of the Member State in which the electronic payment
instrument is offered.
3. The terms include at least: (a) a description of the electronic payment

instrument, including where appropriate the technical requirements with
respect to the holder’s communication equipment authorised for use, and
the way in which it can be used, including the financial limits applied, if
any; (b) a description of the holder’s and issuer’s respective obligations
and liabilities; they include a description of the reasonable steps that the
holder must take to keep safe the electronic payment instrument and the
means (such as a personal identification number or other code) which
enable it to be used; (c) where applicable, the normal period within which
the holder’s account will be debited or credited, including the value date,
or, where the holder has no account with the issuer, the normal period
within which he/she will be invoiced; (d)the types of any charges payable
by the holder. In particular, this includes where applicable details of the
following charges: -the amount of any initial and annual fees, -any
commission fees and charges payable by the holder to the issuer for
particular types of transactions, -any interest rate, including the manner
of its calculation, which may be applied; (e) the period of time during
which a given transaction can be contested by the holder and an
indication of the redress and complaints procedures available to the
holder and the method of gaining access to them.
4. If the electronic payment instrument is usable for transactions abroad

(outside the country of issuing/affiliation), the following information is
also communicated to the holder: (a) an indication of the amount of any
fees and charges levied for foreign currency transactions, including
where appropriate the rates; (b) the reference exchange rate used for
converting foreign currency transactions, including the relevant date for
determining such a rate.
Article 4
Information subsequent to a transaction 1. The issuer supplies the holder
with information relating to the transactions effected by means of an
electronic payment instrument. This information, set out in writing,
including where appropriate by electronic means, and in a readily
comprehensible form, includes at least: (a) a reference enabling the holder
to identify the transaction, including, where appropriate, the information
relating to the acceptor at/with which the transaction took place; (b) the
amount of the transaction debited to the holder in billing currency and,
where applicable, the amount in foreign currency; (c) the amount of any fees
and charges applied for particular types of transactions. The issuer also
provides the holder with the exchange rate used for converting foreign
currency transactions. 2. The issuer of an electronic money instrument
provides the holder with the possibility of verifying the last five transactions
executed with the instrument and the outstanding value stored thereon.
SECTION III OBLIGATIONS AND LIABILITIES OF THE PARTIES

TO A CONTRACT
Article 5 Obligations of the holder
The holder: (a) uses the electronic payment instrument in accordance with
the terms governing the issuing and use of a payment instrument; in
particular, the holder takes all reasonable steps to keep safe the electronic
payment instrument and the means (such as a personal identification number
or other code) which enable it to be used; (b) notifies the issuer (or the
entity specified by the latter) without delay after becoming aware of: -the
loss or theft of the electronic payment instrument or of the means which
enable it to be used, -the recording on his/her account of any unauthorised
transaction, -any error or other irregularity in the maintaining of that
account by the issuer; (c)does not record his personal identification number
or other code in any easily recognisable form, in particular on the electronic
payment instrument or on any item which he/she keeps or carries with the
electronic payment instrument; (d)does not countermand an order which
he/she has given by means of his/her electronic payment instrument, except
if the amount was not determined when the order was given.
Article 6 Liabilities of the holder
1. Up to the time of notification, the holder bears the loss sustained in

consequence of the loss or theft of the electronic payment instrument up
to a limit, which may not exceed ECU 150, except where he/she acted
with extreme negligence, in contravention of relevant provisions under
Article 5 (a), (b) or (c), or fraudulently, in which case such a limit does
not apply.
2. As soon as the holder has notified the issuer (or the entity specified by the
latter) as required by Article 5 (b), except where he/she acted
fraudulently, he/she is not thereafter liable for the loss arising in
consequence of the loss or theft of his/her electronic payment
instrument.3. By derogation from paragraphs 1 and 2, the holder is not
liable if the payment instrument has been used, without physical
presentation or electronic identification (of the instrument itself). The use

of a confidential code or any other similar proof of identity is not, by
itself, sufficient to entail the holder's liability.
Article 7 Obligations of the issuer
1. The issuer may alter the terms, provided that sufficient notice of the
change is given individually to the holder to enable him/her to withdraw
if he/she so chooses. A period of not less than one month is specified
after which time the holder is deemed to have accepted the terms if
he/she has not withdrawn. However, any significant change to the actual
interest rate is not subject to the provisions of the first subparagraph and
comes into effect upon the date specified in the publication of such a
change. In this event, and without prejudice to the right of the holder to
withdraw from the contract, the issuer informs the holder individually
thereof as soon as possible. 2. The issuer: (a) does not disclose the
holder's personal identification number or other code, except to the
holder; (b) does not dispatch an unsolicited electronic payment
instrument, except where it is a replacement for an electronic payment
instrument already held by the holder; (c) keeps for a sufficient period of
time, internal records to enable the transactions referred to in Article 1
(1) to be traced and errors to be rectified; (d) ensures that appropriate
means are available to enable the holder to make the notification required
under Article 5 (b). Where notification is made by telephone, the issuer
(or the entity specified by the latter) provides the holder with the means
of proof that he/she has made such a notification; (e) proves, in any
dispute with the holder concerning a transaction referred to in Article 1
(1), and without prejudice to any proof to the contrary that may be
produced by the holder, that the transaction: -was accurately recorded
and entered into accounts, -was not affected by technical breakdown or
other deficiency.
Article 8 Liabilities of the issuer
1. The issuer is liable, subject to Article 5, Article 6 and Article 7 (2) (a) and
(e): (a) for the non-execution or defective execution of the holder's
transactions referred to in Article 1 (1), even if a transaction is initiated at
devices/terminals or through equipment which are not under the issuer's
direct or exclusive control, provided that the transaction is not initiated at
devices/terminals or through equipment unauthorised for use by the
issuer; (b) for transactions not authorised by the holder, as well as for any
error or irregularity attributable to the issuer in the maintaining of the
holder's account.
2. Without prejudice to paragraph 3, the amount of the liability indicated in

paragraph 1 consists of: (a) the amount of the unexcited or defectively
executed transaction and, if any, interest thereon; (b) the sum required to
restore the holder to the position he/she was in before the unauthorised
transaction took place.
3. Any further financial consequences, and, in particular, those concerning

the extent of the damage for which compensation is to be paid, are borne
by the issuer in accordance with the law applicable to the contract
concluded between the issuer and the holder.
4. The issuer is liable to the holder of an electronic money instrument for

the lost amount of value stored on the instrument and for the defective
execution of the holder's transactions, where the loss or defective
execution is attributable to a malfunction of the instrument, of the
device/terminal or any other equipment authorised for use, provided that
the malfunction was not caused by the holder knowingly or in breach of
Article 3 (3) (a).
Other Electronic Banking Services
OTHER ELECTRONIC
BANKING SERVICES
D Objectives
6.1 Introduction in the Electronic Funds Transfer - EFT
6.2 The banking cards
8.2.1 General aspects
8.2.2 The typology of bankcards
8.2.3 The fraud
6.3 Card market infrastructure
6.4 Bank Clearing System in the United Kingdom
6.1. Introduction in the Electronic Funds Transfer - EFT
The Electronic Funds Transfer is a very simple electronic method by

which it is realised one of the oldest banking functions i.e. the money
transfer. We shall describe a lot of methods EFT, such as:
EFT-POS – the Electronic Funds Transfer to the Selling Points

Terminals;
Cards;
ATM - Automated Teller Machines;
Electronic Data Interchange – EDI;
Internet.
EFT-POS – the Electronic Funds Transfer at the Point of Sale

represents a system, which allows the customer to pay for goods and
services electronically without any paper vouchers’ at the time and place
where the customer makes the purchase. Thus, the funds are transferred
electronically from the customer’s account via computer in the seller’s
account.
The methods of payment are:
- Electronic;
- Instant;
- Paper-free.
The “key” to operating any EFT-POS transaction is a plastic card, such as:
- Credit cards;
- Store cards;
- Debit cards;
- Charge cards.
The main benefits of using EFT-POS for the consumer are:

Convenience
o An alternative method of payment;
o Less need to carry cash;
o EFT-POS is a system which is easy to use;
o All benefits of non-cash payments.
Speed
Using EFT-POS to make payments quicker than any other non-cash method
of payment.
Lower Bank Charges

For consumers who are liable to pay bank charges, there may be a lower rate
of charge for electronic transactions as compared to paper-based
transactions.
In the United Kingdom, the EFT-POS is a national system, which was
founded by 13 banks and building societies under the auspices of the Bank
of England. The system has been designed to be flexible and provide On-
line and Off-line transactions authorisation to suit all retailer needs.
The EST-POS objective is to operate a national transaction network, which
is both secure and uses standard equipment.
The key links in the EFT-POS chain are:
1. Customers’ plastic cards. The information about the customer, his or
her account and other details, are contained in electronic form within
the magnetic strip on the back of the card.
2. The retailer (via the terminal);
3. The retailer’s bank;
4. The customer’s bank;
5. The EFT-POS central control (Controls the flow of electronic
messages within the system and provides centralised settlement of all
transactions).
6. An automated “network” carrying the messages and linking the
whole system together.
EFT-POS is a new method of payment – the basis of a national electronic
shopping system. As such it is a move towards the cashless society – when
all payment transactions can take place without the need for any “paper”.
But, for the moment EFT-POS is intended as an alternative to existing
methods of payment (cash, cheque, credit card, etc.)
The payment procedure is a simple one, following steps1, such as:
♦ Cardholder asks to pay for goods by plastic card.
♦ Card is swiped through the terminal.
♦ The following data is captured from the magnetic stripe on the plastic
card:
- bank sort code;
- cardholder’s account number;
- expiry date on the card;
- card issue number.
1
Davies Audrey&Kearns Martin – Banking Operations, Pitman Publishing, London, 1994
♦ The amount of the purchase or refunds is keyed;

♦ The above data, together with the retailer’s special identification
number and terminal identification, is coded and then transmitted to
the EFT-POS UK Central Computer Switch.
♦ From the bank details, EFT-POS UK recognises the destination bank
and sends the electronic message to the cardholder’s bank computer
system for authorisation.
♦ The bank decodes the message, checks the card against its own files,
checks the account balance and returns in coded form, an approval to
the retailer’s terminal via EFT-POS UK;
♦ When the EFT-POS UK Central Computer Switch receives the
approval, it forwards the message to the retailer terminal so that the
transaction can be completed.
♦ At the same time, it sends a message to the retailer’s bank computer
system, advising the bank to credit the retailer.
♦ At the retailer terminal, the cardholder and cashier are advised of the
approval and the cardholder is asked to sign the advice slip.
♦ If the Personal Identification Number or signature is OK, the cashier
can complete the transaction. If there is a problem, the cashier can
telephone a help desk for guidance.
♦ At the end of the day, all cardholder transactions are collated, as are
retailer payments, and the banks must pay each other the amounts
due. This is done via accounts held by each bank at the Bank of
England.
As a conclusion, it should be mentioned that the term EFT-POS brings

together two separate terms:
EFT: Electronic Funds Transfer
An information technology system by which payments from person “A” to
person “B” take place by the use of electronic messages-without the need of
the traditional paper vouchers’.
Paper vouchers’ covers items such as bank notes, cheques, credit card sales
vouchers, bank giro credit forms, etc.
POs: Point of Sale

In other words the place where the goods and services can be purchased.
Automated Teller Machine – ATM represents a “Service till” or “Auto

bank” seen in the walls of the high street banks. Each has its own version of
the ATM, and a large network to which these and the central computer
system are linked.
The ATM is a mean of providing various services to the customer; which

can include:
o Cash dispensing (the amount requested is checked against the limit
for that day or week);
o Balance enquiry (the enquiry is transmitted through the bank’s
communication network to the central computer; disk holding the
account information is accessed; the answer is routed back through
the system to the ATM);
o Statement request
o Cheque book request.
Requests for statement and chequebook are noted and the response
produced and posted to the customer.
The customer has a card on which there is a magnetic stripe, which holds
the details of their account:
Account number
Bank/branch number
Cash limit (weekly/daily) – this is decided by the bank manager
Security
Any other relevant information.
The PIN (Personal Identification Number) which the customer uses is held
on the stripe in coded form rather than in the same form as that known to the
customer for security reasons.
The use of cards through Automated Teller Machine – ATM has the
following steps:
Customer inserts the card into the ATM;
ATM reads the stripe and confirms that the card is genuine and
accepted by the bank;
Customer punches in their PIN and this is verified as compatible
with the one stored on the card;
Customer chooses the service he/she requires;
ATM provides all the information on transactions to the central

computer several times a day. Information is processed and any cash
withdrawn debited from the customer’s account at the next update;
Customer using the wrong PIN is
- asked to try again, or
- card is retained by the ATM, or
- a stop is made on any further cash withdrawals until customer
and bank have clarified the situation.
6.2 The banking cards
6.2.1 General aspects
The origins of the bankcard have been attributed to John C. Biggins, a

consumer credit specialist at the Flatbush National Bank of Brooklyn, New
York. In 1946, Biggins launched a credit plan called Charge-it. The program
featured a form of scrip2 that was accepted by local merchants for small
purchases. After the sale was completed, the merchant deposited the scrip in
a bank account, and the bank billed the customer for the total scrip issued.
Not long after, in 1951, the Franklin National Bank in New York issued the
first modern card.
The major reasons behind rapid growth must be considered from the
perspective of the consumer, the merchant and the bank. For the consumer,
the bankcard made purchases of products and services more convenient,
especially when credit was desired to fund these purchases. Bank customers
could obtain credit for a variety of purchases without repeatedly going to the
bank for a loan. The amount owed could be paid in full each month or
extended through monthly instalments.
The merchant found the bankcard attractive because sales transactions could
be validated easily and payment guaranteed. Heavy promotion of the card
by banks and the national associations increased the sales opportunities for
merchants who accepted the cards. The associations likewise relieved the
merchants of the risk and cost of in-house credit plans.
2
Paper money substitute redeemable at face value at participating merchant outlets for
merchandise purchased.
Banks found an attractive way to extend credits to consumers through the

revolving line of credit attached to the bankcard. Geographic market areas
were expanded because banks could issue cards to customers who did not
reside near the bank. With these new customers came additional
opportunities to sell other banking products. Income from cardholders was
complemented with new income sources from merchant discounts and new
deposits from sales drafts.
Rapid growth in credit brought new level of credit losses. In many cases,
approval criteria were inadequate for numerous lines of unsecured revolving
credit. Early authorisation systems were slow and use of the card was
difficult to curtail. Nevertheless, these programs survived.
6.2.2 The typology of bankcards
The card represents a payment instrument based on electronics.
A. From the point of view of the technological characteristics, the

bankcards may be classified in:
Magnetic bankcards;
Bankcards with microprocessor.
The magnetic bankcards are manufactured from plastic and have the same
size standardised by ISO3. On the front side they have the issuer symbol and
denomination and a tri-dimensional hologram, while on the backside they
have a magnetic band and a signature panel.
The bankcards with microprocessor are also known as “Smart Cards”.

These cards contain a computer chip with memory and interactive
capability, so that the data can be updated each time the card is used in an
ATM or point-of-sale (POs) terminal.
B. From the point of view of the specific functions they have, the bankcards
may be classified in:
credit card;
debit card;
cheque guarantee card;
ATM card;
3
International Standards Organization
multifunctional card;
point-of-sale card.
The purpose of a credit card is to enable the cardholder to purchase goods

or services at a shop, petrol station, restaurant or other establishment, which
operates the scheme, without paying immediately. The holder presents his
card and signs the bill, which is sent by the supplier to the bank or credit
company, concerned for settlement. The credit cardholder receives a
monthly statement listing all the transactions for that period and he settles
for all of them with one payment, or he is possibly allowed to run an
overdraft up to a set limit with agreed terms for repayment and the charges
he will incur.
The main steps of the process are:
- The customer hands over his credit card to the supplier of the goods or
services;
- The supplier then enters details of the sale on the sales voucher (e.g.
date, description of goods or services, total cost, etc);
- The customer checks if the above details are correct – and that the total
has been filled in – and if so signs the sales voucher.
- The supplier checks that the customer’s signature matches the specimen
on the customer’s credit card, and also the expiry date of the card.
- The supplier hands one copy of the sales voucher to the customer
(together with a receipt for the sale) and returns to the customer the
credit card.
- The supplier keeps a copy of the sales voucher; this is paid into the
supplier’s own bank account. The credit card company pays the
supplier’s bank the amount due for the purchase.
After all these steps:
- the supplier’s bank sends the third copy to the credit card company. It
is then recorded as a transaction in the customer’s computer file.
- at a date fixed for each of its customers credit card companies send out
to that customer a monthly statement of what is owed.
A bank or other financial institution issues the debit card and it permits
access to a customer’s checking or savings account. The debit cards can be
used in place of a paper check and the transaction will be automatically
guaranteed because funds transfer immediately from the purchaser’s account
to the seller’s.
Debit is, of course, a financial term. Its use in connection with the card
implies access to a deposit account, as opposed to the line of credit accessed
by the bank credit card.
As noted before, the term debit refers to accessing a deposit account
typically a personal checking account, although the card can access a
savings or money market account. When used to make a purchase at a store,
the debit card takes the place of a personal cheque. The record of the
transaction appears on the customer’s checking account statement. To
validate the sale, the merchant follows authorisation procedures much like
those followed for credit card purchases.
In spite of immense attention paid to debit cards in the 1970s and early
1980s, widespread use in the market place was just the beginning. The
growth of proprietary debit cards4 is accelerating because many
supermarkets and other high-volume-cheque-cashing merchants are
beginning to accept them. Properly banks participating in regional point-of-
sale networks frequently issue debit cards. Transactions are handled outside
the national networks, and the cost of interchange, as applied to bank credit
cards transactions, is avoided.
One factor that limits the appeal of the debit card involves the consumer’s
choice to use either personal or bank funds to pay for a purchase. Not only
does a debit card access personal funds it also effects immediate transfer of
funds from the account, and so the period of processing and collection
known as float is eliminated.
Merchants that accept bank credit cards should also be willing to accept
debit cards. A merchant that follows routine authorisation procedures for the
card validates the sale and guarantees its payment. In addition, the forms
and procedures used for handling debit cards are similar to those used for
credit cards. Therefore, merchants are already familiar with the routine.
However, not all things are equal.
First, some merchants view the cost of interchange as more expensive than
the cost of handling a personal cheque. Research studies have indicated that
handling personal cheques is more expensive than the cost of interchange,
but this research typically comes from banks.
4
This card identifies a specific bank or group of banks in a regionally shared point-of-sale
network.
A second issue is that of paper transactions versus electronic transactions.

Merchants generally view the latter as less expensive because cheques have
to be handled from the store to the bank. In addition, the merchants must
pursue collection of the returned cheques. In the case of an electronic
transaction, the paper stays on site (the customer gets a receipt and the
merchant retains a copy of the transaction).
A third issue, especially for high-volume merchants, involves the speed of

checkout. Electronic debit card transactions are usually faster than
transactions made with personal cheques.
From the bank’s point of view, the debit cards offer convenience to
customers and provide a less expensive way to process deposit-related
transactions. A bank’s identity is also enhanced when cards are presented to
merchants. However, most customers enjoy the delayed payment schedule
credit cards have to offer. As a result, bankers will have to improve their
sales techniques if they want to persuade customers to access personal
deposits for their purchases.
Individual banks to permit customers to access transaction and savings

accounts 24 hours a day, every day of the year, through automated
teller machines issue the ATM cards. ATM is an acronym for automated
teller machine. Most ATM cards enable the authorised holder to perform the
following functions:
- withdraw cash from checking and savings account;
- deposit to checking and savings account;
- obtain a cash advance from a MasterCard or Visa account;
- make a loan payment, such as to a bankcard, automobile loan, or real
estate loan account;
- get balance information on checking and savings accounts or the
available credit on a bankcard or other credit account, such as a line of
credit attached to a checking account;
- transfer funds from one account to another, such as from savings
account to a checking account.
The ATM card extends banking convenience to the customer. because ATM
machines are typically on the exterior of the bank or in some cases, at a
location away from the bank, they usually operate around the clock, seven
days a week. Therefore, the customer can access accounts without having to
go into the bank. Consequently, the ATM card is called sometimes Access
card. This means, for example, that a customer can use the ATM to get
money without searching for somewhere to cash a cheque. Deposits and
loan payments can be made at night or on weekends, and the customer can
get his or her account balanced even when the bank is closed.
The cheque guarantee card enables merchants to accept personal cheques,

without the risk of recourse, provided the merchant follows accepted
authorisation and documentation procedures. Because the cheque guarantee
card is frequently attached to a line of credit associated with a personal
checking account, it is sometimes not considered a bankcard. However, the
cheque guarantee card is plastic, issued by a bank, and presented to a
merchant to validate a purchase.
To the consumer, this type of card offers another form of banking

convenience. Cheques can be cashed at merchants’ stores more easily.
These cards offer the merchants some guarantee that the cheque being
presented is valid.
The distinctive features of a true cheque guarantee card is that it does

guarantee the cheque. If a bad cheque is returned, the merchant may collect
the amount of the cheque from the bank that issued the card. However, most
cheque guarantee cards may only be used to guarantee fist-party personal
cheques and not pay roll cheques or cheques made payable to the person
holding the card.
The terms of guarantee are generally simple:
- the cheque must be a personal cheque, presented by the cheque
guarantee card holder;
- the amount of the cheque cannot exceed a specified amount;
- the expiration date on the card must not have passed;
- the signature on the card must be reasonably similar to the one on the
cheque.
Banks typically do not charge a fee for the card or cheque guarantee service.
If credit is used, the customer pays interest and fees associated with the
personal line of credit. The most customers view the cheque guarantee card
as a free service that makes cheque cashing easier.
The point-of-sale card (POs) refers to any card presented at the point of
sale, the merchant’s store or other location away from the bank. The POs
system uses communication lines and is designed to authorise, record, and
forward electronically each sale that occurs.
The POs debit card is really a combination of the cheque guarantee card
and an ATM card. If a checking account transaction can be performed at an
ATM, why not have the same functions performed at a merchant location
(provided the merchant has the necessary equipment to accommodate the
card)?
The multifunctional card has mix functions and facilities that derive from
the above mentioned types of cards.
From the issuer’s point of view, the cards may be divided in:
cards issued by banks (bankcards);
cards issued by merchants (private cards);
cards issued by other institutions or organisations (the letter of credit
international cards, the cards issued by credit institutions).
1. The bankcards
After the 1980s the holders of bankcards as well as the number of the
transactions performed through bankcards have strongly increased. In the
developed countries, efforts have been made to unify the offer and eliminate
banking competition (we must take into account the fact that some banks
issue bankcards for free). The inter-banking5 phenomenon appeared as a
consequence. This offers to each cardholder the possibility to use it at all
cash dispensers and with all the merchants, no matter the issuer.
A classification of the bankcard according to their possibilities of utilisation

may be:
Cards for cash withdrawal;
National cards;
International cards;
Prestigious international cards.
5
In France, six networks have regrouped in 1983 in two economic groups: GIE Carte Blue
and GIE Carte Vert, that have merged on 1 November 1985 and constituted GIE Carte
Bancaires.
The cards for cash withdrawal usually have two levels of utilisation:
- Level zero that allows the card to be used only for the services offered
by the issuer. They are issued for free.
- Level one that gives the possibility to use these cards at the inter-
banking network of cash dispensers. They are issued for a fee.
The national cards, called “level two cards” have the same characteristics
as the level one cards. Supplementary, they allow the payment regulation
when the purchase is made at affiliated merchants. The card may be
personal or professional and offers two options: rapid debit and ulterior
debit6.
The international cards are defined through the third level of the inter-
banking agreements and have a similar importance to those of level two
(national cards), but their utilisation is extended to international payments.
They are grouped in two networks: VISA and EUROCARD-
MASTERCARD7. Both networks offer common services and guarantees,
being more advantageous than the national ones: insurance against loss or
theft, insurance in case of travels accidents, invalidity and death.
The prestigious international cards are defined through the fourth level of
the inter-banking agreement and offer various services: cash withdrawal
from the country or abroad, the automated insurance of travels, reservation
services assured, car renting without guarantees, juridical protection, a wide
range of guarantees and insurance accompanied by higher amounts.
Each of the two networks offers its prestigious card: PREMIER for VISA
and GOLD for MasterCard.
2. The private cards
Their issuers are usually large distribution networks (supermarkets, the

leaders of correspondence sales) that are well known by the customers and
have a large market share.
Some cards are used only for some specific markets of products or services,
while others are multi-usable.
6
For an ulterior debit, the holder’s account is debited monthly, with fixed date, with a term
that may be up to 4-5 weeks.
7
Besides, MasterCard offers medical assistance and a reservation guarantee in the larges
hotel chains based on a simple phone call.
3. The cards issued by other institutions or organisations
The cards may be issued not only by banks or merchants, but also by other
partners: credit institutions, transport and telecommunications companies,
car renting companies, oil companies, insurance companies, tourism
agencies, clubs, professional services performers.
6.2.3 The fraud
Bankcard fraud has been described as a two-man war game between the
“good guy” and the “bad guy”. The good guys are the issuing and acquiring
institutions, the national associations and law enforcement agencies. The
bad guys are dishonest individuals or groups who are always on the lookout
for ways to beat the system8.
The amounts of dollars lost to fraud in the bankcard industry across the
world have drawn significantly since the beginning of 1980s. The American
Bankers Association (ABA), MasterCard International and Visa
International, and other interested parties in the bankcard business have
undertaken many efforts to help financial institutions find more effective
ways to prevent bank credit card fraud. These parties work to stop fraud in
instances where preventive measures fail. New technologies help in the
effort and procedures are continuously being refined.
However, fraudulent transactions actually occur between people. Sometimes

a dishonest person fools an honest person in the transaction, such as
unsuspecting retail clerk or a bank teller. Other times, the transaction occurs
between two dishonest people, such as a person working for the bank in
collusion with a merchant. People are involved in every fraudulent bank
credit card transaction.
A great deal of time and money are devoted to deterring criminals from
altering or counterfeiting cards in an attempt to stop the dishonest user
before he or she uses the card.
The fraud losses come directly out of the bank earnings, a concern that
reaches the highest level of bank management. Approximately 60% of fraud
losses occur before the bank personnel know that customer’s card is
8
Michael J Auriemma, Robert S Coley – “Bankcard Business”, American Bankers
Association, 1998.
missing. In fact banks post around 40% of the fraudulent transactions to

their customers’ accounts before the cardholders report their cards missing.
Thus, the bank must work harder to reduce the amounts lost to fraud each
year.
Criminals employ several methods to obtain and use cards fraudulently.

