6. the Banker-customer Relationship

8/13/2019 6. the Banker-customer Relationship

1/31

6.1. Types of the customers

In order to be a customer of the bank there must be an account opened in thename or names of the persons who have entered into a legal contract with a

bank. A person who merely uses a bank, say to change coins for notes eachday, or a person who on one occasion only cashes a travelers cheque is not

by legal definition a customer.

Banking deals with people and their money. The people who use banks are

called customers, a term which is different from client; this term is usedto define the people who use the services of the lawyers or accountants. Inorder to carry out business, a banker obviously needs customers; these can

be defined as persons who have a current account or some similarrelationship with the bank.

The account does not need to have been opened for any stated length oftime, but to be a customer a person must have entered a contract in his

name.

It was laid down that continuous dealing was not the key factor, but that thecustomer relationship starts when the application to open an account has

been accepted, or when money has been taken on the understanding that

cheques will be honored. Duration of the account is not a consideration.However, even where no contract has been completed to open an account,

bankers still have take care when dealing with the public. For example, themanager who has given investment advice to a potential customer was heldto owe the same contractual duty of care that a customer would be entitled

to31.

31Don Wright &Wally Valentine, Business of Banking & Financial Services, Northcote

House, 1992

The banker-customer

relationship


2/31

In Romania, there is usually a contract between the bank and its customer,

where the bank undertakes to receive money and to collect bills for itscustomers account.

A customer is someone who: has a current account or other relationship;

has entered a contract to open accounts and no particular time period isinvolved.

According to the National Bank of Romanias Norm concerning know-your-

customer standards, a bank customer is:a. Any individual, legal entity or entity without juridical

personality that maintains an account with a bank throughwhich transactions concerning funds receiving or distribution

are carried out/ cash transactions;b. Any individual, legal entity or entity without legal

personality on whose behalf an account is maintained;

c. Any individual, legal entity or entity without juridicalpersonality connected with a financial transaction in whichthe bank is involved and who generate a significant

reputation risk or a risk of another nature to the bank.There is no a clear definition of the banker in either the statute or case law,

although the use of the word bankor banker in various pieces of

legislation. The Bill of Exchange Act 1882 in the United Kingdom define abank as a body of persons whether corporate or not who carry on the

business of banking. The Agricultural Credits Act 1928 states a bank canbe any firm, incorporated company carrying forward business which is

approved by the Ministry of Finance.

According to the Bill of Exchange Act 1882, a banker is someone, who

credits money and cheques, debits accounts and keeps account. From thisdefinition we may say that the banker is the person working in a bank whocarry on the business of the bank.

The banking business means the business of receiving money, on currentsavings deposits or other similar account, money which is repayable on

demand by order, cheque, draft and money which will be invested by way ofadvances to customer or otherwise.

6.2. The banker-customer relationshi p

In order that the bankers and the customers can carry out their business they

need to be able to transact business within a legal contractual relationship.The usual relationship between a banker and a customer are as follows:


3/31

- debtor and creditor;

- bailor and baillee;- principal and agent;- mortgagor and mortgagee.

1. Debtor and creditor

This is the basic banker/customer relationship. It arises out of the fact thatthe bank holds money, which belongs to the customer. The money has to berepaid at some time and therefore the banker is the debtor and the customer

is the creditor. When, however, the customer borrows the money from thebank position is reversed and the customer is the debtor and the banker is

the creditor32.

In this case there is an agreement that the customer should repay the debteither by regular installments or by a given date.

2. Principal and agentAn agent is someone employed to work for a principal and to makecontracts on his behalf. A principal is that person who informs the agent

what he wants him to do on his behalf. A bank, when dealing with itscustomer direct, has a debtor/creditor relationship. But where a third party is

involved the relationship becomes one of principal/agent. For example,

when the bank collects a cheque drawn by a third party, or when thecustomer draws a cheque payable to someone else, the bank becomes an

agent. Other examples are when the bank arranges insurance, buys stocksand shares, sends money and so on - all on behalf of the customer.

3. Bailor and baileeOne of the banks services is to receive valuables and documents to hold on

behalf of its customers. When the bank holds these valuables in safe custodyhe has to take reasonable care of the property and has a bailor/baileerelationship with that customer. A bailor is the depositor of the property.

This deposit is made on the understanding that the goods will be returned bythe bailee, or dealt with in accordance with the bailors instructions.

A bailee receives the property and must look after it in a careful/professionalmanner.

4. Mortgagor and mortgagee

32The debtor/creditor relationship was established long ago in the case of Foley v. Hill

(1848).


4/31

With the advent of banks entering into the domestic property market, there

now exists a mortgagor and mortgagee relationship, since a bank will takethe deeds of a house when granting such an advance to a customer, or willtake a morgage (charge) over securities when granting an advance. When

security is charged to the bank the customer is the mortgagor (i.e. the personwho gives the morgage) and the bank is the mortgagee (i.e. the person or

body that receives the mortgage).

Rights and duties

From the various banker/customer relationships arise a number of legalrights and duties which underlie the practical operation of banking.

A right is the performance of actions within accepted standards or moral or

legal behavior. A bank has the right to:- charge a reasonable commission for its services and interest on loans andoverdrafts;

- be indemnified for losses incurred when acting for a customer;- repayment on demand of any overdrawn balance;- to exercise a lien33 over the customers securities in the banks

possession. For example, bills or cheques deposited for collection orpromissory notes can be retained against the debt. This does not include

deposits within safe custody;

- use the customers money in any way provided it honours the customerscheques;

- expect the customer to use resonable care in drawing cheques.A duty is a task or action that a person is bound to perform for moral orlegal reasons.

The banker has the duty:1. to honour the customers cheques provided;

- they are properly drawn;- a credit balance or approved overdraft exists;- there is no legal bar to payment;

- the bank has no knowledge of death, bankruptcy proceedings, ormental incapacity regarding the customer;

- there is no notice of a winding-up procedure or receiving order beingmade.

33In the United Kingdom, a lien is the right to keep possession of the goods as payment in

lieu of the debt.


5/31

2. to abide by any express mandate from the customer such as a standing

order; the bank is required to pay a standing order if there is sufficientbalance in the account.

3. not to disclose its customers affairs unless:

- compelled to do so by law34

;- there is a duty to the public to do so, for example if the customer was

trading with the enemy or there was a danger to the state;- it is the interest of the bank such as when issuing a writ to demand

repayment of a loan;

- the customer has expressly consented.Secrecy is a key duty for all the bank staff and they must be careful not to

divulge information on customers business even when done innocently.Bank staff must not therefore:

- talk amongst themselves about customers business outside the bank;- talk to fiends and relations about customers and their financialposition;

- give customers information over the counter in such a way that it canbe overheard by other customers.

4. to give reasonable notice of closure of an account in order to enable the

customer to make alternative arrangements and that the bank may avoidhaving to return cheques that have already been issued.

5. to provide a statement of account within a reasonable time and to

provide details of the balance on request.

The banker should keep an accurate record of the customers account. Thecustomer, however, does not have an obligation to check the bankstatements or advise the bank of errors, though he can, subsequently,

challenge their accuracy.

This means the banker needs to be careful to avoid errors when recordingtransactions on an account.6. to receive the customers money and cheques for collection and credit

the amounts to the customers account.7. to repay money on demand:

-at the customers written request;-during banking hours;-at the parent branch or another agreed branch.

34For example, disclosure can come about when a court order is served on the bank and ask

for a return of interest paid to customers.


6/31

8. to advise the customer immediately if/when the forgery of a customers

signature is brought to the banks attention.9. to exercise proper care and skill, especially with regard to the payment

and collection or cheques.

The duties of the customer:1. the customer must maintain an adequate balance to meet cheques

presented for payment;2. he must take care when drawing cheques and other mandates, so as

to make them difficult to alter;

3. he must keep the cheque book safe and advice the bank should it belost.