These methods include the use of:
Fraudulent applications that result in accounts being set up and cards
issued to criminals;
Lost and stolen cards used for unauthorised purchases;
Counterfeit cards;
Lost and stolen cards altered for fraudulent use;
Collusive merchants engaged in fraudulent transactions using
counterfeit and altered cards, white plastic fraud, and laundered
drafts9;
Employee fraud in which employees steal cards from inside the card
centre (bank or third-party processor), give out valid account number
to criminals, or set up bogus cardholder or merchant accounts.
Security experts in the bankcard industry continue to evaluate existing and

potential security features for the cards to improve the deterrence of credit
card fraud. Banks and card manufacturers may use any combination of the
following security features in their cards to help deter fraudulent use:
Embedded ink, visible only under ultraviolet light, helps detect
counterfeit cards –for use selectively with merchants that have a high
exposure to fraud;
Fineline printing, like that which appears on currency, makes
counterfeit more difficult because of the precision of printing;
Micro printing of bank identification codes on the cards makes
counterfeiting more difficult;
Trademarks visible only under ultraviolet light reveal counterfeit
cards;
Embossed security symbols facilitate the identification of the bank
issuing the card (often another bank’s customer account number will
appear on an altered card) and make the tracking of drafts possible
through easier identification.
9
Fraudulent transactions that are mixed with legitimate transactions for bank deposits in an
effort to hide the fraudulent activity.
A printed back identification number (BIN) above the embossed

number makes alteration of the BIN on the card readily identifiable;
Signature panels on the front of the cards make an erased signature
more obvious. It is not uncommon for sales personnel to fail to check
the signature on the back of the card with the signature on the sales
draft even though merchants agreements require them to do so;
Matched indelible account number on the back and front of cards
make counterfeiting more difficult and alterations easier to detect.
The banks have adopted their own security measures in order to reduce the
fraudulently use of bankcards. These include:
Limits for the value and number of cash withdrawals;
Limits for the trials allowed to the users that wrong introduce the
PIN;
Observance of the use of the TEF systems in order to detect the
fraud;
24 hours phone line that may be used by the customers to announce
the loss or theft of the bankcard.
As the profitability of bankcard programs has increased, so too have the

incidences of fraud. The parties are taken a much stronger stance in both
prevention and prosecution of card abuses.
6.3 Card market infrastructure
This infrastructure include the following:

1) Cash Dispenser (CD);
2) ATM;
3) Selling Points Terminals (off-line, on-line);
4) Imprinter.
The Cash Dispenser (CD) is a device that allows the authorised user to
withdraw cash-coins or banknotes.
The visible part contains:
A keyboard that allows the user to communicate his demands;
A small screen where the instructions and answers can be seen;
A hole where the cards can be introduced in order to contact the

necessary information to and from the computer;
A special hole where, by the mechanical move of a trap, the banknotes
fall.
The operations of the cash dispenser have the following steps:

The owner introduces his card in the special hole of the machine;
Than, the user must type on the keyboard his personal identification
number (PIN). The correct PIN allows him to access the information
stored in the card.
The user types the amount of money wanted, but the amount must not
exceed the maximum amount negotiated with the bank.
The dispenser provides the money in coins and banknotes.
After the transaction, the device gives back the card.
Selling Points Terminals represent working stations at the staples selling

points. They are used to take in and transmit information concerning the
payments made through them. The terminal consists of a special device- a
complete structure terminal, or made by screen, a keyboard and the
compatible electronics that can maintain the connection with the banks
computer- where the user has his account.
The Imprinter.
A less rapid way to pay using a card involves the telephone connection with
the authorisation centre and the use of an imprinter. In this case, the
merchandiser formally checks the card; the cashier calls the authorisation
centre and sends the identification elements of the card, and the value of the
transaction. The processing centre, using the satellite telecommunication
system, allows the performing of the transaction. When the authorisation
comes, the cashier makes the bill in three copies using the imprinter. The
buyer must sign the bill. After comparing the signatures, the seller gives the
shopping’s and the receipt to the client.
At the end of the day, the seller gathers all the bills, he registers them, and
he gives one copy to the bank. The bank has to pay the bills within a period
of time established by the contract.
6.4 Bank Clearing System in the United Kingdom
Every single working day all banks receive cheques payable to their
customers either across the counter or by post for the credit of their various
accounts. The banks as agents for collection have the duty of presenting all
of these cheques for payment and having credited the customer’s account,
then receiving reimbursement themselves.
The clearing system began over 200 years ago, when the clerks of the
various banks in London used to take the cheques paid in by their
customers, sort them into bank order then walk round each bank, presenting
these cheques for payment and taking back to their own bank sums of
money given in settlement. Like any other commercial activity, the business
of banking increased, not only with the number of cheques in circulation but
also the number of banks that opened in the City of London and the West
End. Thus, the clerks decided to short-circuit the system and unofficially
agreed to meet at some convenient place to exchange the cheques drawn on
their own banks: any differences in the amounts due could then quickly and
easily be settled. The banks, anxious to improve the system, hired a room
for the purpose of exchanging cheques. The system expanded and in 1833,
in 10 Lombard Street, the first clearing house was established.
This system continued10, but until 1854 the membership of the clearing
house was restricted to the private banks only.
a) Debit Clearing. The Bankers’ Clearing House in London was

established in 1833 to facilitate the daily exchange of cheques between
banks and a daily settlement. At the beginning, the Clearing House was
concerned only with the work of the private bankers but its activities
rapidly increased in the second half of the nineteenth century as the
joint-stock banks established their networks of branches. The present-
day ownership and administration of the London Clearing House is
vested in the Committee of London Clearing Bankers, i.e. Barclays,
Coutts, Lloyds, Midland, National Westminster and Williams and
Glyn’s. The Bank of England is also a member of the Clearing House,
but takes no part in its administration. On each working day, the
Bankers’ Clearing House handles more than three million cheques worth
on average about 7,000 million sterling pounds.
10
Whiting D.P. – Elements of banking, Macdonald & Evans Ltd., London, 1985
b) The Town Clearing. The work of the Clearing House is divided into
two parts, the Town Clearing and the General Clearing. The Town
Clearing handles cheques of 5,000 sterling pounds or more drawn on
offices within the City of London, i.e. within walking distance of the
Clearing House which is located in Lombard Street. All other cheques
have to go through the General Clearing. The Town Clearing is meant
to serve the needs of the institutions with the London Money Market,
and large companies such as those concerned with insurance and
shipping. These institutions deal in very large amounts and must have a
speedy system for clearance. There is an understanding that any cheque
dealt with through the Town Clearing is cleared the same day. The total
value of the Town Clearing usually exceeds 90 % of the total daily
clearing but the number of items involved is quite small in comparison
with the volume of work handled by the General Clearing.
c) The General Clearing. Branch banks sort into bank order all the
cheques drawn on other banks that are paid in by their customers and
sent them up to their own Clearing Department in London. Each bundle
is accompanied by a list giving the total as well as the value of each
individual cheque. A Clearing Department of one of the Clearing Banks
will receive from each of its branches a bundle of cheques drawn on
each of the Clearing Banks. The Clearing Department having checked
the totals of the bundles will amalgamate them so as to produce a large
“parcel” of cheques on each of the banks. The listing slips will
accompany each of these large parcels for all of the bundles and a
summary of them. The Clearing Department then delivers the parcels of
cheques to the representatives of the other banks at the Clearing House.
These are then taken from the Clearing House to the respective Clearing
Departments of the banks where the totals are agreed with the listings.
After this the cheques are sorted into branch order and dispatched to the
branches on which the cheques are drawn. Settlement between the banks
for the General Clearing takes place the day after the cheques has
actually been exchanged. This is because the cheques do not reach the
branches on which they are drawn until that day and they are then either
paid or returned unpaid. Unpaid cheques are returned direct to the bank
branch where cheques were paid in.
d) Credit Clearing. Since 1960 the Bankers’ Clearing House has operated
a credit clearing system which works in a rather similar fashion to the
General Clearing but the vouchers that are used represent payments due
to, and not payments received from other banks. They are the credit
transfers under the Bank Giro system. Each day branches remit bundles
of credit transfers to their Clearing Departments in London and these are
handed over to the representatives of the other banks to be dealt with in
a similar fashion to cheques.
e) Computer Clearing. The Clearing and Scottish banks recently
established the Bankers’ Automated Clearing Services Ltd., which is a
company that operates a clearing system based on the use of computers.
Instead of preparing transfer vouchers in order to debit the account of
one person and credit the account of another, such as the standing
orders, direct debits and salary payments, the items are put on the
magnetic tapes. They then pass through Bankers’ Automated Clearing
Services and in effect pass from the paying bank’s computer to the
receiving bank’s computer. Now that the banks have computerised their
customers’ accounts it is possible for transfers to be made in this fashion
and there is obvious room for rapid developments in the use of the
technique. An ultimate possibility is for the larger shopkeepers to be
able to debit a customer’s bank account directly by a computer link.
f) Daily Settlement. At the end of each working day it is necessary for
each of the banks to summarise all of the transactions with each of the
other banks that have resulted from the Town Clearing, the General
Clearing and the Credit Clearing and the Bankers’ Automated Clearing
Services. On the daily statement all the balances due from the other
banks are listed on the debit side and on the credit side all payments due
to other banks are listed. These statements are totalled and the difference
between the two sides represents the net balance due from or to all the
other banks collectively. All that is then necessary is for the bank’s
account at the Bank of England to be debited or credited with this sum.
Obviously the overall position must be that the total of the debits to
clearing bank accounts at the Bank of England must be equal to the
credits, and at the end of the day after these transactions have been dealt
with nothing is owed by one bank to another in respect of the day’s
clearing transactions.
g) Local Clearings. In addition to the Town Clearing, the General
Clearing, the Credit Clearing and the B.A.C.S. Clearing, there are local
clearing arrangements and a bank’s own settlements between branches.
Banks located within a short distance of each other, in the same High
Street maybe, will clear cheques drawn upon one another. A batch of
cheques will be handed over in exchange for a single claim form, which
can be passed through the General Clearing. A bank’s Clearing

Department will receive a batch of cheques each day from every branch
that has been drawn by customers of other branches. Likewise, a batch
of credit items will be received that are to be paid over to customers at
other branches. The accompanying lists are checked and the vouchers
sorted out and sent to their respective branches. Each branch is debited
or credited accordingly in the Branch Accounts at Head Office. The
Clearing Department will also receive a batch of miscellaneous cheques
and payments warrants, which are cleared by direct presentation by
messengers from the Clearing Department.
Progress test
1. What is the Electronic Funds Transfer?

2. What is the Automated Teller Machine?
3. What are the magnetic bankcards?
4. What are the bankcards with microprocessor?
5. List the steps of the credit card process.
6. What are the cheque guarantee cards?
7. What are the ATM cards.
8. What is the fraud in the cards field? Explain and describe.
9. Describe the infrastructure of cards
10. Who owns the Bankers’ Clearing House?
11. Describe the Town Clearing.
12. How does the General Clearing differ from the Town Clearing?
13. Describe the Credit Clearing. What is the fundamental difference
between the Credit Clearing and the Debit Clearing?
14. What was the purpose of the establishment of the Bankers’ Automated
Clearing Services Ltd.? How might its services be developed?
15. How do the London Clearing Bankers settle their daily transactions?
16. Describe the local clearing, and the inter-branch clearing arrangements.
Business of Banking
BANKER - CUSTOMER
RELATIONSHIP
D Objectives:
7.1 Introduction
7.2 Deposits and bank accounts – general overview
7.3 Bank’s duties and rights in the United Kingdom
7.4 Customer’s obligations to his bank in the United Kingdom
7.5 Banking procedures of opening an account in the United

Kingdom and Romania
7.6 Procedures for the opening of “adults as individual customers”

in a Romanian bank
7.7 Customer due diligence for banks

Business of Banking
7.1 Introduction
Banking deals with people and their money. The people who use banks are
called “customers”, a term which is different from “client”, the noun used
by accountants and solicitors to describe persons who employ them. The
term “customer” emphasises the need for services.
Who is a customer?
A person becomes a customer of a bank when he/she goes to the bank with
money or cheques and asks to have an account opened in his/her name and
the bank accepts the money or cheque and is prepared to open an account in
the name of that person, after which he/she is entitled to be called a
customer of the bank. So, a customer is clearly someone who uses the
services of a bank.
The Banker
There is no clear descriptive definition of a bank in either the statute or case
law, although the use of the word “bank” or “banker” in various pieces of
legislation is of some help. For example, the Bill of Exchange Act 18821
says that a banker is: “ any person whether corporate or not who carries on
the business of banking” The Agricultural Credits Act 1928 states: “A bank
can be any firm, incorporated company caring forward banking business
which is approved by the Ministry of Finance”
Under the Banking Act 1979, the supervision of the deposit taking
institutions is exercised by the Bank of England, and there are three classes
of such institutions2: recognised banks, licensed deposit taking institutions
and exempt bodies. In this later category come the Bank of England itself,
the National Savings Bank, the Trustee Savings Bank, the building
societies, the insurance companies etc.
Recognised Banks
To be granted recognition, a bank must satisfy the Bank of England as to its

standing and reputation in the financial community, with special reference
to the ability and competence of its management. It must also have capital
issued and reserves of at least £ 5 million and adequate level of solvency for
1
In the United Kingdom.
2
Jacob Brian – An introduction to banking, Mackays of Chatham, Kent, London, 1990,
p. 185
Business of Banking
the extent of its operations. The Bank of England will also take into account
the extent of the banking service offered and the degree of specialisation.
Among the basic services required are the acceptance of deposits, lending,
foreign exchange transactions, and bill finance, investment management and
corporate financial services, although the Bank of England has discretion of
not insisting upon the provision of all of the last named.
The first two, however, are essential. Such a body is authorised to use the
words “bank”, “banker” in describing itself.
Licensed deposit – taking institutions
There are smaller undertakings and in order to obtain a license, a deposit –

taking institution must satisfy the Bank of England that its business is being
conducted in a manner that the directors and management are fit to and
proper persons. Such a body must have an issued capital and reserves of at
least £ 250,000 coupled with a good trading record. In deciding whether to
grant a license or not, the Bank of England will take account of balance
sheet ratios, liquidity, and the matching of liabilities and assets. Upon
obtaining its license, the institution may trade and accept deposits from the
public for whose protection this legislation was enacted, following the
secondary-banking crisis in the United Kingdom in mid 1970s.
As a conclusion
What is a banker?
A banker is someone who works in a bank.
What is the banking business?
The banking business means the business of receiving money, on current

savings deposit or other similar account, money which is repayable on
demand by order, cheque, or draft, and money which will be invested by
way of advances to customers or otherwise.
Banker – Customer Relationships
The relationship of a bank with its customers gives rise to important legal
rights and duties quite apart from any commercial considerations.
Business of Banking
The basic and perhaps most common relationship between a banker and his
customer is that of debtor and creditor. The bank has duties and rights3 and
the customer has, at the same time, obligations to his bank.
7.2 Deposits and bank accounts – general overview
The basic functions of banks are to accept deposits, transfer funds and
facilitate transactions between different parties. Therefore, banks may offer
a large variety of services including deposit accounts, credit card, lending
facilities, funds transfer, foreign currency sales, traveler’s cheque, payments
and government project funding, taxes and fines collection, executor of
wills, safe custody, investment transactions, discounting of bills, trust,
advice on investments and business, clearing systems, indemnities, opinions
and replies to status enquiries etc.
Sale Custodian
Sale custody or bailment is the oldest service the banks can offer. It means
that a property is preserved and returned upon demand in the same
condition as it was deposited, the customer being the bailor and the banker
the bailee. Moreover, all clearing banks can offer night safe facilities
through selected branches for the safe keeping of money overnight.
Indemnities
There are instances when even a clearing bank may give guarantees or
indemnities to third parties in respect of its customer's liabilities, especially
for good customers having sound financial positions.
Status Enquiries
Banks are obliged to keep their customers' affairs secret and disclosures are
possible only with customer's consent. As a rule, opinions are not given
directly to an individual but to other bankers or certain recognized trade
protection organizations.
As banks strongly tend to increase their business they are highly interested
in drawing in more and more deposits so as to be able to fund lending and
investment activities. For the purpose of attracting funds from individuals
and companies, banks offer a large variety of personal and business
3
Palfreman David – Banking: The legal environment, Pitman Publishing, London, 1994,
p.102
Business of Banking
accounts and give their customers statements of account showing the

account balance, at regular intervals or on demand.
Current Accounts
The current accounts are also known as cheque accounts and offer a low
interest rate or no interest at all. As a result, they represent a low-cost fund
for banks. Both individuals and corporations open them.
Budget Accounts
These accounts are separate nominated cheque ones and are specifically
used for paying bills such as for household expenses, telephone, gas,
electricity, taxes, insurance etc., by monthly transfers or cheque drawing.
Credit cards
They are convenient for both banks and customers as they are easy to bear
and use. Banks receive interest on the amounts advanced to customers as
well as commission from the shopkeepers accepting credit cards in the
payment for goods and services.
Savings Accounts
They are sight accounts similar to the current ones but as they represent
medium or long-term deposits the rate of return is higher. In the corporate
banking, this type of accounts can be also used for night deposits or payroll
payments.
Term Accounts
This category of deposits has the advantage of a higher interest rate for
customers and can be used as a guarantee for loans as well. As the term
accounts are not payable at any time, they offer higher return for depositors
and represent an adequate medium or long-term financing source for banks.
Certificates of Deposit
Specifically, they require a small amount of money, can be changed into
cash at any moment and their ownership can be transferred by consequently
losing part of interest.
Restricted-Close Accounts
Within such an arrangement, the depositor is not allowed to raise the money
until a certain term elapses.
Business of Banking
Student and Youth Deposits

They represent an incentive for promoting savings among young people, on
one hand, and, on the other hand, provide necessary money for progress in
their professional careers; they have a higher interest rate.
Foreign Exchange Accounts

These accounts are specific to the commercial customers of the banks as the
transactions in foreign currency are expanding due to the globalization of
economies and deregulation in funds transfers between countries.
Sweep Accounts
They are particular types of accounts where balances exceeding a certain
level can be transferred into money-market funds; they are mainly offered
to major customers.
Cash Management Accounts

This type of accounts specifically combines a brokerage account with a
bank one. These accounts offer customers a number of facilities such as
daily interest on account balance, Visa debit card, cheque facilities or
instant loans at brokerage interest rates.
Revolving Credit Accounts

They are special accounts where customers can pay in fixed amounts of
money monthly and give depositors the option of withdrawing several
payments by cheque every month.
Office Accounts
Banks usually open such accounts for professionals such as solicitors,
accountants, architects, doctors etc. who need them for their daily
accounting practice.
Similarly, special accounts may be opened for administrators, executors,

trustees and supervisors on the condition that they are personally liable for
any borrowing approved by creditors and beneficiaries.
Estate Agents Accounts

In Great Britain, estate agents can open a separate trust account in
pursuance of law where they keep the money from their clients in order to
use it as pre- contract or contract deposits.
Business of Banking
Insurance Broker Accounts

Except for the ones who are members of Lloyds, the insurance brokers are
required to open separate current or deposit accounts for the money used in
insurance transactions. Such insurance broker accounts may be also used for
receipt of premiums on policies as well as for payments in respect of claims.
Joint Accounts
They represent accounts opened by two or more parties and the most
common ones are run by husbands and their wives; withdrawals can be
made upon a clear authority given to the person intending to take out the
money.
Company Accounts
Public limited or private limited companies constitute the most important
customers of banks as they need banking services for their trade activities
and business operations such as payments to suppliers, guarantees to
international partners, safe custody of excess cash as well as funds for
performance in accordance with the company objects. In this respect, they
run various deposit accounts available to corporations, namely current and
savings accounts, certificates of deposit, repurchase agreements, credit
accounts, foreign exchange accounts as well as all new types of deposit
accounts such as sweep and cash management accounts.
In order to open an account, companies are obliged to lodge with the bank a
resolution passed by directors, a company mandate, the Certificate of
Incorporation, the Memorandum and the Articles of Association.
Business accounts can be also opened by sole traders and partnerships

requiring working capital for trading, finance for repairs, refurbishment or
purchase of new fixed assets or capital items like computers and cars.
Single signature of the proprietor or joint signatures of the partners is
needed for opening such accounts.
Accounts for Unincorporated Entities

The unincorporated entities are associations, clubs or societies having
separate identity in law which can open accounts by mandate as they are
usually conducted by members or a committee and use them for shorter or
longer periods.
Business of Banking
Nostro and Loro Accounts

When currency is transferred all over the world through correspondent
banks the cash becomes titles of ownership. The accounts of the
correspondent banks are known as nostro and loro accounts; the bank
maintaining the nostro account is the one where the debit and credit entries
are performed, while the foreign bank refers to such an account as loro
meaning your account with us. When such inter-bank accounts are used, the
clearance is carried out by cable, telex, and fax requests or by SWIFT
messages.
7.3 Bank’s duties and rights in the United Kingdom
These may be summarised as follows:
- provided that the customer’s cheques are properly drawn, the bank must
honour the cheques to the amount of the balance or if the account is
overdrawn, to the agreed limit;
- the bank is entitled to charge its customers reasonable commission for

services rendered to them, and to charge interest on loans made to them,
except where special arrangements have been made;
- to be indemnified by its customers for expenses and liabilities incurred

while acting for them;
- to exercise a lien4 over any of its customers’ securities that are in its
possession, other than those deposited for safe custody, for any money
owing to it;
- a bank must maintain strict secrecy about its customers’ affairs, both
while the account is open and even after it had been closed;
- the bank must give reasonable notice to its customer, before closing an
account, which is maintained in credit;
- to render statements of account to its customer periodically or upon

request;
4
In the United Kingdom, it is a right to retain possession of the property of another in lieu
of payment due from that person.
Business of Banking
- a bank has no obligations to third parties, arising out of the duty to pay
its customer’s cheques;
- to collect cheques and other normal banking instruments for its customer
and to credit the amounts collected to his account;
- To exercise proper care and skill in carrying out any business it has
agreed to transact for its customer.
7.4 Customer’s obligations to his bank in the United Kingdom
The main customer’s obligations to his bank are:
- the customer is under the duty to exercise reasonable care when drawing
his cheques, to help prevent fraud or forgery;
- the customer must go to his bank when he requires payment; it is not the
incumbent on the banker to seek out the customer;
- before drawing the cheques, the customer must ensure his account is put
in funds to meet it;
- A customer must pay reasonable interest and commission and other

charges for banking services and this is implied when he/she opens an
account.
7.5 Banking procedures of opening an account in the United Kingdom

and Romania
a) Before opening either a current or a deposit account in the United