Usually, the legal obligations of the contracting parties are set up in thecommon agreement according to their nature. For example, in case of a

agreement for a bank deposit (in a Romanian bank), the trustee (bank)committed himself to:- open for a depositor a separate account for every deposit that makes;

- receive the money as a deposit and to hand the providing acts of thedeposit;

- 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 casesprovided by law;

- release the deposit if the depositor asks for that and to guarantee the

deposit.- pay the interest to the depositor.

6.3. Types of accounts

Usually the legal obligations of the parties and their rights depend on- in

strict sense -the type of the account opened by the customer and -in a largesense- the type of the service offered by the bank.

Current accountPerhaps the most important and the most popular account held by a

customer of a bank is the current account. From this account steams thevarious services that the bank can make available to a customer. Indeed, in

order to have a usual relationship between a bank and a customer it is vitalthat an account is held. The current account is often called the chequeaccount, because the money is withdrawn by the use of cheques. The

current account is an account from which a customer may withdraw hisfunds on demand by drawing a cheque, or by advising a bank to debit his

account at regular intervals by means of a standing order instruction, or byauthorizing a bank to accept debits on a monthly, quarterly, half-yearly or


7/31

yearly basis. When the account is opened, the customer is given a cheque

book and paying- in book, free of charge, and he will use these in all histransactions with the bank.

The most important basi service given to any customer with a currentaccount is the dispatch of the statement. This indicates the balance due to

the customer or, if he has overdrawn, the balance due to the bank. It willalso show the debit and credit entries and the balance on the account at theend of each working day. A person may order a statement as often as

necessary, either on demand or at regular intervals.

Budget accountThese accounts are specifically used for paying bills such as for household

expenses, telephone, gas, electricity, taxes, insurance etc. by monthlytransfers or cheque drawings.

The customer calculates his total domestic expenditure and otherexpenditure that is incurred on regular basis. The banks adds to this sum itscharges, the total is divided by twelve and the account is opened by a

transfer from the current account to this cash flow account. The sameamount is transferred each month by standing order. The customer is given a

cheque book on his account and he will then be able to pay his bills as when

they fall due. Obviously, there will be periods when the account is in creditand other periods when the account is overdrawn, but at the end of twelve

moths, providing the calculations are correct and there has been no suddenincrease or decrease in any item of expenditure, the balance on the accountshould be nil. The exercise is then recommenced for the following year.

Deposit account

Customers with large amounts at their disposal may consider that a fixed-term deposit account is more attractive to their needs: a sum of money can

be put on deposit account for a period of one month upwards and so it will

attract a better rate of interest. The interest given will depend on the amountinvested and the length of time that the funds remain on deposit account.

The greater the amount and the longer the time, the better will be the rate ofinterest.Although deposit account holders are customers of the bank, the normal

services of the account are not available with the deposit account. Forexample, a cheque book is not issued, nor is cheque card or cash dispenser

card. Standing orders or direct debits are not given.


8/31

Loan account

Borrowing funds from a bank by obtaining a loan has its attractions to boththe business customer and the private person. On the agreement with a bankto borrow a given sum of money, a loan account is debited with a similar

amount. The loan may be for consumer durable, holidays, or any otheracceptable reason. The businessman may require a business loan either to

improve or extend fixed assets or to purchase additional stocks in order toexpand his business.

Personal accountAny adult (which for banking means 18 years over) can operate an account

in his/her own name with the minimum of formality.

Company account/Business accountPublic limited or private limited companies constitute the most importantcustomer of the banks as they need banking services for their trade activities

and business operations, such as payment to suppliers, guarantees tointernational partners, safe custody etc. In this respect they run variousaccounts available to corporations, namely current and savings account,

foreign exchange account etc. Business accounts can be opened by soletraders and partnerships.

Account for unincorporated entityThe unincorporated entities are associations, clubs or societies having

separate identity in law, which can open accounts by mandate.

Joint account

Joint account is usually opened by husband and wife, although is notuncommon for other people to open such accounts. Any number of people

can join together to open such an account, although in practice the number isusually two or three.To open a joint account, all parties must sign a form known as a mandate.

This will establish who is to sign cheques and withdrawals (e.g. all to sign,both to sign, anyone to sign, or either to sign) or who can sign for the

release of documentation in safe custody.Another important part of this mandate is that the parties agree to joint andseveral liabilities for any overdraft on the account. The importance of this

clause for banks is that if an overdraft was granted on a joint account, and itis not repaid, the bank can take legal action against all parties to the account.

For example, suppose there is a joint account of Mr. X and Mr. Y, with anoverdraft of USD 5 000. The bank could take action against: Mr. X, Mr. Y,


9/31

Mr. X and Mr. Y. This means that if Mr. Y could not repay his share (USD

5000), but Mr. X could, then the full debt can be recovered from him.

Other important benefits of joint and several accounts are:

- the ability to use private account credit balances of one customer againstthe debit balance of the joint account. This is clearly of benefit to the

bank;- on the death of one party the other(s) still have access to a source of

money. This is of particular benefit to a wife on the death of her

husband.One obvious problem for the bank when managing a joint account is if the

parties to the account fall out. This is probably most common with husbandand wife joint accounts, although care must be taken with all accounts when

any such dispute comes to the notice of the bank.

If the original mandate was for either party to sign then there is a danger that

all the funds could be withdrawn by one of them. Whilst the bank would notbe legally liable in such an event this would create bad customer relationswhich could be detrimental to the banks present and future business. To

avoid such a situation, the bank-on finding out about such a dispute-shouldadvise parties that it will not act upon one signature, and that for all future

transactions both parties must sign.

Foreign exchange account

These accounts are specific to the commercial customers of the banks as thetransactions in foreign currency are expanding due to the globalization ofeconomies and deregulation in funds transfers between countries.

6.4. Opening an account

Banks deal with different types of customers. They can be included in threelarge categories:-natural persons (individuals)

-legal persons (legal entities)-unincorporated entities (no juridical personality).

The bank must always identify the person or persons wishing to open anaccount. A bank must exercise caution before an account is opened for any

person. The bank can be sued for conversion, that is, the deprivation ofthe property of a rightful owner to another person. A bank collects cheques

and other instruments every day and can very easily fall into this trap if itdoes not take reasonable precautions.


10/31

Banks need to obtain all information necessary to establish the identity ofeach new customer and the purpose and intended nature of the banking

businesses that the bank should render to the respective customer. The

extent and nature of the information shall depend on the type of theprospective applicant individual, corporate and the expected nature and

size of the transactions that shall be carried out by the intermediary of thebank.

According to Romanian legislation, in the case of customer-natural persons,banks shall require and obtain the minimum information, as follows:

- name and surname and, if the case, the pseudonym;- permanent residential address;

- date and place of birth;- the individual numerical code or, if the case, another analogous singleidentification element;

- name of employer or nature of self-employment/business;- source of funds;- specimen signature.

Banks shall establish a systematic procedure in order to check the new

customers identity and of the persons acting on their behalf, and shall not

establish a banking relationship until the identity of a new customer issatisfactorily verified.

Banks shall verify the information against the original documents of identityissued by an official authority (identity cards, passports), documents, which

are most difficult to obtain illicitly, are not easily forged, or which cannot beeasily obtained within false identities. Banks shall verify customers against

an official document that shall inc lude a photograph of the holder or adescription of that person and his/her signature.

The identification of customers, legal entities or entities without juridicalpersonality is made by obtaining, from a public register, from the customer

or from both sources, registration documents that constitute the basicdocuments for their registration, including an updated financial statement ofthe register, or in the case of the absence of a registration requirement, the

identification shall be accomplished on the basis of the incorporationdocuments, including the business license and/or the audit statement.


11/31

Banks shall not open and manage anonymous accounts, for which the

identity of the holder is not known and recorded accordingly.

In the case of savings and deposit accounts, banks shall verify the identity of

any person that saves or withdraws amounts of money to/from an accountexceeding the equivalent of Euro 10.000.

Another important aspect of the identification process is the verification oflegal capacity of prospective customer (if he is minor) and his integrity (ifhe is a proper person to be entrusted with a cheque book).