Kingdom, a bank must be satisfied as to the character and standing of
the applicant and know his employer’s name and nature of his
employment. This information can be obtained either by a personal
introduction from an existing customer or another branch or bank; or by
taking references, usually two, one of which should be from the
applicant’s employer. In the latter case, if the referee is unknown to the
banker, the authenticity of the reference should be checked, for
example, through the referee’s own banker. Accounts are frequently
opened on production of satisfactory identification, e.g. driving license
or passport.
Business of Banking
Banks differ as to the exact procedures and formalities involved in opening

an account. The following are the standard opening formalities:
1. Specimen signatures of all parties to the account must be obtained.
2. A mandate covering all operations on the account must be obtained if it

is other than a sole amount.
3. A chequebook should only be issued when a satisfactory introduction or

references have been obtained and checked and any cheque opening the
account cleared.
4. A cheque guarantee card should only be issued after the bank has
established that the account will be run in a regular and responsible
manner, or where there is no doubt about the person’s integrity and
responsibility as an account holder.
5. If possible, commission and interest charges should be agreed when the

account is opened in order to avoid having to rely on a banker’s implied
right to recover reasonable charges and commission.
While all banks are anxious to increase their business and draw in deposits,
it is necessary to exercise a degree of caution before opening an account and
affording full “banking facilities”. No prudent banker would open an
account5 immediately on the mere request of a stranger, as there would be
many risks in conducting an account for a rogue.
For common sense reasons therefore, the most important requirement upon
opening an account is that the banker should have a satisfactory introduction
to his new customer, and this is commonly called a “reference”. Recently,
however, some banks have surprisingly decided to dispense with the taking
of references and are prepared to open accounts for new customers provided
that the stranger “proves” satisfactorily the identity and provided that upon
carrying out a credit reference bureau search an negative reply is not
received.
Presumably, those banks which have reduced their standard of care this
way, have been prepared to do so on reasoning that the new procedures will
5
Palfreman David – Banking: The legal environment, Pitman Publishing, London, 1994,
p.102
Business of Banking
reduce the costs of opening a new account and will be less inhibiting to
prospective customers.
Except for regulated agreements under the Customer Credit Act 1974 (in
United Kingdom), where the duty is a statutory one, it is part of the implied
contract between the banker and his customer that the banker will provide a
statement of the account from time to time, or when asked to do so, by his
customer.
The modern practice is to issue computerised statements and past books are
seldom used. When a customer wishes to authorise another person to sign
on his account without becoming a party into it, it will be necessary a
special written authorisation of the customer to the bank.
The authorisation becomes void upon death, bankruptcy or mental

incapacity of the customer, and any cheques drawn by any third party
should then be returned unpaid by the bank with the answer “Account
holder deceased” or “refer to drawer” as appropriate. A customer can close
his account when he wants to, by withdrawing the funds and paying his
bank charges to date.
b) In Romania, there is usually a contract (see Annexes No. 1, and 2)

between the bank and its customer. It appears upon consideration to
include the following provisions:
¾ the bank undertakes to receive money and to collect bills for its
customer’s account;
¾ the proceeds so received are not to be held in trust for the customer, but
the bank borrows the proceeds and undertakes to repay them;
¾ the promise to repay is to repay at the branch of the bank where the
account is kept, and during the banking hours;
It is a term of the contract that the bank will not cease to do business with
the customer except upon reasonable notice. The customer, on his part,
undertakes to exercise reasonable care in executing his written orders so as
not to mislead the bank or to facilitate forgery.
Business of Banking
Categories of customers:
A - Natural Persons/Physical Persons (individuals)
B - Legal Persons/Legal Entities (companies)
In Romania, the commercial banks have the following procedures, in order

to open an account.
7.6 Procedures for the opening of “adults as individual customers”

in a Romanian bank
When a member of the public applies (in Annex No. 3 you can seen models
of application for opening different types of accounts with a bank,
Romanain legal entity) to a bank to open an account, the bank has a primary
duty to satisfy itself on the following points:
1. Verification – check the prospective customer’s identity :
• “Is he the person he claims to be?”
• “Is he legally capable of opening an account in his own name?” (Is

he a minor, or under legal disability?)
• “Is he self-employed or the employee of a company or other

statutory body or organisation”?
• “Is he a proper person the bank would like to do maintain a bank

account for”? (A bank is not under any legal obligation to enter a
banker/ customer relationship).
In practice, there are several steps to follow:
Step one:
1. Customer verification ( identity card, recommendation letter –

reference)
2. Verification of the legal capacity of prospective customer (minor – adult

signature)
Business of Banking
3. Integrity (Is he a fir and proper person to be entrusted with a cheque

book?)
Step Two:
1. As soon as satisfactory references have been obtained, the account may

be opened.
2. The new customer should be invited to complete a “signature card.”

This card contains “specimen” of the customer’s signature. Also, the
customer should be asked to complete a detailed application form
providing the bank with full details regarding his personal and business
life.
3. The bank signs its “acceptance” when it is satisfied with the references
given and when it notifies the customer that the account had been
opened in his name.
Statements and General Requirements
Many branch customers inquire about the status of the account under the
following circumstances:
a. Before they draw a cheque on their account;
b. They may wish to certify the credit/debit balance on their account for
reconciliation purposes;
c. They may wish to confirm that a particular payment has been made into
their account (or that a certain withdrawal has been effected) before
presenting a cheque for payment.
d. They may ask for a statement of their account with the branch for
personal reasons.
Business of Banking
Customer inquiring at counter
The procedure is as follows:
1. The customer should be supplied with a copy of the bank’s “Account

inquiring form” and asked to sign it specifying the type of information
he requires.
2. The signature should be checked against the branch’s records (i.e. the
signature card.) Once satisfied about the correctness of the signature, the
required information should be furnished, preferably, in a sealed
envelope and passed on the customer.
It is established practice in most banks that all inquiries or information

about customer’s statement to be furnished only after the customer had
signed the above request form and his signature had been verified as a
means of certifying his identity.
Rules and Regulations

¾ The Banker-Customer relationship once established it is often a long
term one. (It may even continue after the customer’s death, when the
bank acts in the capacity of executor or trustee of the deceased
customer’s wealth);
¾ It should always be remembered that the bank is not under legal
obligation to accept every applicant as a customer.
¾ The banker must be satisfied with the responses to all inquiries before
agreeing to open an account for a prospective customer.
¾ Banks will satisfy themselves about the identity of a person seeking to
open an account, in order to protect themselves, their customers and
general public.
¾ All banks should institute effective procedures for obtaining
identification from new customers.
7.7 Customer due diligence for banks
Supervisors around the world are recognising the importance of ensuring

that their banks have adequate controls and procedures in place so that they
know the customers with whom they are dealing. Adequate due diligence on
new and existing customers is a key part of these controls. Without this due
Business of Banking
diligence, banks can become subject to reputational, operational, legal and

concentration risks, which can result in significant financial cost.
In reviewing the findings of an internal survey of cross-border banking in

1999, the Basel Committee identified deficiencies in a large number of
countries’ know-your-customer (KYC) policies for banks. Thus, the Basel
Committee asked the Working Group on Cross-border Banking to examine
the know-your-customer procedures currently in place and to draw up
recommended standards applicable to banks in all countries.
Sound know-your-customer procedures must be seen as a critical element in
the effective management of banking risks. The know-your-customer
safeguards go beyond simple account opening and record-keeping and
require banks to formulate a customer acceptance policy and a tiered
customer identification pogramme. These procedures constitute an essential
part of sound risk management (e.g. by providing the basis for identifying,
limiting and controlling risk exposures in assets and liabilities, including
assets under management). Certain key elements should be included by
banks in the know-your-customer procedures. Such essential elements
should start from the banks’risk management and control procedures and
should include:
1. customer acceptance policy;
2. customer identification;
3. on-going monitoring of high risk accounts, and
4. risk management.
Banks should not only establish the identity of their customers, but should
also monitor account activity to determine those transactions that do not
conform with the normal or expected transactions for that customer or type
of account.
Banking supervisors must determine if banks have adequate policies,
practices and procedures in place, including strict “know-your-customer”
rules, that promote high ethical and professional standards in the financial
sector and prevent the banking from being used, intentionally or
unintentionally, by criminal elements.
Financial institutions should develop programs against money laundering.
These programs should include, as a minimum:
Business of Banking
(i) the development of internal policies, procedures and controls,

including the designation of compliance officers at management level,
and adequate screening procedures to ensure high standards when
hiring employees;
(ii) an ongoing employee training programme;
(iii) an audit function to test the system.
Progress Test
1. Who is a bank customer?
2. What is a banking business?
3. What are the bank’s duties and rights?
4. List the customer’s obligations to his bank.
5. Describe the banking procedures of opening an account in the United

Kingdom.
6. Describe the banking procedures in Romania.
7. What are the procedures for the opening of “adults as individual

customers”?
8. What are the key elements included in the know-your-customer

procedures?
9. Describe the contain of a contract concluded between the bank and its
customer.
Business of Banking
ANNEX No 1
AGREEMENT FOR A BANK DEPOSIT

Completed today,................., 200....
Between the contracting parties:
The Bank “X” SA, which has the headquarters at ……………………..

Street represented by Manager ……………….. and the Chief Accountant
………………….., named “trustee” in this agreement, as a party, and:
____________________________________________________________
(The first and the last name of the natural person, the name of the artificial
person)
living in_____, district_____, sector__, released on___, by____, which has

the residence in___, district____, sector____, incorporated in the Trade
Register under no., represented by____, named “depositor” in this
agreement, as another party.
By virtue of the provisions of the art. 1591 and of the Civil Code, this bank
deposit agreement was completed under following conditions:
Art. 1: The object of the agreement:
1.1. The object of this agreement is the depositor to form a bank deposit for
the trustee in amount of lei________, with an interest rate of ____% annual.
Art. 2 The period
2.1. The deposit is made for a period of_____ days, starting with the date
of____.
Art.3.The legal obligations of the parties:
A. The trustee committed himself to:
3.1. Open for the depositor a separate account for every deposit that he
makes.
Business of Banking
3.2. Receive the money as a deposit and to hand the proving acts of the
deposit.
3.3. Keep the secret about the deposit and not to provide proving
information about this only if the depositor agrees with that and only in
special cases provided by law.
3.4. Release the deposit if the depositor asks for that and to guarantee the
deposit.
3.5. Pay the interest specified at Art. 1 to the depositor.
B. The depositor commits himself to:
3.1. Respect the level and the period of the deposit, provided at Art. 1 and
Art. 2
3.2. Ask for the extend or the liquidation of the deposit at the expiring date
of the deposit, or else the deposit is considered a new deposit, on the same
period and under the same conditions provided in this agreement.
Art. 4 Special Clauses
4.1. The interest of the deposit is calculated monthly (a month being

considered as 30 days).
4.2. If the depositor asks for reimbursement of sums from the deposit before
the expiry of the period for which it was made, the trustee is authorised to
recalculate the interest at the level of the sight interest.
4.3. The depositor vests Mr./Ms._________, the son/daughter of

Mr._________ and Ms. ___________, born on the ____________, in
_______________, to withdraw the hole amount, or a partial amount from
this deposit, including the relevant interest.
Art. 5 Final provisions
5.1. This contract can be modified only if both parties agree.

Business of Banking
5.2. The contract may be terminated by any party’s wish, if that party
communicates this in writing to the other party, without any other formality.
The present agreement was completed in two original patterns, every party
having one of it.
TRUSTEE, DEPOSITOR,
MANAGER,
CHIEF ACCOUNTANT,
Business of Banking
ANNEX No 2
MISR ROMANIAN BANK

On...............................200..
Egyptian Joint Stock Company
Account No........................
Bucharest Branch
APPLICATION TO OPEN AN ACCOUNT
Manager of Misr Romanian Bank
Dear Sir,
Please open a .................. account in the name of .... with you and I accept to
deal with you according to the general conditions of the account mentioned
hereunder which are considered a complementary part of our dealings with
the Bank. They are as follows:
1. The correspondences of the Bank are considered to have reached the

client as soon as they are sent to him by mail at the latest address given
by him to the Bank.
2. The debtor statements of accounts are sent monthly to the client and the
creditor once every six months till the end of June and the end of
December every year.
3. The debtor interests are charged and passed monthly to the account
considering the year as having 360 days and the creditor interests every
six months till the end of the year considering it as having 365 days
besides the commission and expenses such as mail, cables, telephones,
stamp duty etc.
4. The Bank has the right to close the client’s account at any time without
giving any reasons. In this case, the client should either withdraw his
money from the Bank during the fixed time or the Bank will have the
right to deposit what the client owns at the safe of the court. If the
Business of Banking
account is closed, the client should return the remaining cheques without
using them.
5. All the different account opened at the Bank (Head Office and
Branches) in the client’s name are considered as indivisible units. Also
all the property of the client at the Bank such as cash, bills, securities,
goods etc. are considered as mortgaged in favour or Misr Romanian
Bank and a guarantee for the disbursement of all his liabilities.
6. The client has to authenticate the statement of his account sent him by
the bank within fifteen days from the date of sending the statement (with
the exception of the normal period of travel) or send a complaint
including reasons, during the same period, otherwise, the statement of
account will be considered correct and agreed upon.
7. The bank is entitled to amend the rate of the creditor or debtor interest at
any time upon an ordinary notice.
8. The client draws his properties from the bank by means of cheques
which he demands from the bank, and the client alone is responsible for
the loss, theft or illegal use of cheques given to him by the bank or
drawn to its bearer. Consequently, the client states that he will encase
his deposits at the bank by means of the above mentioned cheques
bearing his own signature or by banking receipts which he personally
signs before the concerned employee. If he chooses to authorise one
person or more in all or some of his rights with the bank, he should
undertake that this authorisation should be one of the bank’s
authorisations, its kind, the number and the place of its authentication
and the name of the deputy, his address, profession and grade of his
relationship if it exists. If he cancelled the authorisation he must notify
the bank thereof by a registered letter. If is well understood that the bank
will not authenticate the authorisation in any of its shapes in changing
the address or the correspondence of the client for it is agreed upon from
now on that changed in the address of the correspondence should be
done according to an application personally signed by the client. It is
also agreed upon that the bank will not authenticate any authorisation of
the client presented to it if the bank does not receive a notice from the
client of its enforcement according to what is mentioned above. The
bank will also continue using the authorisation unless they receive a
notice from the client of its cancellation in line with the preceding
Business of Banking
details. All this is effected on the client’s responsibility without any

responsibility on the bank.
9. The number of the client’s current account is the same number of the file
in which his securities are deposited, and the bank is entitled to charge
the deposit costs on them as from the date depositing according to the
existing tariff.
10. It is agreed upon that the client is not entitled to use his account in
advanced maturity credit operations (i.e. issuance of cheques payable at
an advanced date), or repeatedly issuing cheques when the account is
overdrawn, otherwise the bank is entitled to close the account
automatically without previous notice.
11. I thereby authorise Misr Romanian Bank to collect the value of all
coupons cheques and bills, and I guarantee its correctness and the
authenticity of the signatures shown on them. I also authorise Misr
Romanian Bank to purchase or sell the securities, bonds and goods, to
open credits and other banking operations and credit then to my current
account held with them. Orders issued by me to the bank concerning
these banking operations and others are to be considered as an execution
of this authorisation.
12. I hereby authorise Misr Romanian Bank to carry out the clearing among
our various debtor obligations (whether we are debtors or guarantors)
and our creditor balances, if any, held with them, and this is to be
effected at whatever time suitable to the bank even before the date of
maturity with full authority to the bank, needless of any notice, excuse
or approval.
Name and Title.................................................................................................

Father’s Name..................................................................................................
Grandfather’s Name.........................................................................................
Nationality........................................................................................................
Profession.........................................................................................................
Work address....................................................................................................
Residence..........................................................................................................
Business of Banking
Kind of account................................................................................................
Rate of interest (creditor)% year 360 days provided that.................................
Rate of interest (debtor)% year 360 days provided that...................................
Remarks............................................................................................................
Information.......................................................................................................
Name of the recommended...............................................................................
His address.......................................................................................................
Recommender’s signature................................................................................
The client’s signature.......................................................................................
The concerned employee signature..................................................................
Business of Banking
ANNEX No 3
APPLICATION FOR OPENING A CURRENT ACCOUNT

FOR A ROMANIAN LEGAL ENTITY
CERERE PENTRU DESCHIDERE DE CONT
PENTRU PERSOANÃ JURIDICÃ ROMÂNÃ
Date/Data:___/____/_______
day month year
zi luna an
♦Name/ ___________________________________________
Denumire _________________________________________________
♦ Address/ ___________________________________________
Sediul___________________________________________
♦ Established as Romanian Legal Entity ♦ Organizată ca persoană juridică română

commecial companies societăţi comerciale
regie autonome regii autonome
associations and foundations asociaţii şi fundaţii
We kindly request and authorize you to open a social cpital account on our name in/
Vã rugăm şi vă autorizăm să deschideţi un cont curent în numele nostru în:
ROL / Lei
For this purpose we attach hereto the company In acest scop anexãm documentele de constituire
incorporation documents as they are specified on a societãţii menţionate pe verso.
the reverse side.
We hereby mutually agree that our account is Sunt de acord cu faptul cã acest cont
governed by the bank’s General Business funcţioneazã sub incidenţa Condiţiilor Generale
Conditions of which we know and which we de Afaceri ale bãncii pe care le cunoaştem şi pe
accept unreservedly. care le acceptãm fãrã rezerve.
Forreign Currency / Valută _____________________________________
Signature/Semnătura: _______
Stamp/Ştampila
To be filled by the bank / se completează de către bancă
Bank’s approval for the accounts no./

Aprobare pentru deschiderea conturilor nr.
Signature/
Semnătura Date/Data: ____/____/_____
zi luna an
Business of Banking

FOR A FOREIGN LEGAL ENTITY
PENTRU PERSOANĂ JURIDICĂ STRĂINĂ
Date/Data:___/____/_______
day month year
zi luna an
♦Name/ ___________________________________________
Denumire _________________________________________________
♦ Address/ ___________________________________________
Sediul ___________________________________________
♦ Established as Foreign Legal Entity ♦ Organizată ca persoană juridică
română
associations and foundations societăţi comerciale
corporations regii autonome
commercial reprezentations and reprezentanţe sau organizaţii
organizations comerciale
We kindly request and authorize you to open a social cpital account on our name
in/
For this purpose we attach hereto the company In acest scop anexãm documentele de constituire
incorporation documents as they are specified on a societãţii menţionate pe verso.
the reverse side.
We hereby mutually agree that our account is Sunt de acord cu faptul cã acest cont
governed by the bank’s General Business funcţioneazã sub incidenţa Condiţiilor Generale
Conditions of which we know and which we de Afaceri ale bãncii pe care le cunoaştem şi pe
accept unreservedly. care le acceptãm fãrã rezerve.
ROL / Lei
Signature/Semnătura: _______
Stamp/Ştampila

Signature/
Semnătura Date/Data: ____/____/_____
zi luna an
Business of Banking
We attach the following documents:
Foundation deed of the legal entitz

The Court setting-up Decision
Registration Certificate
Fiscal Code
Evidence of the empowered persons to represent the legal entity in relations
with third parties
Other ___________________________________________________________
_________________________________________________________________________
_________________________________________________________________________
___________________________________________________________
Anexăm următoarele documente:
Actul constitutive al societăţii

Hotărârea judecătorească de înfiinţare
Certificatul de înmatriculare
Codul Fiscal
Împuternicire pentru persoanele mandatate să reprezinte societatea în relaţiile
cu terţii
Altele _______________________________________________________
__________________________________________________________________
______________________________________________________
______________________________________________________
Business of Banking
Recognition Decision of the Romanian Court (in case there is no reciprocity clause with the
respectively state)
Approval of Romanian Government
Fiscal code
All legal documents related to the identity, head office, type of society place of registration,
power of attorney for the representatives translation into Romanian of the authenticated
documents and certified by a notary
In case of foreign company's branch it is necessary to present documents providing the

establishment of the branch, on the same conditions provided by the previous point
In case of foreign subsidiary company setting up in Romania, it is necessary to present

documents required by the Law applicable where the company was founded
Other _______________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Hotãrâre judecătoreascã de recunoaştere (în cazul in care nu existã clauza de reciprocitate)
Aprobarea Guvernului României
Codul fiscal
Toate documentele legale referitoare la identitatea firmei, sediu, tipul societãţii, locul
înmatriculãrii, împuternicire pentru reprezentanţii societãţii, traducere în limba românã
autentificatã de notar
In cazul filialei este necesarã prezentarea documentelor constitutive ale filialei, în condiţiile
prevãzute la punctul anterior
In cazul deschiderii unei filiale in România, este necesarã prezentarea documentelor impuse
de legea unde s-a înfiinţat societatea mamã
Altele _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Business of Banking

FOR INDIVIDUALS
PENTRU PERSOANE FIZICE
Date/Data: ____/____/________
day month year
zi luna an
♦ Name/Nume ________________________________________
________________________________________
♦ Address/Adresa ________________________________________
________________________________________
B.I. (paşaport) _________________ CNP: ________________________

ID (paşaport) Tel.: ________________________
For this purpose I attach hereto a copy În acest scop anexez o copie după actul
of my ID de identitate.
I hereby mutually agree that my account Sunt de acord cu faptul că acest cont
is governed by the bank’s General funcţionează sub incidenţa Condiţiilor
Business Conditions of which I know Generale de Afaceri ale băncii, pe care
and which I accept unreservedly le cunosc şi pe care le accept fără
rezerve.
I kindly request and authorize you to open a current account on our name in/
Vă rog şi vă autorizez să deschideţi un cont curent în numele meu în:
ROL / Lei
Signature/Semnătura: _____________
Business of Banking

Signature/
Semnătura Date/Data: ____/____/________
day month year
zi luna an
Bucureşti, ________________
ÎMPUTERNICIRE
SC__________________________________________________________
înregistrată la R.C. sub nr. ___________ având cod fiscal _____________ ,
reprezentată legal de ____________________________________________
în calitate de __________________________________________________
împuternicesc pe d-na/d-nul ______________________________________
BI/paşaport cu seria nr. ______eliberat de _______la data de____________
să reprezinte valabil societatea, având drept de semnătură, fără limită de sumă,
pentru următoarele operaţiuni bancare :
• Depunere de numerar în lei şi în valută

• Retragere de numerar în lei şi valută
• Ordin de vânzare, cumpărare lei/valută
• Semnătura documente aferente operaţiunilor de import export: DIV,
DPVE, etc
• Ordine de plată în lei
• Depunere şi ridicare documente bancare
• Ordine de încasare cecuri
• Efectuare de schimb valutar
• Ridicare extrase de cont
• Încheiere contracte de depozit in numele societăţii
Împuternicirea este valabilă până la revocare
Semnătura autorizată,
Business of Banking
APPLICATION FOR OPENING A SOCIAL CAPITAL ACCOUNT

CERERE PENTRU DESCHIDERE DE CONT DE CAPITAL SOCIAL
Date/Data:___/____/_______
day month year
zi luna an
♦Name/ ___________________________________________
Denumire _________________________________________________
♦ Address/ ___________________________________________
Sediul ___________________________________________
♦ Established as Romanian Legal Entity ♦ Organizată ca persoană juridică română
commercial companies societăţi comerciale
regie autonome regii autonome
associations and foundations asociaţii şi fundaţii
We kindly request and authorize you to open a social cpital account on our name
in/
ROL / Lei
For this purpose we attach hereto the În acest scop anexãm documentele de
company incorporation documents as they constituire a societãţii menţionate pe verso.
are specified on the reverse side.
We hereby mutually agree that our social Sunt de acord cu faptul că acest cont nu
capital account bears no interest. este purtător de dobândă
Signature/Semnătura: _____________
Stamp/Ştampila

Signature/
Semnătura Date/Data: ____/____/________
day month year
zi luna an
Business of Banking
Foundation deed of the legal entity -original and 1 copy
Headquarters document - original and 1 copy
Mandate for the person in charge to open social capital account
Other _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Actul constitutiv al societãţii în original şi 1 copie
Documentul care atestă sediul social în original şi 1 copie
Împuternicire pentru persoana autorizată să deschidă cont de

capital social
Altele _______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
_______________________________________________________
Business of Banking
ÎMPUTERNICIRE PENTRU CONTURI

PERSOANE FIZICE
Dl./Dna. ______________________________________________________
în calitate de titular de continue împuternicesc pe d-na/d-nul ____________
____________BI/pasaport cu seria nr. ________ eliberat de ____________
la data de___________________ să mă reprezinte valabil având drept de
semnătură, fără limită de sumă, pentru următoarele operaţiuni bancare :
• Depunere de numerar în lei şi în valută

• Retragere de numerar în lei şi valută
• Ordin de vânzare, cumpărare lei/valută
• Ordine de plată în lei
• Ordine de plată în valută
• Efectuare de schimb valutar
• Încheiere contracte de depozit în numele titularului
• Depunere şi ridicare documente bancare
• Ridicare extrase de cont
Împuternicirea este valabilă până la revocare
Semnătura d-nei/d-nului angajează în mod legal titularul ____________

si este recunoscută şi opozabilă acesteia.
Semnătura titular
Business of Banking
Date/Data: ___/____/_______
day month year
zi luna an
Către / To : THE COMMERCIAL BANK ……………… S.A.