According to the Romanian legislation, banks shall develop customer

acceptance policies and procedures establishing at least the customer typesthat it intend to encourage, the banking products and services types that it

can provide to each category of customers, in accordance with the riskassociated to different categories of customers.

Whenever the bank considers that there is a suspicious element concerning

the identity of the beneficiary or of any transaction may require additionalinformation or refuse to enter into relationship with the respective customer.

The identity of the customer can be considered suspicious in the followingsituations:

- when the customer empowers a person with whom it has no closed

business relationships, to carry out transactions through hisaccount;

- when the value of the funds or assets in a transaction ordered by acustomer is not in the same proportion with his financial statement

that is known by the bank;- when the bank too notices other unusual situations during the

process of carrying out of its business relationships with a

customer.

Banks should not only establish the identity of their customers, but should

also monitor account activity to determine those transactions that do notconform with the normal or expected transactions for that customer or type

of account.The suspicious transactions can be:

- transactions that are not consistent with the normal patterns, for

example unusual frequency of the withdrawals or deposits relatedto an account;

- transactions too complex, of high value, concerning deposits andwithdrawals of large amount of money;


12/31

- external transfers which are not consistent with the statutory

activity of the customer.

Closing an account

There are two parties who can close an account. The first is the customer.All he needs to do is to withdraw his funds whenever he feels to do so.

Clearly, when a banker is informed that this situation is about to rise, hemust ensure that there are no outstanding cheques and must obtain the returnof any unused cheque or cards that have been issued. Standing orders and

direct debits must be cancelled. Finally, the bank must take its commission,and interest if is payable, then give the customer his funds in cash, bankers

draft or by transfer to another bank or branch.

Usually, the bank cannot close the account of an undesirable customerwithout giving him reasonable notice. Whenever a person misuses or abusesthe banker-customer relationship, there is no reason why the bank cannot

withdraw his cheque book or card, and refuse to issue a new cheque book.

6.5. Money Launder ing through f inancial and banking institutions

Money laundering or funds recycling is defined as the process through

which the proceeds from criminal activities are transported, transferred,

converted or mixed with legally raised funds in order to obscure their trueorigin and nature.

The purpose of money laundering is to make the funds derived from illicitactivities appear as legitimate. Money laundering is a vital component of

any activity related to an offence, especially drugs traffic and smuggling.

Recycling profits earned from drug trading implies, usually the internationaltrade movement of funds, because the payments must be made to thecultivators in the countries where the drugs originate as well as the

payments of those who transport and sell them.

Irrespective of the degree of complexity, the laundering process isaccomplished in 3 main stages: placement, layering and integration.

Placementmeans the physical disposal of the majority of profits in cash. Aslarge amount of money, resulting from criminal offences and owned by

offenders may draw attention, they are placed in traditional(commercial banks, insurance companies, savings institutions etc) and non-


13/31

traditional financial institutions (investment funds, casinos, companies), in

commercial activities or they may be taken out of the country and placed inother countries. In this stage, the amounts of money are placed with one ofthe above- mentioned institutions, but, at the same time, they may be used to

purchase goods against payment in cash (cars, stocks, jewels, properties).Another method of placement is represented by illegal foreign currency

exports, namely taking money out of the country, depositing and using itabroad.

Layering designates the stage in which illicit funds are separated from theirsource by designing and performing complex transactions, conceived so that

they may not be traced out. Thus, the cash derived from illegal businesses isconverted into money instruments, such as: travelers cheques, letter of

credits, payment orders, cheques, bonds and stocks. Transforming cash intomoney instruments allows illicit profits to be more easily transported-transferred outside the country, without being traced. In the same stage, the

goods that have been purchased against cash (except the placed ones) maybe resold within the country or abroad, and the assets resulted from resellingare turned into money instruments. The most important and widely used

method of layering is represented by electronic transfer or wire transfer offunds, which means moving them to another institution.

Integrationis the stage in which the funds derived from offensive activitiesare given the likehood of legitimacy and legally. The integration schemes

used by money launderers place funds in the economy under the likehood oflegal business. In this stage, the distinc tion between illicit and licit profits

blurs and becomes extremely difficult to be made.