Subsemnatul
The undersigned
B.I.
ID (passport)
Reprezentant al
Representative
Vă solicităm şi autorizăm, contrar

instrucţiunilor iniţiale, referitoare la depozitul
la termen
I/we kindly request and authorize you, despite

to my/our initial instructions with reference to
time deposit
Business of Banking
Date/Data: ___/____/_______
Business of Banking
day month year

zi luna an
Către / To : THE COMMERCIAL BANK ……………… S.A.
Subsemnatul
The undersigned
B.I.
ID (passport)
Reprezentant al
Representative
Cont nr.:
Account nr.:
Business of Banking
RISKS
MANAGEMENT
D Objectives:
8.1 General issues: definition of banking risks, importance of

managing the banking risks
8.2 Managing risks
8.3 The prudential measures of the National Bank of Romania

Business of Banking
8.1 General issues: definition of banking risks, importance of managing

the banking risks
The financial market is extremely volatile due to the influence of various

factors, objective or subjective; the credit institutions being aware of the
fact that maximising profit implies a permanent incur of risk.
Most definitions of the risk and risk management are focused on the
classical function of money, that of intermediary in the field of financial
risks through their division. From this point of view it is usually regarded
the problem of unexpected losses in bank assets, losses caused by market,
credit or liquidity risks.
The risk may have a considerable impact over the bank or financial
institution, both an impact consisting in the incurred direct losses, and an
impact consisting in the effects over the customers, personnel, business
partners and even over the bank authority.
In general, the risk represents the probability of occurrence of an event that

will produce serious consequences for the subject. In the same context, it
should be mentioned that for the risk exposure to be actual value of all
losses or supplementary expenses the financial institution would or could
cover. According to this definition, the risk exposure may be real or
potential.
It is important to know that the risk is generated by a large number of

operations and procedures. Therefore, in the financial field at least, the risk
must be considered as a mistune or a complex of risks, usually independent
through common targets or the fact that the occurrence of one risk may
cause a chain occurrence of other risks. As a consequence, these operations
and procedures permanently generate a risk exposure.
Banking risks are those risks the banks are confronted with in their current
operations, and not only the risks specific to the classic banking activity.
It is obviously that a notable banking strategy must include both programs

and procedures of managing banking risks, regarding the minimisation of
the probability the risks would occur the potential exposure of the bank. The
three objectives of the bank management are maximising profitability,
minimising the risk exposure and observing the banking regulations. None
Business of Banking
of them has a major influence, as a task of the bank management consists of

in establishing the central objective for each period.
Banks are also subject to all the risks that their customers face, risks as
diverse as crop failure, environmental damage claims or the failure of a new
product developed at a high cost.
The most significant and persistent risk faced by banks is credit risk - the
risk that counterparts will be unable to meet their obligations. Credit risk
arises from lending to individuals, companies, banks and governments, from
entering into market transactions which give rise to a receipt on maturity,
from stock lending and from transactions with supplies.
The main types of risks1 involved in the banking activity are: financial risks,
delivery risks, and environmental risks.
Financial risk arises from any business transaction undertaken by a bank,

which is exposed to potential loss. The main financial risks are the
following:
Credit risk
Interest rate risk
Liquidity risk
Foreign exchange risk
Capital risk
Credit risk may be defined as the risk that a counterparty of a financial

transaction will fail to perform according to the term and conditions of the
contract, thus causing the asset holder to suffer loss. This failure may be the
result of bankruptcy, a temporary change in market conditions, or other
factors adversely affecting the borrower’s ability to pay.
The most obvious example of a credit risk is the risk that a customer will
fail to repay a loan. However, it is important to appreciate that credit
exposure extends to a large variety of bank’s activities including the
extensions of commitments and guarantees, acceptances, trade finance
transactions, placements and the range of capital markets instruments
activity such as foreign exchange, futures, swaps, bonds, options, equities
and bullion.
1
Hempel, G.H. Coleman A.B. – Bank Management, New York, 1990
Business of Banking
Credit risk may also arise from off balance sheet transactions. A bank may
guarantee a client’s performance under a contract in return for a fee - giving
rise to the risk that the bank may be called upon to fulfil its guarantee at
some later date because its client has failed to meet its contractual
obligations. This gives rise to a counterclaim against the guaranteed party
for the money paid out under the guarantee.
Credit risk may take the form of delivery or settlement risk. Where a bank
buys securities from a third party or transfers securities under a repurchase
agreement, it faces a risk that the counterpart will be unable to deliver the
securities on the due date leaving the bank exposed to the possibility that it
will not be able to replace the securities at the same price.
Interest rate risk

A fundamental banking objective is to borrow funds at one rate and to lend
them at higher rate. Interest rate risk, sometimes called funding risk,
involves the effect in the bank profitability of changes on the market interest
rates.
Interest rate risk refers to the financial risks caused by the interest rate
fluctuations that affect both the profit obtained by the client and the
indebtedness degree to the bank. A major increase of the interest rate may
determine a financial pressure for the client’s activity, which will not be
able to repay the amounts due.
The main factors that increase the interest rate risk are: volatility of interest
rates;, and mismatches between the interest “reset” dates on assets and
liabilities.
The main factors that mitigate interest rate risk are: established limits on
mismatch position; hedging with financial futures or other instruments;
management monitoring exposure.
Liquidity risk
It is the risk that ocurs when the bank will not be able to meet its cash or
payment obligations as they fall due. The risk arises because cash flows on
assets and liabilities do not match. Due to the size and spread of the
resources, the bank is often called to borrow “short” and lend “long”. This
gives rise to the risk that depositors may seek to withdraw their funds and
the bank may not be able to effect repayment except by raising additional
Business of Banking
deposits at a higher cost, or by a forced sale of assets, perhaps at a loss.

Thus, an important aspect of the banking business is the fact that the
depositors may withdraw their money whenever they want, for deposits at
sight, and at the established term, for deposits at term. If a bank can not
meet these obligations, the customers’ trust in the bank will diminish, even
in the whole banking system. The customers will not wish anymore to
deposit their money in banks, and there may appear massive withdrawals of
funds, with a negative effect over the national economy.
The main factors that increase the interest rate risk are: erosion of
confidence in the bank, in the market place because of earnings difficulties
or other reasons; dependence on one market or a few counterparties for
deposits; unstable financial markets; extensive “short” borrowing or “long”
lending.
This is why it is necessary to forecast exactly the changes that may occur in
the level and structure of the interest rate, this being correlated with the
evolution of macroeconomic indicators. For the current period and for the
near future, mainly the banks’ clients undertake the interest rate risk related
to national currency activities. This is caused by the fact that the credit and
deposit interest rate modifies continuously because of the fluctuations of the
market; the exception is given by the deposit certificates that have a fixed
interest. We must always take into consideration the analysis of the structure
of the deposits and investments, as well as their evolution.
It is desired to minimise the interest rate risk according to the relationship

between the interest caring assets and liabilities. The value of the ratio must
be as close to 1 as possible.
The main factors that mitigate interest rate risk are: maintenance of a high
level of liquid assets (e.g. cash, money at call, marketable securities);
standby credit facilities with other institutions; availability of related party
funding; a lender at last resort to reassure depositors (e.g. Government
deposit insurance); maintenance of a closely matched maturity structure
between assets and liabilities.
Foreign exchange risk is related to interest rate risk and liquidity risk. It
arises from a mismatch: this time of currency and assets and liabilities.
Thus, the currency may fluctuate in an unexpected direction or higher than
it has been anticipated. This type of risk is determined by the exchange
Business of Banking
operation, that affects the situation of the clients who obtain a credit in
foreign currency and do not perform exports, or those revenues from exports
do not cover the debt contracted. Transactions affected include both on-
balance sheet (e.g. loans, deposits), and off-balance sheet (e.g. forward
currency contracts) items. Foreign exchange risk is also called currency risk.
The main factors that increase currency risk is volatility of exchange rates;
significant open currency position.
The main factors that mitigate currency risk are: position limits;
management monitoring of exposure; use of hedging techniques.
In Romania, the supervision of the foreign exchange risk2 is accomplished:

a) by banks;
b) by the National Bank of Romania, on the basis of the foreign exchange
position indicators reported by banks.
With a view to limiting the foreign exchange risk the banks have the
following obligations:
a) to have a record system which permits permanently both the immediate
registration of the operations in foreign exchange and the calculation of
their results, as well as the determination of the adjusted individual
foreign exchange positions and the total foreign exchange position;
b) to have a supervision and administration system of the foreign exchange
risk on the basis of norms and internal procedures approved of by the
bank’s board of directors;
c) to have a permanent control system for checking the observation of the
internal procedures, necessary with a view to accomplishing the
precedent orders;
d) to designate a manager who ensures the permanent co-ordination of the
bank’s foreign exchange activity.
Delivery risks3 include the following risks: operational, technological, new-

product, and strategic risk.
2
National Bank of Romania’ Norm No. 4/2001 concerning the supervision of banks’
foreign exchange positions, published in Monitorul Oficial al României, Part I,
No. 631/2001
3
Hempel, G.H. Coleman A.B. – Bank Management, New York, 1990
Business of Banking
Operational risk, sometimes called burden risk, is the ability of the bank to
deliver its financial services in a profitable manner. Both the ability to
deliver such services and to control the overhead associated with them are
important elements.
Technological risk refers to the risk that a delivery system may become
inefficient because of new delivery systems.
New-product risk is the danger associated with the introduction of new

products and services. Lower than anticipated demand, higher than
anticipated cost, the lack of management talents in new markets can lead to
severe problems with new products.
Strategic risk refers to the ability of the bank to select geographic and
product areas that will be profitable for the bank in a complex future
environment4.
The environmental risks include the following risks: defalcation,

economic, competitive, regulatory risk.
Defalcation risk is the risk of theft or fraud by bank officers or employees.

It must be carefully guarded against to avoid substantial losses.
Economic risks are associated with national and regional economic factors
that can affect the bank performance.
Competitive risk arises because more and more financial and non-financial
firms can offer most bank products and services.
Regulatory risk involves living with some rules that place a bank at
competitive disadvantage and ever-present danger that legislators and
regulators will change the rules in an unfavourable manner to the bank.
Other British authors divide the main risks in two big categories of risks,
such as: product market risks, and capital market risk (see Figure No.1, and
Figure No.2).
4
Hempel, G. H. Coleman A.B. – Bank Management, New York, 1990
Business of Banking
Figure No 1 – Product Market Risk
Credit risk
Strategy risk
Bank settlement
risk
Operating risk
Product market Merchandise

risk risk
Human
resource risk
Legal risk
Product risk
Source: Aspinwall, R.C., Eisenbeis, R.A – “Handbook for Banking

Strategy”, John Wiley and Sons, Inc. 1995
Business of Banking
Strategy Risk (business risk)
It is the risk that all the business line will succumb because of the
competition or obsolescence. One such example may be represented by the
relative disappearance of the traditional market with high credits with low
risk for companies, these being replaced by commercial papers.
Another example of strategy risk is that in which a bank is not ready or not
able to become competitive in a new activity. For example, in the activity of
cards issuance, some banks postponed this process and they could not earn a
competitive advantage in this field. This conservatory attitude of waiting for
the market itself to develop represents a risk.
Bank Settlement Risk
The financial institutions, as profit centres, function in compliance with

licenses that may be revoked and this may lead to the loss of important
investments. Thus in USA in the past decades banks nationalisation have
taken place. In Romania we can mention the license withdrawal from some
banks that although were non-operational, engaged important investments
for headquarters and equipment in the moment of withdrawal. Also, another
settlement risk may be the withdrawal of dealer license from the Romanian
banking market of some Romanian and foreign banks.
The settlement risk can be met when a bank specialised in one field
becomes a universal bank, and thus it is going to compete with the other
banks that act in the same domains.
In this category there can be found an additional risk that is the possibility
of the regulatory authority to change the operating policies. One example
here, is the Romanian Stock Exchange modification of the calculation of the
mutual funds assets, regulation that led to the collapse of some institutions.
Regulatory authorities may decide who should stay and who should leave
the financial market, through the capital adequacy requirements. Thus the
National Bank of Romania, by increasing the level of the subscribed social
capital from 100 million lei to 250 billion lei, makes many of them lack the
possibility to attract supplementary capital and thus, under such
circumstances, they may be withdrawn the functioning license.
Business of Banking
Merchandise Risk
The merchandise prices may affect banks, as well as other creditors,

unforeseen sometimes, having general impact over the savings and debtors.
For example, the rising of the energy price may influence the inflation,
contributing to the increase of the financial rates based on a fixed interest
rate. Also the increase of the oil price may lead to different results in some
companies.
Human Resources Risk
This represents the subtlest type of risk, very difficult to be measured,

resulting from the personnel policy: recruitment, training, motivation and
maintenance of specialists.
If one specialist leaves, the whole activity or only one working system is
compromised. The protection against this risk implies the payment of more
employees in order to insure the knowledge and experience of the leaving
employee.
A similar risk is the wrong motivation of the employees. Under certain

circumstances it may have significant results. It refers to the lack of
stimulants or their wrong application.
Legal Risk
We encounter two sides of such risks:
a) the creditors’ responsibility in case the debtors claim that the bankruptcy
was caused by the fact that the bank had promised it would not
withdraw the credit or that it would grant supplementary credits;
b) Litigation related to toxic materials deposited on the dispossessed field.
These are unforeseen measures difficult to be estimated, which must be
taken into consideration by the financial institutions, as they can reach
high values.
Generally speaking, the capital markets and their risks affect all the
companies, especially the financial institutions, where it is hard to make a
clear differentiation between the product market and the capital market.
Business of Banking
For example, the interest rate risk for fixed rate credits is a capital market
risk; at the same time the fixed rate credit risk may determine the
bankruptcy of a poor debtor, and thus, the interest rate risk becomes a credit
risk, that is actually a product market risk.
The banks supply financial products and services to industry and

consumers. The financial services involve their own risks, specific to the
capital market on which they function. From the capital market point of
view there exist the following types of risk:
Figure No. 2 – Capital Market Risk
Interest rate
risk
Liquidity risk
Capital Market Currency risk

Risk
Discount risk
Basic risk
Source: Aspinwall, R.C., Eisenbeis, R.A – “Handbook for Banking

Strategy”, John Wiley and Sons, Inc. 1985
Business of Banking
Discount Risk
This is a particular type of error risk, which involves the bank’s competitors.
It refers to the money transfer between national and international banks.
This risk is carefully handled by using sophisticated technology for payment
pursuit. Thus, only one payment is performed at the end of the day, instead
of numerous payments from individual transactions.
Basic Risk
It is a currency risk variation. In order to protect against the interest rate

transactions with various basic assets can be used, being pursued mainly the
existing and predictable relationship between them. The FUTURES
contracts may be used as hedging instruments.
Obviously, the financial institutions, the commercial banks, in their

financial service rendering activity, administrate their own risks, but they
may also transfer the risk through the hedging transactions. If the bank can
not avoid the risk, its burden, and respectively, its costs are both
administrated and transferred.
A rapid growth of the risk is noticed both on the product market and on the
capital market in the financial services, and at the same time the increase in
the preoccupation for protection against the risk. The derivatives represent
thus, ways to avoid the risks on the capital market. The swaps, options and
futures contracts are instruments used for risk transfer.
Other types of risks are:
The fraud risk is defined as a deception or an act either by stating what is

false or by suppression of the truth in order to deceive another, gain an
advantage over another. The fraud does not represent a risk only for a bank,
but also for its depositors that have entrusted their capital.
The country risk is defined as the non-reimbursement act generated by an

insolvency determined by the debtor’s financial position and not by the
deterioration of his financial situation. It does not represent a credit risk
because the debtor’s insolvency does not appear.
Business of Banking
The market risk refers to the unfavourable variations of the market value
of the positions during the minimum period of time needed to the settlement
of the positions.
The market risk appears due to the fact that the prices of these financial
values are determined on the market, and they are modified.
8.2 Managing risks
At the present time, there is no generally accepted system for risk
management. By their nature, commercial banks often obtain their profit by
performing their activity in certain segments of the market. Bank’s capacity
to ensure against excessive risk depends on:
• capital size;
• its bank management quality;
• its technical expertise;
• Personnel experience in the corresponding market segment.
The banks must have their own system to monitor and control the risk.
Generally, bank’s prudential measures against risk may be the following:
• Bank management must be aware of the risks resulting from the bank’s
activity, and must be able to measure, monitor and control these types of
risks;
• Bank must have clear policies, as well as risk measurement and control
procedures;
• Bank management must establish the internal limits of risk;
• Periodical reports must be concluded, analysed and controlled by the
bank’s internal control and its censors.
After the uncertainties caused by the 1975 crisis, the necessity to elaborate
some rules for the bank administration and the consolidation of the clients’
security appeared. These rules are expressed through the “Cooke Ratios”.
They refer to the banks’ liquidity and solvency. For example:
Own funds
Risk coverage index = x 100 = 8%
Total commitments
Risk for one client =

Risk sharing index = x 100
Net own funds 40%
Own funds + Resources > 5 years

Liquidity index = x 100 = 60%
Uses > 5 years
Business of Banking
In many states worldwide, the minimum compulsory reserves represent an

instrument of the monetary policy. The Central Bank supervises the
liquidity indexes that establishe the banks’ general rating. These indexes are
calculated based on the banks’ financial reports presented periodically to the
Central Bank or in this case of a control.
Solvency – represents the capacity of one natural or legal person, or bank to

face the commitments taking into account the resources constituting the
patrimony or assets.
Solvency is interesting when granting a credit, allowing the identification of

possible non-repayment on the due date. For banks, solvency represents the
capacity to cover losses for the credits granted without jeopardising the
deposits’ repayment.
The major role of the supervision authority is that to prevent the systemic
risk by promoting efficient bank supervision which may ensure the
accomplishment of the stability and viability of the banking system.
For this purpose, In Romania, it was necessary to implement the Banking

Rating System and the Early Warning System. This system represents an
efficient instrument for the evaluation of the banking institutions in order to
identify those banks that are inefficient financially and operationally. The
rating system is based on the evaluation of the following six components:
capital adequacy; asset quality; management; earnings; liquidity. Each
component was evaluated on a scale of values from 1 to 5, taking into
consideration the bank performance. Thus, 1 represents the highest level,
and 5 the lowest.
In Romania, in order to determine the necessary specific credit risk

provisions related to one credit or investment, under the NBR Regulation, it
is necessary to perform the following steps5:
1 – assign credits or investments in the corresponding credit risk
categories;
2 – determine the basis of calculation for the specific credit risk
provision;
5
Regulation 2/2000 concerning the classification of credits and placements, published in
Monitorul Oficial al României, Part I, No.316/2000
Business of Banking
3 – apply the provision co-efficient over the basis of the calculation

obtained.
Banks shall proceed to remove to off-balance sheet all of the sums related to
a credit or investment in the following cases:
1 – no less than those sums registering a debt service of more than 360
days;
2 – those in which the executor formula has been invested:
credit contract, as well as contracts of guarantee as the case may
be;
a definitive legal decision which orders against the credit contract
as well as against the contract of guarantee as the case may be, or
against the contract of investment;
3 – where the procedure of executor style of patrimony in the case of
individuals has been initiated;
4 – where the procedure of judicial reorganisation or the bankruptcy
procedure against the debtor has been initiated.
8.3 The prudential measures of the National Bank of Romania
In Romania the loans are granted by banks under their own norms and
regulations issued in accordance with the directives of the National Bank of
Romania.
The main prudential measures issued by the National Bank of Romania are:
1. The classification of credits and investments, as well as the establishment,
adjustment, and use of the specific credit risk provisions;
2. Large loans;
3. The minimum capital of the banks;
4. The solvency ratio;
5. Loans granted to the debtors in special relations with a bank;
6. Liquidity.
Business of Banking
1. In order to establish the classification of credits and investments, and/or

regularize specific credit risk provisions, banks have the obligation to have
an adequate methodology of organizing information and procedures.
Banks are obliged to report to the National Bank of Romania – the

Supervision Division:
a) – the situation of classification of credits, as well as the necessary of
specific credit risk provisions;
b) – the situation of classification of investments with banks and of the
necessary of the specific credit risk provisions;
Credits and investments are classified in the following categories6:

- standard;
- watch (only for credits granted to clients of the non-banking sector);
- substandard;
- doubtful;
- loss.
Classification of credits and investments is made through the simultaneous

application of the following criteria:
- debt service;
- initiation of legal proceedings.
The relationship between classification categories and criteria is provided

for in tables no. 1 and 2 of Annex No 1.
Credits granted to one debtor and/or investments established therein, are

included in one single category of classification on the basis of the principle
of lowering the position through contamination, respective of taking into
consideration the weakest among the individual classification categories.
2. The level of a large exposure shall not exceed 20 % of the own funds of
the bank, and the total amount of large exposures shall not exceed 8 times
the level of the own funds of the bank.
6
Regulation 2/2000 concerning the classification of credits and placements, published in
Monitorul Oficial al României, Part I, No.316/2000
Business of Banking
Banks are obliged to report to the National Bank of Romania - Supervision

Department the level of the large exposures via the form “The situation of
large exposures”, whose model is provided in Annex No. 2) and the form
“The situation of groups which represent a single debtor against the bank
which registers large exposures”, whose model is provided in the
Annex No 3).
The total amount of net loans granted by the bank to its own staff, including
their families, may not exceed 5 % of the own funds of the bank.
Banks shall report to the National Bank of Romania – Supervision

Department the level of the net loans granted to insiders and, respectively
that of the net loans granted to their own staff, as well as their families, by
the use of the form “Situation of the net loans granted to insiders, to their
own personnel and as well as to their families”, whose model is provided in
Annex No. 4 of the present norms.
3. The National Bank of Romania establishes the minimum level of the

capital of the banks.7 Under the provisions of the stipulated norms, the
minimum level of a bank is established at Lei 250 billion.
Banks authorised by the National Bank of Romania as of the date of the

entry into force of the norm concerning the minimum level of the capital
should attain the level in two steps, these being ordered, beginning with
31.05.2001, for social capital and own funds of no less than 150 billion lei
and beginning with 31.05.2002 for a social capital and own funds of no less
than 250 billion lei.
4. Considering the credit risk limitation, banks are compelled:

a) to have adequate administrative procedures and internal control
procedures which allow the supervision and management of the credit
risk, as well as the permanent framing of the solvency indicators, of
greater exposures and of loans granted to insiders, own personnel, as
well as to their families;
7
National Bank of Romania - Norms no. 9/2000 concerning the minimum capital of the
banks and branches of foreign banks, issued in Monitorul Oficial al României, Part I,
No. 474/2000.
Business of Banking
b) To ensure an adequate reference to accounting evidence, which shall

represent the foundation of prudential bank reports, thus:
1. for the asset accounts and rectifiable liabilities related to those in the
balance sheet asset:
1.1 the evidence shall be kept on risk entities, for which the related
amounts shall be registered separately;
1.2 the amounts from item 1.1 shall be recorded, at their turn, on
credit risk ranks in the following distinctive columns:
- “Credit risk rank 0%”;
- “Credit risk rank 100%”.
2. for the off-balance sheet asset accounts, presented in the Annex No.5);
2.1 the evidence shall be kept on risk entities, for which the related
amounts shall be recorded distinctively;
2.2 the amounts from item 2.1 shall be recorded, at their turn, on risk
rank of transformation in credit of the off-balance sheet elements,
in the following columns:
- “Credit equivalent 0%”;
- “Credit equivalent 50%”;
- “Credit equivalent 100%”.
2.3 the amounts from the item 2.2 shall be recorded based on credit
risk rank, in the following distinctive columns:
c) to codify, to name and to keep a record, not referring to accounting, for
each group of physical persons and/or legal entities which represents a
single debtor; the code shall be made of unique alpha numeric sequence
and the registration date of the group in the bank evidence and shall keep
as long as the modification in the group structure are not relevant;
d) to codify and to keep evidence, not referring to the accounting, of each
physical person or legal entities which represents a single debtor or which
is part of a group of physical persons or legal entities which represents a
single debtor and/or part of an insiders group and/or part of a group made
of their own personnel and their families; the code shall be made of an
Business of Banking
unique alpha numerical sequence and the date of registration of the

physical person and legal entities as a debtor of the bank and shall be
permanently kept. In the case of physical persons and legal entity, the
unique alphanumerical sequence shall be represented by the personal
numerical code and by the fiscal code;
e) to conclude transactions which lead to larger exposures based only on a
decision taken by the Board of Directors; the decision of the Board of
Directors shall be based on a report of the risk committee, which shall
include, at least, the analysis of the transaction, of the financial situation
and of the reliabilities of the physical persons and the legal entities
representing a single debtor, as well as the analysis of the structure of
group of physical persons and/or legal entities, in the case in which there
represents a single debtor;
f) to grant credits to insiders only based on the decision adopted by the
Board of Directors; the decision of the Board of Directors shall be based
on a report of the speciality divisions which shall include the description
of the nature of the special relation, the analysis of the transaction, of the
financial situation and of the reliabilities of the insiders; employees of the
bank shall be excepted from the application of provisions, and their
families;
g) to grant credits to their own personnel, including there families, only
based on some internal norms approved by the Board of Directors.
In order to determine the solvency indicators, large exposures and net loans
granted to insiders, own personnel, as well as to their families, banks should
take into account the following:
a) the bank assets shall be grouped on risk entity, as well as in categories of
credit risk, in accordance with the framing criteria presented in
Annex No 5;
b) in the case of collateral with a risk higher than that of the counterpart, the
risk rank (grade) shall be related to the counterpart;
c) in the case of an asset element guaranteed with one of the collateral’s
type provided in Annex No 5, to whom it corresponds a specific rank of
risk lower than that corresponding to the counterpart, the guaranteed part
of the respective asset element shall be recorded in a category with a
lower risk grade, and the not guaranteed part of the asset element shall be
recorded in the category corresponding to risk grade related to
counterpart;
Business of Banking
d) in the case of an asset element guaranteed with two or more of the types
of guarantees provided in Annex No 5, this shall be taken into
consideration starting with those which allow the framing of the
respective asset in the lowest risk grade categories;
e) in the case of securities granted as a loan, the risk entity, as well as the
risk grade related to those shall be established taking into consideration
the highest of the credit risk grade related to the issuer and the credit risk
grade related to debtor, and, in the situation in which the securities
granted as loan to be secured with one of the types of guarantees
provided in Annex No 5;
f) for the rectifiable liabilities elements the risk entity shall be the same as
that of the asset elements which corrects, and the framing in credit risk
categories shall be made in the credit risk categories corresponding to
asset elements which they are correcting, starting with the highest
category of risk;
g) off-balance sheet elements shall be grouped on risk entities, as well as on
credit risk categories for transformation in credit, in accordance with the
criteria of framing presented in Annex No 6, after which shall be
considered balance sheet elements, and shall be included in credit risk
categories, in accordance with the criteria’s presented in Annex No 5.
The minimum limit of the solvency indicator8, calculated as a ratio between
the level of own funds and net exposure shall be 12 % and the minimum
limit of the solvency indicator, calculated as a ratio between the level of
own capital and the net exposure shall be 8%.
Banks shall report to the National Bank of Romania – the General
Department for Licensing, Regulation and Prudential Supervision of the
Banking Companies the level of the solvency indicators by the form
“Solvency of banks”, whose model is provided in Annex No 2.
5. Under the norms9 issued by the National Bank of Romania the bank can
grant loans to the persons with whom it has special relations with, only
under conditions provided by the norms.
8
NBR Norm 8/1999 concerning the limit of the credit risk of the banks, published in
Monitorul Oficial al României, Part I, No. 245/1999.
9
NBR Norm 8/1999 concerning the limit of the credit risk of the banks, published in
Monitorul Oficial al României, Part I, No. 245/1999.
Business of Banking
Persons in special relations with the bank are considered:

a) the representatives of the State Ownership Fund in the general
meeting of the shareholders of the bank;
b) the bank’s administrators and the censors, natural persons of the bank,
the managers, the directors and the internal auditors of the bank;
c) the censors, legal entities, of the bank and the independent audit of the
bank;
d) the executive directors of the bank;
e) any legal entity which exerts effective control of the bank, the main
shareholders and its managers;
f) any commercial company that participated at the capital of the bank
(at least 10%);
g) the NBR’s staff that makes control and supervises the bank;
h) the NBR’s members of the Board of Directors;
i) the spouses or the relatives, up to the fourth degree of relation
including, of the persons provided by the letters a) and b) and of the
managers or main shareholders of the legal entities who have effective
control of the bank;
j) any main shareholder and any commercial company being under his
effective control, directly or indirectly;
k) The staff of the banking company, etc.
Effective control of a bank or of any other commercial company is taken

into consideration when a physical or legal person:
¾ holds more than 50% of the voting rights or of the registered capital of
the bank or of any other commercial company;
¾ has the right to appoint or to replace the majority of the members of
the Board of Directors of the bank or of any other commercial
company;
¾ is shareholder or partner and controls alone the majority of the voting
rights, according to an agreement concluded with other shareholders
or partners of the bank or of any other commercial company;
¾ has the power to exert a decisive influence over the management and
the policy of the bank or of any other commercial company.
Business of Banking
6. The own funds10 of a bank are made of the following categories of

capital:
- own capital;
- additional capital.
The own capital is comprised of:
a) the social capital paid;
b) premiums related to capital, totally collected;
c) legal reserves;
d) general reserve for credit risk;
e) reserves from the influences of the exchange rate related to the liquidity
in hard currency representing the social capital in hard currency, in
accordance with the Government Decision no. 252/1996 regarding the
regime of the foreign exchange differences related to the social capital in
hard currency and other applicable operations, starting with the balance
sheet with the submission deadline of 15 April 1996, modified by
Government Ordinance no. 23/1996 and by Government Decision no.
213/1999;
f) reserves set-up from premiums related to capital and net profit

distribution, indicating in the reporting form the symbol and the name of
the account;
g) reserves from the favourable differences from the patrimony revaluation

indicating in the reporting form the name and symbol of the account, as
well as of the legal provisions based on which it is constituted;
h) the tangible assets fund;
i) the fund for increasing their own financing resources;
10
NBR Norm No.7/1999 concerning own funds of banks, published in Monitorul Oficial al
României, Part I, No. 206/1999.
Business of Banking
j) the funds set up by banks, indicating in the reporting form of the symbol
and the name of the account, as well as the legal provisions based on
which it is constituted;
k) statutory reserves;
l) the reporting result representing undistributed profit;
m) the net result of the current financial year representing profit;
n) the funds with permanent features being at the disposal of their own units
from abroad.
For the establishment of the own capital level the following elements shall
be deducted:
a) the amounts representing the value of their own redeemed shares having
in view the reduction of the social capital in the conditions provided at
Art. 53 letter b) of Law no. 58/1998;
b) the not amortised value of the establishment expenses;
c) the net value of the commercial fund;
d) the amounts of the net profit of the current financial year representing
dividends (in the case of banks which are not under the incidence of the
Art. 47 of Law no. 58/1998), the personal participation at profit and the
participation share of the manager at the profit. This amounts shall be
calculated off balance sheet (outside of accountant), by using for the net
profit recorded at the end of each month of the weighted elements in
accordance with the distribution of the net profit of this destinations,
performed based on the accountant balance sheet of the previous year;
e) the amounts representing expenses to be distributed and expenses to be

recorded in advance, which must be supported in a deferred manner on
expenses during futures periods or financial years;
f) the carried forward result representing unsupported loss;
g) the net result of the present financial year representing loss;
h) distribution of the profit;

Business of Banking
i) the endowment for owns units abroad.

Additional capital is comprised of:
a) other reserves;
b) subordinated debt;
c) subventions for investments;
d) favourable differences from the revaluation of the patrimony, indicating
in the reporting form the name and symbol of the account, as well as of
the legal provisions on the basis in which they were constituted.
For the determination of the level of the own funds of a bank it shall take
into account the following:
a) the additional capital shall be taken into consideration at the calculation
of the own funds only in the conditions of registration of a positive level
of the own capital and in a proportion of not more than 100% of this;
b) subordinated debt shall be included in the calculation of the own funds in
a proportion of maximum 50% of the own capital and must fulfil the
following conditions:
- to be totally used;
- in the case of subordinated debt on term, the initial maturity must be of
at least 5 years; if the subordinated debt is for an indefinite period, it is
not reimbursed only at the initiative of the debtor bank and only in the
conditions in which the level of the own funds is not altered;
- for the calculation of the level of own funds the volume of the
subordinated debt shall be gradually decreased by 20% per year in the
last 5 years prior to maturity;
- the credit contract shall not include the clause of anticipated
reimbursement of the subordinated debt in other circumstances than the
liquidation of the bank;
c) deduction from the level of the own funds of the following elements:
- the amounts representing participation in commercial companies,
participation securities, and securities of portfolio activities, held with
banks and companies with financial activity, corrected by the amounts
representing conversion differences, payments to be made for
Business of Banking
participation in commercial companies, for participation securities and

for securities for portfolio activities and provisions for depreciation of
the participation held in commercial companies, participation securities
and securities for portfolio activities;
- subordinated credits, granted to banks and companies with financial
activities, corrected by the amounts representing provisions for past due
and doubtful claims, related to those.
Banks have the obligation to determine, monthly, and the level of own
funds, according to the methodology of the present norm, based on the
dates from the accountant balance sheet of each month. Banks shall
send to the NBR - The General Department for Supervision the monthly
reporting form within not more than 10 days from the next month. The
model of the calculation and reporting form of own funds is presented
in the annex no.8.
For all prudential banking indicators, whose determination shall be
done based on own funds, banks have the obligation to use the last level
of own funds resulting from the application of Art. 5.
7. In Romania, the supervision of the liquidity risk shall be realised by:
- banks;
- the National Bank of Romania, under the liquidity indicator calculated
by comparing the effective liquidity with the necessary liquidity on the
basis of each maturity band.
The minimum limit of the liquidity indicator, calculated as a ratio between
the effective liquidity and the necessary liquidity on the basis of each
maturity band shall be 1.
The effective liquidity is determined by summing up the balance sheet
assets and off-balance sheet received commitments, on each maturity band.
The necessary liquidity is determined by summing up the balance sheet
obligations and off-balance sheet given commitments, on each maturity
band.
If a surplus of liquidity has been registered in any of the maturity bands
(except for the last one), this shall be added to the level of the effective
liquidity afferent to the next maturity band.
Business of Banking
Progress test
1. Define the banking risks.
2. What is the financial risk?
3. List at least three financilal risks and explain them.
4. What is the interest rate risk?
5. What is the liquidity risk?
6. What is the foreign exchange risk?
7. List the delivery risks.
8. List the environmental risks.
9. How does a bank manage all the risks?
10. What is the solvency?
11. What are the main prudential measures used by the National Bank of
Romania?
12. What is the minimum level of capital of a bank?
13. How is the solvency ratio calculated?
14. List the debtors in special relations with the bank.
15. How does a bank establish its own funds?

Business of Banking
ANNEX No 1
Table No 1 – Criteria of inclusion in the categories of classification of

credits, for non-banking sector
INITIATION OF JUDICIAL JUDICIAL

JUDICIAL PROCEDURES PROCEDURES
PROCEDURES HAVE BEEN HAVE NOT BEEN
INITIATED INITIATED
DEBT SERVICE
Maximum of 15 days loss standard
16 – 30 days loss watch
31 – 60 days loss substandard
61 – 90 days loss doubtful
minimum of 91 days loss loss
Table No 2 – Criteria of inclusion in the classification categories of credits

and investments, for the banking sector
INITIATION OF HAVE HAVE NOT

JUDICIAL INITIATED INITIATED
PROCEDURES JUDICIAL JUDICIAL
PROCEDURES PROCEDURES
DEBT SERVICE
Maximum of 3 days loss standard
4 – 15 days loss substandard
16 – 30 days loss doubtful
minimum of 31 days loss loss
Table No 3 – Provision co-efficient related to classification categories
CLASSIFICATION CO-EFFICIENT
CATEGORY
Standard 0
Watch 0.05
Substandard 0.2
Doubtful 0.5
Loss 1
Business of Banking
ANNEX No 2
THE SITUATION
regarding big exposures
Bank’s denomination ..............................................

Date of reference: [ / / ]
- thousands lei -
Own funds 10% from own funds 20% from own funds 800% from own
(OF) funds
“One debtor” Gross exposure Net exposure

from % from
from the the the own
No from the praised Total from the praised Total funds
crt. Code Denomination balance off col. 3 = balance off col. 6= col. 7 =
sheet balance col.1 + sheet balance col. 4 + col. 6 *
assets sheet col. 2 assets sheet col.5 100/OF
elements element
s
A B C 1 2 3 4 5 6 7
TOTAL:
Bank Manager,
....................................................
(name, surname and signature)
Manager of the financial-accounting department,

.....................................................................................
Made by:
Name and surname: ......................................................
Telephone number / line:.................................................
Business of Banking
ANNEX No 3
THE STRUCTURE
of groups which represent “one debtor”, towards which the bank
registers big exposures
Bank’s denomination ....................................................

Physic persons or legal entities

Group of physical persons
or legal entities
or legal entities
from group’s composition
No crt. Code Denomination No crt. Code Denomination
0 1 2 3 4 5
Bank Manager,
....................................................

........................................................................................
Made by:
Name and surname: ........................................................
Business of Banking
ANNEX No 4
THE SITUATION
regarding the net loans granted to the persons, which are in special
relations with the bank, own personnel, as well as to its families
Bank’s denomination ...................................................
- thousands lei -
Own funds (OP) 5% from own funds 20% from own funds
Gross exposure Net exposure

% from
from the from the Total
Total the own
No. from the praised from the praised col. 6 funds
The group col. 3 =
crt. balance off balance off = col. 7 =
col.1
sheet balance sheet balance col. 4 col. 6 *
+
assets sheet assets sheet + 100/OF
col. 2
elements elements col. 5
A B 1 2 3 4 5 6 7
1. Persons
which are in
special
relations,
provided by
article 1
paragraph 2
letter n)
items 5-12
2. Own
personnel
and its
families
Bank Manager,
....................................................
.....................................................................................
Made by:
Name and surname: ......................................................
Business of Banking
ANNEX No 5
CRITERION
of framing the assets in credit risk categories
Credit Elements taken into account

risk rate
0% 1. hard cash and values from gold, metals and jewels
0% 2. assets representing claims about or guaranteed in a deliberate
way, irrevocably and unconditionally by or guaranteed with
securities issued by the special central public administration of
the Romanian state or by the National Bank of Romania
securities issued by the central administrations, central banks of
A category countries or European Communities
0% 4. assets representing claims about the central administrations or
central banks of B category countries, expressed and financed in
the national currency of the debtors
0% 5. assets representing claims guaranteed in a deliberate way,
irrevocably and unconditionally by the central administrations or
central banks of B category countries, expressed and financed in
the national currency common to the guarantor and to the debtors
0% 6. assets guaranteed with collateral deposits sold to the bank
itself or with deposit certificates or similar instruments issued by
the bank itself and entrusted to this
0% 7. assets inferred from its own funds
securities issued by banks with multilateral development or by
the European Bank of Investments
way, irrevocably and unconditionally by the territorial
administrations from Romania
Business of Banking
way, irrevocably and unconditionally by the banks from

Romania
way, irrevocably and unconditionally by the local and regional
administrations from the A category countries
way, irrevocably and unconditionally by the banks from the A
category countries
20% 13. assets representing claims, with maturity of no more than 1
year, about or guaranteed in a deliberate way, irrevocably and
unconditionally by the banks from the B category countries
20% 14. elements that are about to be cashed (checks and other
values)
50% 15. credits granted for physical persons, guaranteed with
mortgages in bank’s advantage, of values superior to the
mortgages set up in other creditors advantage, towards lodgings
that are or will be taken into possession by the debtor or which
are let out on hire by this
50% 16. receiving incomes
100% 17. assets representing claims about the central administrations
or central banks of B category countries, expressed and financed
in the national currency of the debtors
100% 18. asset representing claim towards local and regional
administrations from the B category countries
100% 19. assets representing claim, with maturity of more than 1 year,
towards the banks from the B category countries
100% 20. assets representing claims towards the non-banking sector
from the A category countries or the B category countries from
Romania
100% 21. intangible assets
100% 22. other assets
Business of Banking
ANNEX No 6
CRITERION
of framing the off - balance sheet elements in risk categories

transformation into credit
Credit risk
transformation Off - balance sheet elements
into credit
100% 1. pledges in other banks advantage
100% 2. pledges in clientele advantage
100% 3. securities sold with the possibility to repurchase,
for which the option of redemption was firmly
expressed
100% 4. doubtful pledges
100% 5. other given pledges

50% 6. cautions, guarantees and other collateral given to
other banks
50% 7. guarantees given for clientele
50% 8. securities sold with the possibility to repurchase,

for which the option of redemption was not firmly
expressed
0% 9. securities given in warranty

Business of Banking
ANNEX No 7
BANKS SOLVENCY
I. The structure of the assets from the balance sheet
Bank’s denomination................................
- thousand lei -
Credit risk rate 0% Credit risk rate 20%
Amounts Amounts
Amounts due to the due to the
Amounts
due to credit risk credit risk
due to the
the credit rate 0%, Net rate 20%, Net
credit risk
Position risk rate registered amount
rate 20%,
registered amount
ASSETS 0%, in the s in the s
code registered
registere accounts col.3= accounts col. 6 =
in the
d in the balances col.1- balances col.4-
accounts
accounts of the col. 2 of the col. 5
balances
balances rectified rectified
assets
assets liabilities liabilities
accounts accounts
A B 1 2 3 4 5 6
TREASURY
OPERATIONS
AND A01
INTERBANKING
OPERATIONS
- Cash and other
A10
values
- Current account at
A20
the central banks
- Accounts of banks
A25
correspondent
- Deposits at banks A101
- Credits granted to
A30
the banks
- Values received A40
- Values to be
A50
recovered
Business of Banking
A B 1 2 3 4 5 6
- Outstanding debts A102
- Doubtful debts A70
- Attached debts A90
CLIENTELE
B01
OPERATION'S
B03
the clientele
the financial B80
clientele
- Values received B85
- Debtor current
B99
accounts
- Values to be
B9J
recovered
- Outstanding debts B102
- Doubtful debts B9K
- Attached debts B9V
SECURITY
OPERATIONS
C0A
AND OTHER
OPERATIONS
- Securities received C1A
- Transaction
C2A
securities
- Investment
C3A
securities
- Investment
C4A
securities
- Discount accounts
regarding security E6A
operations
- Intra- banking
E7A
discounts
- Debtors E123
- Supply accounts E70
- Regulation
E8A
accounts
- Outstanding debts E104
- Doubtful debts E90
- Attached debts E97
Business of Banking
A B 1 2 3 4 5 6
FIXED ASSETS
F01
VALUES
- Subordinated
F02
credits
- Interest within the
legal banking
companies,
participation F10
securities and
securities of the
portfolio activity
- Endowment for the
own units from F50
abroad
- Fixed assets under
way, fixed assets of
the operations
F6A
activity, fixed assets
besides operation
activity
- Leasing and
assimilated F7A
operations
- Simple tenancy F80
- Outstanding debts F102
- Doubtful debts F9A
- Attached debts F97
SHAREHOLDERS
LOC
OR SOCIETIES
TOTAL: L98
Business of Banking
TABLE - SEQUEL
- thousands lei –
Credit risk rate 50% Credit risk rate 100%

Amounts
Amounts
Amounts due to the
due to the
Amounts due to credit
credit risk
due to the the risk rate
rate 50%, Net Net
credit risk credit 100%,
Position rate 50%, registered amounts
ASSETS risk rate registered amounts
code registered in the
col.9= 100%, in the col. 3 =
accounts
in the col.8- registere accounts col.1-
balances of
accounts col. 7 d in the balances col. 2
the
balances accounts of the
rectified
assets balances rectified
liabilities
assets liabilities
accounts
accounts
A B 7 8 9 10 11 12
TREASURY
OPERATIONS
AND A01
INTERBANKIN
G OPERATIONS
- Cash and other
A10
values
- Current account
A20
at the central banks
- Accounts of
banks A25
correspondent
A30
the banks
- Values
A40
received.........
- Values to be
A50
recovered
Business of Banking
A B 7 8 9 10 11 12
CLIENTELE
B01
OPERATION'S
B03
the clientele
the financial B80
clientele
- Debtor current
B99
accounts
- Values to be
B9J
recovered
SECURITY
OPERATIONS
C0A
AND OTHER
OPERATIONS
- Securities
C1A
received
- Transaction
C2A
securities
- Investment
C3A
securities
- Investment
C4A
securities
- Discount
accounts regarding E6A
security operations
- Intra- banking
E7A
discounts
- Debtors E123
- Regulation
E8A
accounts
Business of Banking
A B 7 8 9 10 11 12
FIXED ASSETS
F01
VALUES
- Subordinated
F02
credits
- Interest within the
legal banking
companies,
participation F10
securities and
securities of the
portfolio activity
- Endowment for
the own units from F50
abroad
- Fixed assets
under way, fixed
assets of the
F6A
operations activity,
fixed assets besides
operation activity
- Leasing and
assimilated F7A
operations
SHAREHOLDERS
LOC
OR SOCIETIES
TOTAL: L98
Business of Banking
Table sequel
- thousands lei -
Net
presentation
ASSETS Position code from the
balance assets
col.131
A B 13
TREASURY
OPERATIONS AND
A01
INTERBANKING
OPERATIONS
- Cash and other values A10
- Current account at the
A20
central banks
- Accounts of banks
A25
correspondent
- Credits granted to the
A30
banks
- Values received A40
- Values to be recovered A50
CLIENTELE
B01
OPERATION'S
B03
clientele
B80
financial clientele
- Debtor current accounts B99
- Values to be recovered B9J
A B 13
1
col. 13 = col. 3 * 0% + col. 6 * 20% + col. 9 * 50% + col. 12 * 100%
Business of Banking
SECURITY
OPERATIONS AND C0A
OTHER OPERATIONS
- Securities received C1A
- Transaction securities C2A
- Investment securities C3A
- Investment securities C4A
- Discount accounts
regarding security E6A
operations
- Intra- banking discounts E7A
- Debtors E123
- Regulation accounts E8A
FIXED ASSETS
F01
VALUES
-Subordinated credits F02
- Interest within the legal
banking companies,
participation securities F10
and securities of the
portfolio activity
- Endowment for the own
F50
units from abroad
- Fixed assets under way,
fixed assets of the
operations activity, fixed F6A
assets besides operation
activity
- Leasing and assimilated
F7A
operations
SHAREHOLDERS OR
LOC
SOCIETIES
TOTAL: L98
Business of Banking
II. The structure of the off balance sheet elements:
Equivalent credit 0%
Amounts Amounts
Off balance Position Amounts Amounts
due to the due to the
sheet elements code due to the due to the
credit credit
credit risk credit risk
risk rate risk rate
rate 20% rate 100%
0% 50%
A B 1 2 3 4
- Pledges in
other banks N1B
advantage
- Pledges in
the clientele N1R
favour
- Surety,
guarantees
and other
N3B
gradations
given to other
banks
- Gradations
given to N5A
clientele
- Receiving
N8B2
securities
- Given
P120
pledges
- Doubtful
Q80
pledges
TOTAL X
2
At this position the balance of the account 9219 “Other receivable securities” shall not be
taken into consideration.
Business of Banking
Equivalent credit 50%

Amounts Amounts
Off balance Position Amounts Amounts
due to the due to
sheet elements code due to the due to the
credit the credit
credit risk credit risk
risk rate risk rate
rate 20% rate 100%
0% 50%
A B 5 6 7 8
- Pledges in
other banks N1B
advantage
- Pledges in
the clientele N1R
favour
- Surety,
guarantees
and other
N3B
gradations
given to other
banks
- Gradations
given to N5A
clientele
- Receiving
N8B2
securities
- Given
P120
pledges
- Doubtful
Q80
pledges
TOTAL X
Business of Banking
Equivalent credit 100% Net

exposure
Amounts from the
Amounts Amounts Amounts off
Off balance due to the
Position due to the due to the due to the
sheet credit risk balance
code credit risk credit risk credit risk sheet
elements rate
rate 0% rate 20% rate 50%
100% elements
col.131
A B 9 10 11 12 13
- Pledges in
other banks N1B
advantage
- Pledges in
the clientele N1R
favour
- Surety,
guarantees
and other
N3B
gradations
given to
other banks
-
Gradations
N5A
given to
clientele
- Receiving
N8B2
securities
- Given
P120
pledges
- Doubtful
Q80
pledges
TOTAL X
1
col. 13 = 0% * (col. 1 * 0% + col. 2 * 20% + col. 3 * 50% + col. 4 * 100%) + 50% *
(col.5 * 0% + col. 6 * 20% + col. 7 * 50% + col. 8 * 100%) + 100% * (col. 9 * 0% + col.
10 * 20% + col. 11 * 50% + col. 12 * 100%)
2
At this position the balance of the account 9219 “Other receivable securities” shall not be
taken into consideration.
Business of Banking
III. Calculation of the solvency indicators
Own capital total (form “Calculation of own funds”, rd. 35, col. 3) 1
Own funds calculation (form “Calculation of own funds”, rd. 44, 2
col. 3)
Total of net exposure from balance assets (form I, rd. “TOTAL”, 3
col. 13)
Total from the net exposure from the off balance sheet elements 4
(form II, rd. “TOTAL”, col. 13)
SOLVENCY INDICATORS (minimum 8%) 5
rd. 5 = rd. 1 * 100 / (rd. 3 + rd. 4)
SOLVENCY INDICATORS (minimum 12%) 6
rd. 6 = rd. 2 * 100 / (rd. 3 + rd. 4)
Bank Manager,
....................................................

........................................................................................
Made by:
Name and surname: ........................................................
Business of Banking
ANNEX No. 8
THE CALCULATION OF THE OWN FUNDS
Name of the bank ...........................................
Date of reporting: [ / / ]
No.line Account Adjusted

Elements taking into account Adjusted
value number value
A B 1 2 3
Paid-in social capital (account
1 x
balance 5012)
Premium related to capital (balance
2 x
of the account 511)
Legal reserves(acc.balance 512) 3 x
General reserve for credit risk
4 x
(account balance 514)
Amounts recorded in the account
“Other reserves”, “Reserves from
influences of foreign exchange
related to the appreciation of
availability’s in hard currency
5 x
representing the social capital in
hard currency, in accordance with
the Government Decision no.
252/1996” (account balance 519,
analytical distinct)
“Other reserves” representing
premiums related with capital 6 x
(balance account 519, analytical
distinct)
“Other reserves” distributed from
the net profit (account balance 519,
analytical distinct) of which: 7 x
- ...................................
- ...................................
- ...................................
Business of Banking
A B 1 2 3
“Other reserves, analytical distinct
“Reserves from favourable
differences from the revaluation of
the patrimony” (balance of the
account 519, analytical distinct), of 8 x
which:
- ...........................................
- ...........................................
- ...........................................
Amounts recorded in the account“
Tangible assets fund” (balance of 9 x
account 5281)
“Other funds”, analytical “Fund for
increasing their own financing 10 x
sources” (balance of account 528,
analytical distinct)
Amounts legally recorded in the
account “Other funds”, others than
those included at line 9 and 10
(balance of account 528, analytical
distinct), of which: 11 x
- ...........................................
- ...........................................
- ...........................................
Statutory reserves (balance of
12 x
account 513)
The reported result representing the
undistributed profit (balance of 13 x
account 581)
Net result of the current financial
exercise representing profit (current 14 x
balance of account 591)
Elements assimilated to the
15 x
capital
Total (line 1 to 15) 16 x
Business of Banking
A B 1 2 3
“Own shares” representing the
value of the own shares redeemed
in the view of social capital
17 x
reduction, in the conditions
provided under the Article 53 letter
b) of the Law no. 58/1998 (balance
of account 30214)
Expenses for constitution (balance
18 x
of account 4412)
The amortisation of the expenses
for constitution (balance of account 19 x
46112)
Not amortised value of the
established expenses (line 18 - line 20 x
19)
Commercial fund (balance of the
account 4411 + balance of account 21 x
451)
Amortisation of the commercial
fund (balance of the account 46111 22 x
+ balance of the account 4621)
Provisions for depreciation of the
commercial fund (extract balance 23 x
of the account: 49221, 49231)
Net value of the commercial fund
24 x
(line 21 - line 22 -line 23)
Dividends *) 25 x
The participation at the profit of the
26 x
personnel
The participation quota of the
27 x
manager in profit
*
Shall be completed in accordance with the provisions of Art. 2 paragraph 2 letter d) of the
presents norms, mentioning that for the date of 31 December shall not be recorded in the
remake reporting form and resented by the banks in accordance with the Art. 7 of the
present norms.
Business of Banking
A B 1 2 3
Distribution from net profit to
28 x
funds
Expenses to be distributed and
expenses recorded in advance 29 x
(balance of account: 374,375)
The reported result representing the
unsupported loss (debtor balance of 30 x
account 581)
Net result of the current exercise
representing loss (debtor balance of 31 x
account 591)
Distribution of the profit (balance
32 x
of account 592)
Endowment for the own units from
33 x
abroad (balance of account 421)
Total deductible elements (line 17+
34 x
line 20+line 24 to 33)
Total own capital (line 16 - line 34) 35 x
“Other reserve”, others than those
36 x
included at line 5, 6, 7 and 8
(balance of account 519)
Amounts recorded in the accounts
“Subordinated debts on term” and Maximum
“Subordinated debts with unlimited 37 50% of
term” (balance of accounts: 531, line 35
532)
“Subvention for investment” 38 x
(balance of account 541)
“Revaluation differences” (balance
of account 516, analytical distinct),
of which: 39 x
-.........................................
-.........................................
-.........................................
Business of Banking
A B 1 2 3
Total additional capital col. 1 =
Maximum
col.1, line 36-39; col.3 = col.3,
40 100% of
rd.36 to 39 (in the limit of max. line 35
100% of col. 3, line 35)
Amounts representing participation
in legally commercial companies,
participation securities and
portfolio securities, hold with banks
and companies with financial 41 x
activities (balance of accounts:
4111, 4112, 4121, 4122, 413 +/-
balance of the acc. 414 – balance of
the acc: 418, 491
Amounts recorded in the accounts
“Subordinated credits on term”
and“ Subordinated credits on
unlimited term”, granted to other 42 x
banks and companies with financial
activities (Balance of accounts 401,
401, 481, 482 - balance of acc.499)
Total deductible elements
43 x
(line 41 + line 42)
Total own funds 44 x
Banks and Lending
BANKS AND LENDING
D Objectives:
9.1 Introduction
9.2 Analysing a new lending proposition
9.3 Lending money
9.4 Credit analysis
9.5 Working capital analysis and financial projections

Banks and Lending
9.1 Introduction
Lending money is one of the basic functions of a bank. It is the interest

earned from banks that brings in most of the revenue to pay the expenses,
including staff salaries of the bank and give a sufficient surplus to pay
shareholders a dividend and retain funds in reserves accounts for expansion
of the bank.
For the Romanian banks, there are the following sources of funds:
¾ bank deposits (in Romania about 70%-90% of the volume of funds)
divided in:
*Short-term bank deposits expressed in domestic currency (ROL), or
foreign currency;
*Long term bank deposits expressed in domestic currency (ROL), or
foreign currency;
¾ borrowed funds including:
* Loans borrowed from other banks (in domestic or foreign
currencies);
*Refinance of the National Bank of Romania, which has the following
forms1:
structural credit;
auction credit;
special credit;
credit granted with derogation from regulation;
Lombard credit;
preferential credit (frozen credit from 1993 to be reimbursed);
¾ own funds2 including:
*Own capital (paid up capital; reserve fund, profit, other funds);
*Supplementary capital (risk fund, other funds).
1
National Bank of Romania – Regulation no. 1/2000 concerning the transactions on the
monetary market realised by the NBR, issued in Monitorul Oficial al României
no. 142/2000.
2
National Bank of Romania – Norms no. 7/1999 concerning the own funds of banks,
issued in Monitorul Oficial al României no. 206/1999,
Banks and Lending
It should be remembered that the funds that are put out on loans belong to
customers. It is their money that is put at risk, so that if a bank is continually
making bad or unprofitable loans, this will sooner or later be reflected in the
deposits.
Before giving an advance, it is necessary for the manager to know the

purpose of the loan.
The lending officer may wonder whether the loan is for a legal purpose, or
not.
A loan means immediate possession of resources in exchange of a future

payment promise involving also an interest payment that rewards the
lender.3
Types of credit or loan
Generally, banks have their specific lending policies, which may change
from time to time due to the market conditions or government regulations.
Their policies are essentially based on the evaluation of the related risks
such as the credit risk, interest rate risk and concentrated risk. The lending
may be also authorised at a branch level if the branch portfolio allows that.
In order to make proper lending decisions, banks purposely observe a set of

general lending principles such as age and state of health, stability, integrity
and honesty, sources of income, regular expenditure, existing connections,
ability to manage financial affairs as well as margin, purpose, amount,
repayment capability and security.
As corporations, companies, individuals or the government represent the

category of bank customers; the types of loans vary accordingly and can be
generally divided into country loans, business loans and personal loans.
Country loans
So, as to be able to achieve national political, social and economic goals,
governments may need finance and, in this respect, the international
financial institutions are expected to grant them a large variety of loans
including apex, distressed, economic recovery, emergency reconstruction,
3
Basno Cezar, Dardac Nicolae, Floricel C.- Monedă, Credit, Bănci Ed. Didactică şi
Pedagogică, Bucureşti, 1994
Banks and Lending
sovereign, standby loans as well as balloon, call, carryover, equity, hard and
soft loans, colons, indexed, outstanding, jeopardy, jumbo, non-accruing or
non-performing loans, overage, participation and package loans, pipeline,
pooled, premature, programme, project and sector loans, secured, quality,
quick disbursing loans, senior, subsidiary, syndicated, time-slice, top-rated,
revolving, working capital loans, sub-loans etc.
Corporate lending
As corporations and companies represent the major category of clients, for
the corporate lending banks do analyse a set of basic and additional criteria
such as the ability of continuing business, the expected future cash flows,
security and collateral, the rate of return to the bank as well as the level of
the whole business which the bank has done with them.
The usual procedures which banks apply in the loan granting to corporate
borrowers specifically include submission of the application and required
information, evaluation of the information, initial evaluation of the
proposed security, negotiation, approval, legal examination of the security,
signing of the contract, disbursement of the amount and recovery of the
capital and interest.
The credit granted to companies, whether public or private, generally

comprises loans for working capital and for fixed assets, financing such as
overdrafts, term loans, syndicated loans, and revolving credit and working
capital loans.
Loans for Working Capital:

Overdrafts
Overdrafts are usually granted to those companies desirous to use the credit
amount not as a whole but rather in accordance with their needs and for a
certain period without having to pay interest on the entire amount but on the
term agreed for interest calculation. In such cases, whenever the company
gets excess of capital it can repay parts of the credit and, consequently,
decrease the amount outstanding.
Export Financing
As most major companies deal with exports, banks can offer short time
credit to exporters until they recoup the money from importers, upon a
collectibles guarantee for the lending bank.
Banks and Lending
Loans for Fixed Assets Financing

Such loans essentially include short-term, medium-term and long-term
loans with respect to maturity. The security for such a lending may be
uncovered, covered by cash equivalent, by personal guarantees or mortgage
assets, collateral and, according to the type of repayment, it may comprise
equal capital amortisation, equal instalment payment, specific terms, fixed
or floating interest etc. When loans in foreign currency are expected to be
granted, banks usually tend to hedge their positions in the foreign currency
but, very often, they rather speculate.
Syndicated Loans
Unlike the participation loans, the syndicated ones consist of an agreement
specifying that two or more banks accept to directly lend to the same
borrower or borrowers. In such a case, one of the banks plays the role of the
agent bank while the others participate by own portions in the syndicate, the
risks being shared by all of them.
Retail Lending
Besides the corporate lending, the personal lending is also an important
activity of banks. Before credit is granted to individuals, the bank
thoroughly analyses the income status of the applicant, the stability, the
permanency of his or her cash inflows, guarantees by third parties as well as
the existing collateral.
The usual procedures in the lending to individuals include the receipt of the
applications and required information, evaluation of the collectibles and
collateral, decision on the loan amount, approval from the proper
committee, legal evaluation and examination of the collateral, signing the
contract and disbursement of the amount. Specifically, the retail lending
includes the categories of consumer credit and house financing.
The Consumer Credit

Individual borrowers, including professionals, sole traders, partnerships,
students and youth, clubs, associations and societies may be granted
personal loans, including the following facilities: overdrafts, credit card,
revolving credit, acceptance credits, hire purchase, conditional sale, credit
sale, probate advances, instalment and non-instalment credit. Under such
arrangements, the interest rate may be fixed, variable, obtained either at the
sale point or at the bank.
Banks and Lending
Personal Loans
They are of a fixed amount, for a fixed period of time and at fixed interest
rates and they are usually spent on the purchase of personal items, travels,
holidays etc.
These are rather similar to loan accounts, with regular payments,

mentioning that the interest on the total loan is calculated before the
advance is given, then once it has been accepted, the principal and interest
are debited to the loan account and the customer repays the total sum by
regular instalments. No security is required for a personal loan as most
banks will incorporate some form of insurance, so that in the event of the
customer’s death, there will be no charge to his dependants.
Overdrafts
Banks can grant overdrafts to individual customers at an agreed interest rate.
Under such a facility, the borrower can take the needed amount for a
particular desired period and does not have to pay interest on the entire
amount. Thus, an overdraft occurs when a customer is permitted by the bank
to have a debit balance on the current account, up to an agreed amount.
Interest is charged at a given percentage above the base rate.
Loan accounts
Loans are another way of lending money. For this method a loan account is
opened with a credit to the current account and a debit to the loan account.
Repayments are usually by regular monthly debits to the current account
and credit to the loan account. Interest is charged either quarterly or half
yearly to current account or loan account at the option of the customer.
This method is particularly useful where the customer wishes to make

regular payments on the amount borrowed, while from the bank’s point of
view the monitoring of a loan account is easier than an overdraft. Loans are
often given to businesses for the purchase of fixed assets or to an individual
for the purchase of customer durable goods.
Credit Cards
The facility of the credit card enables the customer to borrow up to certain
limited amounts either at lending places or at points of sale and to withdraw
cash from cash dispensers whenever he wants.
Banks and Lending
Budget accounts
This account is for those persons who find it difficult to monitor their
expenditure. It is a form of borrowing and the interest is incorporated in the
bank’s overall charges.
Revolving Credit
Under such an arrangement, customers disposing of such types of accounts
are given the option of borrowing amounts up to a certain multiple of their
deposit.
Some banks offer the customer an arrangement in which he or she places a

regular amount of money into this account and then has the facility to
withdraw, without further authority, up to thirty times the regular credit.
The House Financing

Specifically, the amounts lent by banks for house financing represent a
certain percentage of the house total value and the repayment period vary
from 15 to 50 years. The interest rate is also variable and essentially is
based on short-term and long-term rates determined as rollover mortgages.
The repayment patterns of such loans include the following types: annuity
mortgages with constant monthly instalments, endowment mortgages
repaid at maturity upon a life assurance contract, only-interest mortgages
for a certain period, gradually increasing payments and linear mortgages
with equal capital repayments and decreasing interest.
Credits actually represent the relation between two entities in which one
entity has the money (creditor) and gives to the other entity (debtor) a
certain sum of money that the latter has to return in an agreed time period
and under certain conditions. Based on this, the credits in the Romanian
business banking system are classified by the following characteristics4:
1) Depending on the maturity date:
- short-term credits;
- medium-term credits;
- long-term credits.
2) Depending on the type of insurance:
- non-insured credits;
- insured credits.
4
Dr. Cirovic M.: Theory on Credits, Skoplje 1996
Banks and Lending
3) Depending on the type of creditors:

- banking credits;
- commercial credits.
4) Depending on the type of debtors:

- agricultural credits;
- industrial credits;
- real estate credits;
- personal credits.
5) Depending on the type of destination:

- consumer credits;
- commercial credits;
- industrial credits;
- credits for starting up companies;
- credits for operations with the papers of value, investment credits;
- seasonal credits;
- importing credits;
- exporting credits;
- construction loans;
- small business loans.
6) Depending on the domicile of creditor:

- domestic;
- foreign.
7) Depending on the domicile of creditor.

- Fixed interest rate loans;
- Variable interest rate loans;
- Floating interest rate loans.
8) Revolving lines of credits etc.

Banks and Lending
9.2 Analysing a new lending proposition

There are five stages5 to any analysis of a new lending proposition:
1. Introduction of the customer;
2. The application by the customer;
3. Review of the application;
4. Evaluation;
5. Monitoring and control.
Introduction
Lenders do not have to do business with people they do not feel comfortable
with.
An important source of new business for most lenders is introductions from
professional advisers such as accountants and solicitors. But, a bank is not
obliged to lend to customers introduced in this way.
The application (see Annex No. 1) can take many forms but should include
a plan for repaying the loan and an assessment of the contingencies, which
might reasonably arise, and how the borrower would intend to deal with
them.
It might be in detailed written form, or not.
Review of the Applicaton
During this stage all the information must be tested. It is sometimes difficult
to remember all the points to be covered during an interview and many
lenders use a check list (a mnemonics) including:
character (about the individual’s character);
capital;
capability/ability;
purpose/destination;
amount;
repayment;
terms;
security/insurance.
5
Bankers’ lending techniques issued by the Chartered Institute of Bankers, London 1994.
Banks and Lending
Ability - this aspect relates to the borrower’s ability in managing financial

affairs and is similar to character (about skill, experience of the manager).
Purpose - The lender will want to verify that the purpose is acceptable
(legal, moral etc.).
Amount - Is the customer asking for either too much or too little? There are
dangers in both and it is important therefore to establish that the amount
requested is correct. The amount requested should be in proportion to the
customer’s own reasons and contribution.
Repayment - It is important that the source of repayment is made clear.

Where the source of repayment is income, the lender will need projections
to ensure that there is a surplus of funds to cover the repayment after
meeting other commitments.
Insurance - The canons of lending should be satisfied of available security.
Evaluation - The aim of the evaluation is to establish the risk involved.

Listing the pros and cons of a proposition is helpful.
As a summarise, It should be mentioned that before any loan is granted, the

following questions must be answered by the customer:
how much is required?
the purpose of the loan (legal, moral and within the policy of the
government and the bank, National Bank of Romania);
length of time the advance is requested? (how long the money is

required and whether the outstanding debt will be repaid monthly,
quarterly etc).
the source of repayment - the answer to this question is important to the

bank. Any customer must have sufficient resources to repay (capital +
interest) the bank within the stipulated agreed time. The sources of the
repayment could be from wages, dividends, an inheritance, profits and
so on.
Banks and Lending
9.3 Lending money
Banks have as one of their basic functions lending money to both physical
and juridical persons. The banks charge a certain interest rate on these
loans, that represents the earnings used to pay expenses, such as salaries and
wages of the workers, rents, other administrative expenses, give interest
payments to those holding their money in deposits at the bank, pay
shareholders dividends and also retain funds as reserves for the own
expansion of the banks.
Bank loans finance different groups in the economy. Manufacturers,
distributors, service firms, farmers, builders, homebuyers, commercial
real estate developers, consumers, and others all depend on bank credit.
The ways in which banks allocate their funds can strongly influence the
economic development of the community and nation. Every bank bears
a degree of risk in its granting of credit, and, without exception, every
bank experiences some loan losses when certain borrowers fail to repay
their loans. Whatever the degree of risk taken, loan losses can be
minimised through highly professional organisation and management
of the lending function.
The composition and quality of a bank’s loans should be reflected in its loan
policy. The policy sets out the bank’s lending philosophy and specifies
procedures and means of monitoring lending activity. A written loan policy
should serve to obtain three results:
- produce sound and collectible loans;
- provide profitable investment of bank funds;
- encourage extensions of credit that meet the legitimate needs of the
bank’s market.
A meaningful loan policy will express strategies in concrete terms. The
desired loan mix should be quantified. The loan mix expresses the
diversification sought by the bank in its loan placements. Diversification
reduces the level of default risk that is associated with large concentrations
of loans in a single category.
The bank’s liquidity strategy should be indicated, because it acts as a
constraint on lending activity and because liquidity is partly determined by
the maturity structure of the loan portfolio. The desired size of the loan
portfolio expresses the bank’s intended aggressiveness in expanding its loan
portfolio. A highly aggressive loan policy has both a bright side and a dark
Banks and Lending
side. The bright side is that a large loan portfolio might increase bank
earnings. The dark side is that an aggressive policy might lead to lower
credit standards, marginal loans, and an unacceptable amount of risk.
Most borrowers are exposed to risks that threaten their ability to repay their
bank loans. Key-man life insurance is especially important to protect against
loss if death or disability strikes the borrower or one of the borrower’s
indispensable employees. A catastrophic fire or flood may interrupt the
borrower’s business or destroy the loan’s collateral.
The loan policy should indicate the types of borrowers who must be insured.
The policy must designate the bank as the loss payee, or when the cash
value of a life insurance policy is offered as protection, it must be properly
assigned to the bank. An increasingly common form of protection is the
credit life policy written by the bank. It is simply term life insurance written
on consumer loan customers. It pays off outstanding balances due to the
bank in the event of the customer’s death. A somewhat different form of
protection is obtained through reinsurance. If the borrower defaults,
reinsurance pays out and the insurance company pursues collection on its
behalf on the bank’s defaulted note. Reinsurance premiums are rather
costly, and policy should indicate what classes of borrowers, if any, should
be under reinsurance programs.
Most banks conduct loan reviews to reduce losses and monitor loan quality.
Loan reviews consist of a periodic audit of the on-going performance of
some or all of the active loans in a bank’s loan portfolio. Its essence is credit
analysis, although, unlike the credit analysis conducted by the credit
department as part of the loan approval process, credit analysis in loan
review occurs after the loan is in the books. Other than its basic objective of
reducing loan losses, some intermediate objectives of loan review are as
follows:
- to detect actual or potential problem loans as early as possible;
- to provide incentive for loan officers to monitor loans and report
deterioration in their own loans;
- to enforce uniform documentation;
- to ensure that loan policies, banking laws, and regulations are
followed;
- to inform management and the board about the overall condition of
the loan portfolio;
- to aid in establishing loan loss reserves.
Banks and Lending
Whatever means are used to conduct loan reviews, the following points
should be covered:
- financial condition and repayment ability of borrower;
- completeness of documentation;
- consistency with loan policy;
- perfection of security interest on collateral;
- legal and regulatory compliance;
- apparent profitability.
When a problem loan is detected, the responsible officer should take

immediate corrective action to prevent future deterioration and minimise
potential loss.
9.4 Credit analysis
Credit analysis is the process of assessing the risk of lending to a business or

individual*. The so-called credit risk must be evaluated against the benefits
that the bank expects to derive from making the loan. The direct benefits are
simply the interest and fees earned on the loan and possibly, the deposit
balances required as a condition of the loan. Indirect benefits consist of the
initiation or maintenance of a relationship with the borrower that may
provide the bank with increased deposits and demand for a variety of bank
services.
Credit risk assessment has both qualitative and quantitative dimensions; the
former are generally the more difficult to assess. The steps in qualitative
risk assessment are primarily gathering information on the borrower’s
record of financial responsibility, determining his or her true purpose for
wanting to borrow funds, identifying the risks confronting the borrower’s
business under future industry and economic conditions, and estimating the
degree of commitment the borrower will have regarding repayment. The
quantitative dimension of credit risk assessment consists of the analysis of
historical financial data and the projection of future financial results to
evaluate the borrower’s capacity for timely repayment of the loan and,
*
Source: Murray, Andrew – Credit Analysis, Eastern Publishing Ltd., 1998
Banks and Lending
indeed, the borrower’s ability to survive possible industry and economic

reverses.
The essence of all credit analysis can be captured in four basic factors or
lines of inquiry:
- the borrower’s character – most bankers agree that the paramount
factor in a successful loan is the honesty and goodwill of the
borrower;
- the use of loan funds – determining the true need and use of funds
requires good analytical skills in accounting and business finance;
- primary source of repayment – the analyst’s accounting and finance
skills are crucial in determining the ability of the borrower to repay a
loan from cash flows. He must ascertain the timing and sufficiency of
these cash flows and evaluate the risks of cash flows falling short.
- secondary source of repayment – the collateral value should cover, in
addition to the loan amount and interest due, the legal costs of
foreclosure and interest during foreclosure proceeds. Even if the
collateral is the preferred secondary source of repayment, others can
be guarantors and co-makers, but in such cases, the collection usually
requires expensive litigation and results in considerable ill will
between the bank, borrower, and guarantor.
In credit investigation, banks usually resort to the following sources of
information:
- customer interview – it provides the most important information
needed in credit investigation, including the type and amount of the
loan required, sources and plans of repayment, eventual collateral and
guarantors, previous and current creditors, primary customers and
trade suppliers, accountants, main officers and shareholders etc.
- internal sources – credit files on any current or previous borrowings,
checking account activity, other previous or current deposits,
liabilities, income sources, assets, expenses and revenues etc.
- external sources of information – specialised service agencies,
newspapers, magazines etc.
Under the National Bank of Romania’s regulation6 the principal and credit
are defined as follows:
6
Regulation No. 2/2000 concerning the classification of credits and placements, issued in
Monitorul Oficial al României No. 316/2000
Banks and Lending
a) The principal represents the amounts advanced by the bank to the

debtors in the form of loaned capital, including also in this category
when becomes due the banks’ obligations resulting from agreements to
lend and to provide guarantees, as well as deposits placed at other
banks;
b) Credits – The credit categories shall be classified depending on debt
service and initiation of legal proceedings (e.g. credits granted to clients
from the non-banking sector, credits granted to banks, credits granted to
clients of the non-banking sector etc.).
Before granting a credit/loan, a bank makes a trustworthiness analysis of

the customers.
The main trustworthiness ratios are:
Total liabilities
Indebtedness level x 100
total assets
Current asset
Immediate Liquidity x 100
short term liabilities
Owners’ equity
Solvency Ratio x 100
owners’ equity + liabilities
net profit
Profit margin x 100
turnover
Coverage of expenses with Total revenues

x 100
revenues total expenses
The main principles of granting credits are:

- The banking prudence;
- The creditworthiness of the borrowers;
- The credits granted should be profitable both for the bank and for the
borrowers;
Banks and Lending
- The credits have a destination precise and mandatory which can not be
changed by the borrowers;
- Credits are granted under guarantees that are written the credit
contract. The guarantees must cover the maximum amount of credit,
amount consisting in the principal and interest.
- The bank shall reserve the right to verify to its customers (borrowers)
the permanent existence and the integrity of the ensured guarantees
during the whole period of the credit. In the case in which the bank
shall establish the non-observance of the contractual terms, it shall
withdraw the credits before the maturity date;
- During the validity of the credit, the beneficiaries of the credits have
the obligation to deposit to the bank their balance sheet and the
financial statement;
- Under the provisions of the banking law, the loans granted to a single
debtor, shall not exceed 20% of the capital and reserves of the bank.
In order to receive the credit, the economic agents should accomplish
the following conditions:
to be recorded as a company, under the provisions of the law;
to have the capital paid off;
to carry out legal and efficient activities;
to have good indicators; to have opportunities to re-imbursement
at maturity both the credits and interests;
to possess moral and materiel guarantees;
to agree the contractual terms etc.
9.5 Working capital analysis and financial projections
Historically, the major role of banks in commercial lending has been to

finance non-permanent additions to working capital, defined simply as all
current assets. Such additions enable the business to increase its cash
balances and inventory in anticipation of seasonal bulges in sales and
temporarily to extend larger amounts of credit to its customers as an after-
effect of such sales. Working capital loans are said to be self-liquidating
because repayment occurs with an orderly reduction in inventories as sales
rise, followed by reductions in receivables after collections are made on
Banks and Lending
credit sales. The repayment of such loans is largely independent of long-

term profitability and long-term cash flows.
The measure known as net working capital, defined as current assets minus
current liabilities, indicates the amount of a firm’s working capital that is
financed by long-term or so-called permanent sources of funds. Net working
capital is a good indicator of a firm’s liquidity because it identifies the part
of a firm’s most liquid assets that is supported by reliable (long-term) funds;
that is, it is the amount of current assets that is not subject to claims by
holders of current liabilities.
A corollary measure of liquidity is net liquid assets, which is a rough

indication of the absolute currency amount of liquidity in the firm.
Subtracting from current assets the amount invested in inventory and all
current liabilities derives it. Inventory is subtracted because its liquidity is
often suspected.
Sources and uses of funds analysis – decreases in assets and increase in

liabilities constitute sources of funds, whereas increases in assets and
decreases in liabilities are uses o funds. It can be used to make simple
financial projections.
More detailed projections are probably warranted in the form of cash

budgets. The preparation of cash budgets requires projecting specific
cash inflows and cash disbursements on a monthly or even more
frequent basis. The cash budget more closely identifies the amounts and
timing of specific draws against a credit line extended by a bank, or,
alternatively, it identifies periods of excess cash in which short-term
money market investments can be considered.
In the final analysis of a loan, lenders must rely upon cash flow to repay
loans. Cash flow from a firm’s operations, although not directly available,
can be derived through adjustments to the firm’s balance sheet and income
statement.
Thus, it should be mentioned that the borrower’s ability to repay a loan is

mostly a matter of financial analysis. Historical financial analysis is two-
dimensional. Time series analysis is used to spot evolving financial
strengths and weaknesses with the perspective of the passage of time. Cross-
sectional analysis permits the analyst to determine how effectively the
Banks and Lending
borrower has performed in relation to other firms with like market

opportunities and risks.
Under the provisions of the Law No 58 – the Banking law, the credit
documents needed for the conclusion of the convention between the bank
and a potential client (see Annex No. 2) are the following:
Application form (see the Annex No. 1);
Current financial situation of the applicant and of any of its guarantors,

including the projected cash flows for the repayment of credit and
principals;
Description of the guarantees for the entire payment of the debt, and if
necessary an analysis of the goods representing the guarantee;
Description of the credit conditions containing the credit value, the

interest rate, the repayment procedure, the scope for using the credit;
Specimen of signature for each person that authorised the credit and the
name of the bank;
Annual Balance Sheet and Profit and Loss Account for the last three
years of operation (plus annexes);
Company’s Overview;
Description of the current activity/ financial info;
The cash-flow statement for the entire loan period;
Description of the credit conditions containing the credit value, the

interest rate, the repayment procedure, the scope for using the credit;
Specimen of signature of each person that authorised the credit and the
name of the bank.
Banks and Lending
Progress Test
1. What is the meaning of loan?
2. What are the sources of funds used by the Romanian banks?
3. List and comment the five stages of the analysis of a new lending
proposition.
4. List and comment 5 types of loans.
5. What are personal loans?
6. What is the revolving credit?
7. List all the types of loans classified by maturity, destination and pricing.
8. Describe lending money.
9. List the main ratios calculated by a bank in order to establish the

trustworthiness.
10. List the elements of the application form.
11. List the main documents submitted by a customer to a bank in order to

receive a loan.
Banks and Lending
ANNEX No 1
CREDIT REQUEST
Company: “X” SRL

Represented by: Mr. X (authorised to sign)
WE REQUEST the following facility:

Overdraft
¾ Loan
Line for L/Gs, L/Cs
In amount of: ___135,000_______Currency___ USD_ Multicurrency __
Object of facility: purchase of 400 sqm piece of land
Validity: from 31/08/00 to 30/11/00
Reimbursement:
at the end of the validity period
¾ Several instalments
Securities proposed:
¾ Cash collateral _______________________________
Letter of guarantee _______________________________
Mortgage on land/buildings ________________________________
Assignment of receivables _______________________________
Pledge business assets/shares _______________________________
Please find attached the necessary documents for each type of security. The bank has the right to
choose the securities for the credit facility.
Banks and Lending
ANNEX No 2
LOAN AGREEMENT NO… /31.07.200_
The Romanian Bank… S.A. registered in the Register of Trade under no…
Branch… hereby called “the bank”, represented by L. C. as general
manager, and
The company “X” SRL, registered in the Register of Trade under
no………….hereby called “the borrower”, represented by Mr. Y, as general
manager, has agreed upon the following:
1. The bank grants the borrower a loan amounting USD 135,000, for 90
days, with an annual interest rate of 9.5%, in order to pay for a piece of
land of 400 sqm, located in Bucharest.
2. The loan is granted through the account no…………….
3. Payment settlement is money transfer, as a general rule for all
instalments, the possible cash payments being approved in the long run
as the necessities require.
4. The loan is granted on a temporary basis, until stocks are constituted and
expenses recorded, by direct discount of payment documents, in
conformity with the approval ceilings the bank disposes of at the time.
5. During loan employment and collection, the bank is allowed to adjust
the interest rate in accordance with the evolution of inflation and cost of
financial resources. The new interest rate is to be applied to the loan
balance of the date of changing. The borrower is to be informed within 5
days, in writing, with no other specification. In case that, after being
notified, the borrower does not pay the rest of the principal and interest
within less than 10 days since notification, the bank is entitled to
consider the new interest level as accepted and payment of the newly
computed amount (rest of principal and interest) as granted, with no
other specifications.
6. The interest and fees for the loan granted are computed and paid
monthly, beginning with a month after the loan is granted; cashing being
performed directly by the bank, out of the borrowers direct account,
based on statement of account. Interest computation period is since the
21st of the last month till the 20th of the current month.
Banks and Lending
Computed interests that could not be cashed by the end of the month (on the
last working day of the month) are to be recorded in the account
“Uncollected interest till 30 days”. In case that these amounts cannot be
cashed due to lack of cash of the borrower, they are to be transferred from
the above-mentioned account to “Uncollected interest longer than 30 days”
account. These amounts will be adjusted with a rate of 0.4 for every day of
delay taking care that penalties will not amount more than the initial amount
due.
7. Dates and amounts to be collected:
TOTAL
DATE PRINCIPAL INTEREST
AMOUNT
August, 30, 2000 45,000 1,068.75 46,068,75
September, 30, 2000 45,000 712.5 45,712.5
October, 30, 2000 45,000 356.25 45,356.25
TOTAL 135,000 2,137.5 137,137.5
8. The loan (principal and interest) is allowed to be pre-paid, partially or

entirely.
Any breach of the clauses of the present contract entitles the bank to cancel
the loan, unconditionally, and to get payment from the borrower for the
possible damages.
In case that within 30 days since the date the bank is informed about the
borrower’s inability to pay the due amounts of principal and interest, the
borrower is still not able to pay these amounts plus penalties, the whole
principal and interest become eligible and the bank will proceed to liquidate,
according to law, the guarantees, to cover the loss.
9. The borrower is committed to secure the loan concluding a collateral
contract with the bank, specifying hereby the precise characteristics of
pledged goods. According to the contract, the pledged goods remain in
the borrower’s possession, with a preferential claim of the bank in case
of the borrower’s default.
10. The bank has the right to check observance of the terms by which
permanent availability and integrity of the pledged goods are insured,
during the entire life of the loan.
Banks and Lending
11. Alteration, degradation, improper maintenance or use of the pledged

goods, as well as legal ascertainment of changes in their value, entitles
the bank to cancel the unsecured loan before stated maturity.
12. The borrower is committed to:
- employ the loan only for the specified destination;
- pay the principal, interest and fees on their agreed upon maturities;
- observe bank’s regulation and to properly record all transactions
concerning granting, employing and collecting the loan;
- submit its Balance Sheet to the bank;
- submit, on bank’s request, all documents – revenues and expenses
budget, Income Statement, as well as all documents concerning
guarantees, goods or process employing borrowed money.
13. The bank is entitled to cancel the loan in case the borrower submits
unreal data, beginning collection 5 days after notifying the borrower in
writing.
14. The bank does not take political or natural disaster risks and is not
responsible of the legal value (authenticity) of submitted documents.
15. Mutual bonds that are not specified in the present contract must observe
credit rules as well as all banks’ regulation in force at the moment.
16. The borrower must declare other loan agreements with other banks, in
force at present, together with the collateral backing up these loans.
17. Any litigation between the hereby-stated parts is to be solved in the
Court.
18. The present contract has legal force and power of executor title.
19. The contract is concluded, today, July 31, 2000, in 4 copies, 3 remaining
with the bank and one with the borrower.
The Romanian… Bank SA The Company “X” SRL

General Manager, General Manager,
L. C X
Glossary
THE BANKING SYSTEM IN ROMANIA
(accounting) ledger = Cartea - mare;
account = cont;
~ foreign exchange = devize în cont;
~ payable = cont creditor;
~ receivable = cont debitor;
~ settled = cont achitat;
bank ~ = cont bancar;
current ~ = cont curent;
foreign exchange ~ = cont în devize;
on one’s ~ = pe cont propriu;
personal ~ = cont personal;
profit and loss ~(P&L- in UK) = cont de profit şi pierdere;
sales ~ = cont de vânzări (al agentului / comisionarului);
sight ~ = depozit la vedere;
statement of ~ = extras de cont;
the running of an ~ = mişcarea contului;
to keep open accounts = a ţine contabilitatea / conturile;
income and expenditure account = cont de venituri şi cheltuieli;
accountant = contabil;
certified ~ = contabil autorizat;
accounting = contabilitate;
Glossary
applicant = solicitant, petiţionar;
assets = bunuri; active;
audit = verificarea conturilor de către o societate specializată; activitate

desfăşurată de o persoană specializată numită auditor;
auditing commission = comisia de cenzori;
balance = sold;
bank ~ = sold bancar;
credit ~ = sold creditor;
debit ~ = sold debitor;
balance of payments = balanţă de plăţi;
balance of trade = balanţă comercială;
balance sheet = bilanţ contabil;
bank = bancă;
~ deposit = depozit bancar;
~ loan = împrumut bancar;
agricultural ~ = bancă agricolă specializată în acordarea de credite
pentru dezvoltarea agriculturii;
central ~ = bancă care realizează politica economică a guvernului;
clearing ~ = bancă de compensare, în acest caz, banca este membră a
unei case de compensaţie, specializată în decontarea cecurilor;
commercial ~ = bancă comercială specializată în constituirea de
depozite, efectuarea de transferuri de fonduri; poate să fie o societate
pe acţiuni sau o bancă particulară;
discounting ~ = bancă specializată în scontarea cambiilor;
Federal Reserve Bank = Banca Centrală a Statelor Unite ale Americii;
Industrial ~ = o bancă care face parte dintr-un grup de case mici
financiare, care primeşte investiţii de la persoane fizice;
issuing ~ = instituţie financiară care gestionează o nouă emisiune de
acţiuni;
joint-stock ~ = bancă constituită ca societate pe acţiuni;
Glossary
merchant ~ = bancă de afaceri, este o instituţie specializată în

efectuarea operaţiunilor în domeniul industrial şi al business-ului.
banking = activitate bancară;
banking Directives = Directive bancare emise de Uniunea Europeana;
bankruptcy = faliment, incapacitate de plată;
banker’s bank = funcţie a unei Bănci Centrale “bancă a bancilor”; bancă

care refinanţează sistemul bancar;
bank’s own capital = capitalul propriu al băncii;
BIS = Bank for International Settlements = Banca Internaţională a

Reglementelor;
bill = titlu, bon;
Bill of Exchange = bank draft = cambie;
Board of directors = Consiliu de administraţie;

~meeting = şedinţa Consiliului de administraţie;
bond = (aici) obligaţiune;
book - keeping = contabilitate;

double-entry ~ = contabilitate în dublă partidă;
borrow (to) = a împrumuta;
borrowed reserves = rezerve atrase; rezerve împrumutate;
branch = sucursala unei banci;
building society = societate ipotecară; în UK este o instituţie financiară care

oferă ipoteci, fondurile acesteia provenind din depozitele
constituite de publicul larg;
capital = în sens larg, avuţie acumulată;
Glossary
(aici) se referă, în special, la resursele unei persoane fizice, ale

unei organizaţii, ale unei bănci;
capital market = piaţa de capital;
capital structure = structura capitalului;
capital assets = fixed assets = fonduri fixe;
cash = bani lichizi, numerar format din bancnote şi monede;
cash flow = flux de numerar;
ceiling of gold = plafon pentru aur;
Central Bank = Banca Centrală;
charge = taxă;
chart of accounts = planul de conturi;
chattel = bunuri mobile;
claim = (aici) creanţă;
commission = comision;
commitment fee = comision de angajare;
credit co-operative = credit union = cooperativă de credit;
credit institution = instituţie de credit;
creditor = creditor, persoană care deţine creanţe băneşti asupra altor

entităţi;
currency = bancnote şi monede folosite ca monedă naţională a unei ţări;

foreign ~ = valută;
convertible ~ = valută convertibilă;
hard ~ = valută forte;
Glossary
reserve ~ = valută deţinută de Banca Centrală;
currency position = poziţie valutară.
dead line = termen limită;
debentures = titluri de credit; titluri de valoare emise de societăţi cu

răspundere limitată în schimbul unor împrumuturi pe termen
lung;
debt = datorie, obligaţie;

bad ~ = datorie care nu a fost şi nici nu se speră a fi achitată;
National Debt = datoria guvernului;
debtor = debitor – o persoană sau o socieate comercială care datorează

bani, bunuri sau servicii unei alte persoane;
deficit = depăşirea veniturilor de către cheltuieli sau a activelor de către

pasive;
buget ~ = un buget neechilibrat cauzat de cheltuielile mai mari
decât veniturile;
trade ~ = o balanţă de plăţi neechilibrată în care exporturile au
fost depăşite de exporturi;
deposit = depozit;
discount = scontare;
~ house = casă de scontare;
~ market = piaţa scontului;
~ rate = rata scontului.
Early Warning and Rating System = sistem de avertizare timpurie şi de

stabilire a rating-ului de ţară;
electronic banking = activitate bancară derulată electronic;
endowment capital = capital de dotare;
European Bank for Reconstruction and Development (EBRD) = Banca

Europeană pentru Reconstrucţie şi Dezvoltare (BERD);
Glossary
European Community (EC) = Comunitatea Europeană (EU);
European Central Bank (ECB) = Banca Central Europeană;
European Union (EU) = Uniunea Europeană;
exchange = schimb, piaţă;
exchange control = control valutar;
exchange rate = curs de schimb;

fixed ~ = curs de schimb fix;
floating ~ = curs de schimb fluctuant;
managed floating ~ = curs de schimb cu fluctuare dirijată;
managed ~ = curs de schimb controlat;
flexible ~ = curs de schimb flexibil;
pegged ~ = curs de schimb legat;
crawling ped ~ = curs de schimb târâtor sau cu paritate
glisantă;
spot ~ = curs de schimb la vedere;
forward ~ = curs de schimb la termen;
external assets and liabilities = active şi pasive externe;
field of activity = domeniu de activitate;
financial leasing = leasing financiar;
fiscal year = an fiscal;
foreign assets = active externe;
foreign liabilities = pasive externe;
foreign currency/foreign exchange currency = valută;
General Meeting of the Shareholders = Adunarea generală a acţionarilor;

Glossary
gross profit = profit brut;
headquarter premises = clădirea sediului central;
in bail = în custodie;
international foreign reserves = rezerve internaţionale;
International Monetary Fund (IMF) = Fondul Monetar Internaţional

(FMI);
issue guarantees (to) = a emite scrisori de garanţie bancară;
joint-stock company = societate pe acţiuni;
lender of last resort = creditor de ultimă instanţă;
legal entity = legal person = persoană juridică;
legal tender = national currency = monedă naţională;
legal framework = cadru legal;
liability = obligaţie, datorie, pasiv;
majority state-owned capital = cu capital integral de stat;
majority private capital = cu capital integral particular;
majority domestic capital = cu capital integral intern (autohton);
majority foreign capital = cu capital integral străin;
management of foreign exchange reserves = administrarea rezervelor

externe;
maturity = tenor = maturitate, scadenţă;

maximal exposure = expunere maximă;
merger = fuziune;
Glossary
minimum compulsory reserves = rezerve minime obligatorii;
monetary survey = situaţie monetară;
monetary, foreign exchange, credit and payments policy = politică

monetară, valutară, de credit şi plăţi;
money issue = emisiune bănească;
money circulation = circulaţia banilor;
money market = piată monetară;
money supply = broad money = masă monetară; bani în sens larg;
mortgage = ipotecă;
net foreign position = poziţia netă externă;
off - balance sheet = în afara bilanţului;
open an account with (to) = a deschide un cont la;
own capital = capital propriu;
pledge = (aici) gaj, zălog, amanet;
promissory notes drawn or endorsed = bilete la ordin trase sau andosate;
rate of interest = rata dobânzii plătită pentru atragerea capitalului utilizat

într-o afacere;
central bank discount ~ = rata de scont a Băncii Centrale;
accrued ~ = plata unei dobânzi datorate, dar care nu a fost
primită;
bank ~ = rată oficială a dobânzii stabilită de Băncile
Centrale; termenul nu se mai foloseşte în U.K.
fiind înlocuit cu minimum lending rate;
rate of return = rata profitului;

Glossary
real estate assets = active imobiliare;
rediscount = rescontare;
refinance (to) = a refinanţa;
reserve tranche = tranşă de rezervă;
retail banking = activitate bancară cu amănuntul;
revenue and expenditure budget = bugetul de venituri şi cheltuieli;
savings (s.) = (aici) economie (de bani);
savings banks = bănci de economii/case de economii;
security = (aici) efect de comerţ, titlu de valoare;
settlement = (aici) decontare;
shareholder = acţionar;
solvency = solvabilitate;
special drawing rights (SDR) holding = deţinere de drepturi speciale de

tragere (DST);
stock = acţiune (aici), stoc;
stock exchange = bursă de valori;
subsidiary = filială;
reserve fund = fond de rezervă;
conclude an agreement (to) = a încheia un acord;
grant a credit (to) = a acorda un credit;

Glossary
grant interest (to) = a bonifica dobândă;
issue banknote and coins (to) = a pune în circulaţie bancnote şi monede de

metal;
lend to the banking companies (to) = refinance the banking system (to)
= a acorda împrumuturi băncilor / a
refinanţa;
open and keep an account (to) = a deschide şi a menţine un cont;
redeemable = recuperabil;
render (to) = provide banking services (to)= a acorda/ a presta servicii

bancare;
two tier levels = pe două nivele;
Treasury = Trezorerie, departamentul economic şi financiar central al unui

guvern;
vault cash = ghişeu de casierie;
warehouse receipt = recipisă / chitanţă warrant;
warrant = warrant;
weight (to) = (aici) a pondera;
withdraw (to) = a retrage bani.
THE BANKING SYSTEM IN ENGLAND
accountant’s department = departamentul de contabilitate;
bankrupt = faliment;
buying rate = curs de cumpărare;

Glossary
charter/law/act = act de constituire a unei instituţii sau organizaţii

economice, lege;
coinage = batere de monede;
currency issue = emisiune monetară;
discount = discounting = scontare;
discount houses = casa de scontare;
discount market = piaţă a scontului;
discount rate = taxă a scontului;
fiduciary issue = note issue = emisiune fiduciară de bancnote;
foreign exchange market = piaţă valutară;
foreign exchange rate = curs de schimb valutar;
Government’s bank = banca guvernului;
hub = centru de activitate / de interes;
joint - stock banking company = societate bancară pe acţiuni;
lender of the last resort = creditor de ultimă instanţă;
lending institutions = instituţii care acordă împrumuturi; instituţii de

împrumut;
merchants bank = bancă de afaceri;
money market = piaţa monetară;
mutual fund = fond mutual;
overdraft = descoperit în cont; sold debitor; sumă trasă din cont fără
acoperire.
Glossary
rate of interest = rata dobânzii;
selling rate = curs de vânzare;
subsidiary = filiala unei banci;
borrow (to) = a da cu împrumut;
draw a cheque (to) = a trage un cec;
lend, lent, lent (to) = a lua cu împrumut;
National Debt = datoria guvernului;
retail bank = activitate bancară cu amănuntul;
Treasury = Trezorerie (în SUA: Ministerul Finanţelor);
Treasury bills = bilete de trezorerie;
trust bank = bancă de custodie;
turnover = cifră de afaceri;
OTHER BANKING SYSTEM IN THE WORLD
chairman = preşedinte;
Board of Governors = consiliul guvernatorilor;

money supply = masă monetară
discount rate = taxa scontului;
savings banks = bănci de economii;
vault cash = numerar în casierie;
pension and retirement funds = fonduri de pensie;

Glossary
failure = eşec, faliment;
Federal Deposit Insurance Corporation = FDIC = Fondul federal de

asigurare al depozitelor;
merge (to) = a fuziona;
Federal Reserves = Fed = este o agenţie independentă, creată în 1913, care

supervizează şi verifică băncile de stat care fac
parte din Sistemul Federal Reserve;
European System of Central Banks = ESCB = Sistemul European

al Băncilor Centrale;
European Central Bank = ECB = Banca Central Europeană;
minimum reserves = rezerve minime obligatorii;
MONEY SERVICES
advise = sfat, informaţie; (aici) aviz;
Airmail Transfer = transfer prin poşta aeriană;
application form = formular de cerere;
at sight/at presentation = la vedere/la prezentare;
available funds = fonduri disponibile;
Banker’s draft = poliţa bancherului;
banking clerk = funcţionar bancar;
banknotes = bancnote;
bearer = purtător;
Glossary
bearer bonds = titluri la purtător;
blank endorsement = andosare în alb;
by air = pe calea aerului;
by cable = telegrafic;
by endorsement = prin andosare;
by ordinary trasfer of debts = prin simplul transfer al creanţelor;
cash = numerar, bani lichizi;
cashier = casier;
certificate cheque = cec certificat;
cheque = cec;
cheque payable to bearer = cec la purtător;
client = customer = client;
coins = monede;
collect (to) = a încasa;
collection process = procesul de încasare;

compulsory mentions = menţiuni obligatorii;
cross = barare;
crossed cheque = cec barat;
drawee = tras;
drawee bank = banca trasului, în acest caz banca plătitoare;
drawer = trăgător;
Glossary
duties = îndatoriri; sarcini;
endorse (to) = a andosa;
endorsement = andosare;
endorser = persoană care efectuează andosarea;
exchange risk = risc valutar;
expenses = cheltuieli;
general cross = barare generală;
give instructions (to)= a da instrucţiuni;
holder = deţinător;
input messages = mesaje de intrare;
interest charges = cheltuieli cu dobândă;
interest incomes = venituri din dobânzi;
International Money Order = mandat de plată internaţională;
International Payment Order = ordin de plată internaţională;

not to order = nu la ordin;
notify and pay (to)= a notifica şi a plăti;
order form = formular de ordin;
output messages = mesaje de ieşire;
overseas bank = bancă cu sediul în străinătate;
owner = proprietar;
Glossary
passbook = carnet de cec;
payee = beneficiary = beneficiarul unei plăţi;
paying bank = banca plătitorului;
payment by cheque = plată prin cec;
payment in cash = plată cu numerar sau în bani lichizi;
postal orders = mandat poştal;
proceeds = venituri;
remit funds aboard = a remite fonduri în străinătate;
remittance by post = remitere prin poştă;
remittance telegraphically = remitere telegrafică;
remitter = remitent;
securities = titluri de valoare;
simple remittance = remitere simplă;
special cross = barare specială;

special endorsement = andosare specială;
specimen signatures = specimen de semnături;
Standing order = ordine de plată permanente;
Telegraphic transfer (TT)= transfer telegrafic;
be valid (to) = a fi valabil;
traveller’s cheque = cec de călătorie;

Glossary
ELECTRONIC BANKING SERVICES
debit cards = cărţi de debit;
Electronic banking services = servicii bancare electronice, adică servicii

efectuate prin calculator;
electronic cash = numerar electronic;
electronic cheque = cec electronic;
electronic money = monedă electronică, bani electronici;
electronic signature = semnătură electronică;
fraud = fraudă;
network = reţea;
~ transmission = reţea de transmisie;
password = parolă;
PIN = Personal Identification Number = număr personal de identificare;
POS = Point of Sale Terminal = locul vânzării;

record (to) = a înregistra;
user = utilizator;
telephone banking = bancă la domiciliu.
OTHER ELECTRONIC BANKING SERVICES
Electronic Funds Transfer = EFT = Transfer Electronic de Fonduri;
money transfer = transfer de bani;
Automated Teller Machine = ATM = ghişeu automat de numerar;

Glossary
EFT-POS = Electronic Funds Transfer to the Selling Points Terminals

= transferul electronic al fondurilor la locul vânzării;
credit cards = cărţi de credit;
store cards = carduri de magazin;
debit cards = cărţi de debit;
retailer = detailist;
magnetic strip = bandă magnetică;
cash dispensing = distribuitor de numerar;
balance inquiry = solicitarea soldului contului;
POS = Point of sale = punct de vânzare;
keyboard = tastatură;
Joint-stock banks = bănci pe acţiuni
Money market = piaţă monetară.

BANKER - CUSTOMER RELATIONSHIP
Act/charter/law = lege;
adequate level of solvency = nivelul adecvat al solvabilităţii;
application to open an account = cerere pentru a deschide un cont;
banker/bank = bancă;
Banker-customer relationship = relaţia dintre bancă şi client;
banking procedures = proceduri bancare;

Glossary
building societies = societăţi de construcţii;
creditor = creditor;
current savings deposit = depozit curent de economii;
customer/client = client;
deal (to) = (a face o) tranzacţie (cu);
debtor = debitor;
deputy = (aici) delegat; adjunct;
disbursement = plată, achitare;
duties and rights = obligaţiuni şi drepturi;
forgery = fraudă;
insurance company = societate de asigurări;
legal person = persoană juridică;

lend (to )= a împrumuta (pe);
license/authorisation = licenţă / autorizaţie;
licensed deposit taking institutions = instituţii acreditate să consti-

tuie/primească depozite;
mortgage = ipotecă;
natural person = persoană fizică;
overdrawn = fără acoperire;
proceeds = venituri;
recognised banks = bănci acreditate;

Glossary
sealed = sigilat;
sight interest = dobânda la vedere;
solicitor = avocat;
theft = furt;
be entitled to (to) = a fi împuternicit (să);
be supplied with (to) = a fi alimentat cu;
complete/conclude a contract (to) = a încheia un contract;
finish/terminate/cancell a contract (to) = a rezilia un contract;
mortgage (to) = a ipoteca;
open an account with (to) = a deschide un cont;
pass on (to) = a statua;
vest somebody to do something (to) = a investi pe cineva să facă ceva;
Trustee Savings Bank = bănci de încredere specializate în deţinerea

economiilor (un fel de CEC);
RISKS MANAGEMENT
credit institution = instituţie de credit;
risks management = administrarea riscurilor;
financial risks = riscuri financiare;
foreign exchange risk = risc valutar;
liquidity risk = risc de lichiditate;

Glossary
interest rate risk = riscul ratei dobânzii;
operational risk = risc operaţional;
own funds = fonduri proprii;
commitments = angajamente;
solvency = solvabilitate;
banking rating system and the early warning system = sistem de

avertizare timpurie şi de stabilire a rating-ului de ţară;
level of large exposures = nivelul expunerilor mari;
minimum level of the capital = nivelul minim al capitalului;
administrative procedures = proceduri administrative;
internal control procedures = proceduri de control intern;
classification of credits = clasificarea creditelor;
large loans = împrumuturi mari;
loans granted to the debtors in special relations with a bank =

împrumuturi acordate debitorilor care se află în relaţii speciale cu banca;
liquidity = lichiditate;
debt service = serviciul datoriei;
doubtful credit = credit îndoielnic;
interest rate risk = riscul ratei dobânzii;
off balance sheet items = elemente în afara bilanţului contabil;
prudential measures = măsuri de prudenţialitate;

Glossary
credit risk = riscul de credit;
watch credit = credit în observaţie;
doubtful credit = credit îndoielnic;
loss credit = credit de pierdere;
shareholder = acţionar;
grant a credit (to) = a acorda un credit;
financial-accounting department = departamentul financiar-contabil;
assets = active;
BANKS AND LENDING
auction credit =credit de licitaţie;
borrowed funds = fonduri atrase (împrumutate);
capability = ability = capacitate; abilitate;
currency risk = riscul de schimb valutar;
fixed interest rate loan = împrumut cu rata dobânzii fixă;
floating interest rate loan = împrumut cu rata dobânzii flotanta;
legal person = persoană juridică;
lending = împrumut;
Glossary
lending facilities = facilităţi legate de acordarea împrumutului;
liabilities = pasive;
liquidity risk = riscul de lichiditate;
Lombard credit = credit lombard;
loss = pierdere;
market risk = riscul pieţei;
minimum capital = capital minim;
operational risk = riscul operaţional.
paid up capital = capital vărsat;

physical person = persoană fizică;
preferential credit = credit preferenţial;
purpose = destination = scop / destinaţie;
repayment = plată;
solicitor = avocat; (amer. procuror);
solvency ratio = rata solvabilităţii;
special credit = credit special;
standard credit = credit standard;
structural credit = credit structural;
substandard credit = credit substandard;

Glossary
supplementary capital = capital suplimentar;
weight (to) = a pondera;
variable interest rate loan = împrumut cu rata dobânzii variabilă;
watch credit = (aici) credit în observare

Bibliography
BIBLIOGRAPHY
ABRAHAM FROIS, Gilbert Economia politică, Editura Humanitas,

1994.
BASNO, Cezar, Monedă, credit, bănci, Editura Didactică şi

DARDAC, Nicolae, Pedagogică, RA, Bucureşti, 1994.
FLORICEL, C.
BASNO, Cezar, Monedă, credit, bănci, Aplicaţii şi studii,
DARDAC, Nicolae, Editura Didactică şi Pedagogică, RA,
FLORICEL, C. Bucureşti, 1994.
BRANCH, E. Alan Export-Import Documentation, Publishing

House: CNAPMAN and HALL.
BUTTER W., Financial markets and European monetary

CORSETTI, G., cooperation, 1998, published by the Press
PESENTI, P. Syndicate of the University of Cambridge,
U.K.
DAVIES, Audrey & Banking operations, Pitman Publishing,

KEARNS, Martin London, 1992.
GAFTONIUC, Simona Finanţe internaţionale, Editura Econo-

mică, Bucuresti, 1995.
GAFTONIUC, Simona Practici bancare internaţionale,

Editura Economică, Bucureşti, 1995.
GOLOŞOIU-GEORGESCU, Banking techniques and operations,

Ligia Editura ASE, Bucureşti,1999.
GOLOŞOIU-GEORGESCU, Mecanisme valutare, Editura ASE,

Ligia Bucureşti, 2001.
GUST, Marius, Management bancar, Editura

coordonator Independenţa economică, Brăila 1999.
Bibliography
HARROP, Jeffey The Political Economy of Integration in

the European Union, third edition,
published by Edward Elgar Publishing
Limited, 2000, U.K.
HOWELLS, P. & The economics of money, banking and

BAIN, K. finance A European text, 1998, Pearson
Education Limited, England.
IONESCU, C. Lucian, Fundamentele profesiunii bancare –

coordonator Băncile şi operaţiunile bancare,
Editura Economica, Bucureşti, 1996.
IONESCU, M. Gh., Legislaţie bancară cu adnotări şi

SILBERSTEIN, I. comentarii, vol. 3, Editura Expansion
Armonia, Bucureşti, 1998.
JACOB, Brian An introduction to banking, Holt, Rinehart

& Winston, London, 1990.
KIRIŢESCU, Costin Relaţii valutar-financiare internaţionale,

Editura Ştiinţifică şi Enciclopedică,
Bucureşti, 1978.
MACOVEI, Ioan Contractele de comerţ exterior în dreptul

roman, Editura Junimea, Iaşi, 1977.
KLEIN, G & The business of banking, Low priced

LAMBERT, J. British books, London, 1993.
MISHKIN, S. Frederic The economics of money, banking and

financial markets, sixth edition, Columbia
University USA, 2001.
NEGRUŞ, Mariana Tehnici de calcul valutar-financiar,

Editura Militară, Bucureşti, 1992.
NEGRUŞ, Mariana Plăţi şi garanţii internaţionale,

Editura All, Bucureşti, 1996.
Bibliography
PALFREMAN, David Banking: the legal environment, Pitman

Publishing, London, 1994.
POPA, Ioan Tranzacţii comerciale internaţionale,

Editura Economică, Bucureşti, 1997.
PUNNETT, B.J. & International businness, second edition,

RICKS, D Blackwell Business, 1998, U.K.
RUHL, C., Economic transition in Romania - Past,

DĂIANU, D. present and future, Arta grafică, Bucureşti
1999.
TWELLS, Harry Exporters’ checklist – National

Westminster Bank Lloyd’s of London
Press Ltd., 1992.
VALDEZ, Stephen An introduction to global financial

markets, 3rd edition, MacMillan
Busineeess, London, 2000.
VAN HORNE, J. Financial market rates and flows, fifth

edition, New Jersey, 1998.
YARBROUGH, Beth & The world economy: trade and finance,

YARBROUGH, Robert The Dryden Press, second edition, 1996.
WHITING, D. P. Elements of banking, Macdonald & Evans

Ltd., London 1985.
Dictionar de Relaţii Economice

Internaţionale, Editura Enciclopedică,
Bucureşti, 1993.
Harp’s Dictionary of Bussiness and

Finance, London, 1988.
Dictionar de business englez-roman, Ed.

Universal Dalsi, 2001 (Grupul Penguin).
Bibliography
Legea nr. 82/1991 - Legea Contabilităţii,

publicată in M.O. nr. 265/1991, precum şi
Regulamentul de aplicare al acesteia,
publicată în M.O. nr. 303 bis/1993.
Legea nr. 58/1998 - Legea bancară,

publicată în M.O. nr. 121/1998.
Legea nr. 101/1998 privind Statutul Băncii

Naţionale a României, publicată în
M.O. nr. 203/1998.
Legea nr. 83/1998 privind procedura

falimentului bancilor, publicată în
M.O. nr. 159/1998.
OUG nr. 186/1999 pentru modificarea şi

completarea Legii nr. 83/1998, publicată
în M.O. nr. 567/1999
OUG nr. 138/2001 pentru modificarea şi

completarea Legii nr. 83/1998 privind
procedura falimentului băncilor, publicată
în M.O. nr. 671/2001.
Banca Naţională a României Rapoartele anuale 1995 – 2000.
Banca Naţională a României Normele nr. 8/1999 privind limitarea

riscului de credit a băncilor, publicate în
M.O. nr. 245/1999.
Banca Naţională a României Normele nr. 9/2000 privind capitalul

minim al băncilor, publicate în M.O.
nr. 474/2000.
Banca Naţională a României Normele nr.4/2001 privind supravegherea

poziţiilor valutare ale băncilor, publicate
în M.O. nr. 631/2001.
Bibliography
Banca Naţională a României Norma nr. 7/1999 privind fondurile

proprii, publicată în M.O. nr. 206/1999.
Banca Naţională a României Regulamentul nr. 1/2000 privind operaţi-

unile pe piata monetară efectuate de BNR
şi facilităţile de credite şi de dobândă
acordate de aceasta băncilor, publicate în
M.O. nr. 142/2000.
Banca Naţională a României Regulamentul nr. 4/1998 al Băncii Naţio-

nale a României privind regimul
rezervelor minime obligatorii, publicat în
M.O. nr. 272/1998.
Banca Naţională a României Norma nr. 1/1999 privind registrul

bancar, publicată în M.O. nr. 12/1999.
Banca Naţională a României Regulamentul nr. 3/1997 privind

efectuarea operaţiunilor valutare, cu
modificările ulterioare, publicat în M.O.
nr.395/31 decembrie 1997.
Banca Naţională a României Regulamentul nr. 2/2000 reglementează

clasificarea creditelor şi plasamentelor,
precum şi constituirea, regularizarea şi
utilizarea provizioanelor specifice de risc
de credit de către băncile persoane
juridice române, publicat în M.O.
nr.316/07.07.2000.
Banca Naţională a României Normele metodologice nr. 2 din

07.04.2000 se referă la aplicarea
Regulamentului Băncii Naţionale a
României nr. 2/2000, publicate în M.O.
nr. 316/07.07.2000.
Banca Naţională a României Circulara nr. 6/1999 privind constituirea

provizioanelor specifice de risc, publicată
în M.O. nr. 175/1999.
Bibliography
Banca Naţională a României Normele nr. 9/1999 pentru calcularea

valorii activului şi pasivului băncilor în
vederea stabilirii stării de insolvabilitate a
acestora, publicate în M.O. nr. 472/1999.
Banca Naţională a României Circulara nr. 26/2001 privind modificarea

şi completarea Regulamentului nr. 3/1997
privind efectuarea operaţiunilor valutare,
publicată în M.O. nr. 769/2001.
Banca Naţională a României Normele nr. 3/2001 privind modificarea

datei de intrare în vigoare a Normelor
BNR nr. 1/2001 privind lichiditatea
băncilor, publicate în M.O. nr. 470/2001.
Banca Naţională a României Normele nr. 3/2002 privind standardele de

cunoaştere a clientelei, publicate în
M.O. nr. 470/2001.
Banca Naţională a Ordinul nr. 875/2001 privind Regula-

României, mentul operaţiunilor cu titluri de stat,
MFP, CNVM publicat în M.O. nr. 450/2001
Federal Reserve Bank A Primer of the FED, Virginia, 1988.
Federal Reserve Bank A Summary Report of the FED-Monetary

policy objectives, 2000.
Federal Reserve System Purposes &Functions, Washington D.C.,

1984.
Bank for International Customer due diligence for banks,

Settlements – Basel October 2001.
Committee on Banking
Supervision
OECD Proceedings The new banking landscape in Central and

Eastern Europe – OECD Publications,
Paris, 1997.
Bibliography
w.w.w.bnro.ro
w.w.w.bis.org
w.w.w.europa.eu.int
w.w.w.pambuccian.ro/RlegSingn.htm
w.w.w.pambuccian.ro/R-LegEcom.htm
w.w.w.usic.org/papers/stateoftheinternet99.htm

Business of Banking (Volumul I)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Business of Banking (Volumul I)

Uploaded by

Copyright:

Available Formats

FOREWORD

The book “The business of banking” is addressing the students of the

The aim of Business of Banking is to equip the students of the Economic

The book consists of a variety of materials and is organized around

The material in each chapter contains a definition, descriptive passages or

Professor Gabriela Anghelache

After studying this chapter you should understand:

1.1 The history of the Romanian banking system – brief presentation

The first modern commercial bank was established in the Romanian

The National Bank of Romania was established at the initiative of the

The economic progress that accompanied the consolidation of the Romanian

During 1931-1932, the banking sector felt the repercussions of the

In order to strengthen the banking system, the Romanian Parliament passed

1.2 The banking system in Romania after 1989

• State capital: Banc Post SA;

• Private capital: Mind Bank SA.

Banks operating in Romania, by the type of the capital

Number 1994 1995 1996 1997 1998 1999 2000

Source: National Bank of Romania

Generally, a central bank acts as a state institution in order to establish and

The main functions2 of a central bank may be the following:

The National Bank of Romania is the only institution authorized to

The National Bank of Romania distributes the money issue and

The National Bank of Romania uses procedures and instruments

The National Bank of Romania may discount, acquire, accept as

The National Bank of Romania establishes the minimum compulsory

As a part of its monetary, foreign exchange, lending and payments policies,

• Government bonds which are part of public issues redeemable within

• Bills of exchange or promissory notes drawn or endorsed for

Managing the foreign exchange regime, the National Bank of Romania is

The National Bank of Romania sets and holds international reserves.

• Gold holdings at the Treasury or in deposits abroad;

institutions which are denominated in such currencies and held in such

The National Bank of Romania has exclusive competence for granting

In order to ensure a viable and operational banking system, the National

• Issue regulations, take measures to enforce their observance and rule

The National Bank of Romania is vested by the Parliament with the

Organization of the National Bank of Romania

• The prime vice Governor as vice president;

The Board of Directors of the National Bank of Romania decides,

• Monetary, foreign exchange, credit and payments policies and monitors

• Measures in the field of licensing and prudential supervision of the

• Internal organization, staff salaries and profits, etc.

The members of the Board of Directors are appointed by the Parliament on

The National Bank of Romania’s internal organization has been changed

The National Bank of Romania internal organization on the 31st of

1.4 Banks - A Main Part of the Romanian Banking System

Under the provisions of the Romanian Banking Law, with subsequent

The European Union countries utilize the concept “credit institution” in

No entity is allowed to perform any banking business within the Romanian

• Receive demand, time and notice deposits;

The National Bank of Romania may withdraw the authorization granted to a

The organization and management of banks are established through

The administrators of the bank may be only individuals, in a number of

Each bank is a legal entity, organized as a joint stock company.

The following bodies generally, manage the bank:

• Capital markets department;

The headquarters’ departments have some similar attributions resulting from

The branch of a bank has the organizational structure as that presented in

The National Bank of Romania establishes the minimum share capital.

Under the provisions of the Banking Law, banks operating in Romania

• Engagement in transactions with chattel and real estate assets;

• Deposits receiving, if most of the deposits come from the bank’s

Banks have to keep their accounting ledgers according to the provisions of

The minimum level of solvency, determined as a ratio between the level

Maximum exposure to a single debtor, expressed in percentage as a ratio

Maximum exposure aggregate, expressed in percentage as a ratio

Minimum level of liquidity determined according to the deadlines of the

The classification of granted loans and of uncased interests related to

Currency position, expressed in percentage according to the level of the

Resource management and investments of the bank;

Enlargement of the branch network and other subsidiaries of the bank.

At the headquarters of the banks, branches and other subsidiaries in the

Rural and agricultural banks, and