Among the methods used in the integration stage, we can mention

purchasing real estate by a bogus firm and then immediately selling it,fictious loans (the firm which made profits from illegal businesses self-finances itself), use of forged bills by the import-export companies in order

to over-estimate the amounts registered in documents35.

35Lucian C. Ionescu, English for Banking, Ed. Economica, Institutul Bancar Roman, 1999.


14/31

Stud -case: M oney laundering in Romania

It is very difficult to state how well the National Office for the Prevention and

Fighting against Money Laundering (NOPFML) could cover the issue of illegalfinancial activities and the real amount of money laundered in Romania over the past

there years. On the one hand, it could be assessed that Euro 1,5 billion laundered over

the three years is quite low taking into account the scope of Romanian underground

economy, estimated to 18 to 40% of the Gross Domestic Product as per various

sources. On the other hand it could be stressed that on the contrary the amount

envisaged by the NOPFML is too high since not all the suspected operations

represented financial crimes that could make part and parcel of this category. As

usual, maybe the truth is somewhere in between. It is certain anyway that the progress

of NOPFML is self-evident and it has been noticed by similar European

organizations. Recently a twining program has been agreed upon in the value of 500

000 Euro and the partners are similar organizations in Italy and Austria; the programaims at strengthening the appropriate Romanian institution in preventing and fighting

money laundering. The real experience and the partnership led to the drawing up of

the project of the new law on preventing and fighting the money laundering. Another

feature of this partnership is a guide and a manual for the staff involved in this field

and these two instruments are both for the banking sector as well as other entities

such as investment companies, auditors, public notaries, lawyers etc.

The new law (which is under parliamentary debates) amends drastically the Law

No.21/1999. First of all, the scope of laundering money has been changed. The

former law listed only a limited number of frauds, which now has been reviewed and

extended. The new law stipulates that all authorities involved in financial control and

prudential supervision will keep in touch with the NOPFML and inform itaccordingly whenever the legal provisions are not observed.

It is very difficult to detect all the suspicious transactions as the Romanian econom

is still using excessive amount of cash. The suggestion of international experts is to

stipulate by law a limit to any cash amount involved in financial transactions (not

only for legal but also natural persons). This would have a beneficial impact on the

Romanian financial market and banking system.

Another helping hand to this NOPFML would be an interinstitutional on-line system

that would link all the involved entities in offering pertinent information. This entails

also the training of the staff working in the financial banking system, as well as in

other field that may be related to money laundering.


15/31

Summary

A customer i s someone who:

- has a current account or other relationship

- has entered a contract to open accounts and no particular time periodis involved.

The banker-customer relationshi p

- debtor and creditor;- bailor and baillee;- principal and agent;

- mortgagor and mortgagee.

Types of customers:

- natural persons (individuals)- legal persons (legal entities)

- unincorporated entities (no juridical personality).

Types of accounts:

- budget account- deposit account

- loan account- giro account

- current account- joint account- personal account

- company accountetc.

Check out questions1 How would you define a customer of a bank?

2. How long does an account have to be opened for someone to becomea customer?

3. Can you be defined as a customer without having an account?

4. Name three main banker/customer relationships.


16/31

5. When does the relationship become one of the principal/agent?

6. What are the bailor and bailee, and when does their relationship

come about?

7. State three duties and three rights of the banker.

8. What is meant by lien?

9. Under what circumstances can a bank disclose its customers affairs?

10. The basic relationship between a banker and a customer is that of:

a. master and servantb. debtor and creditorc. donor and trustee

d. principal and agent.

11 A customer who leaves valuables in a box for safekeeping with his

bank is :a. a bailor

b. a factor

c. a mortagagord. a bailee.

12 Joint and several liability means that:a. only one person can be sued for the debts

b. all partners are collectively liablec. each person is personally and collectively liable for the debts.

13 In which of the following cases is the banker an agent for itscustomer:

a. when he cashes a cheque for him over the counterb. when he credits his account with a cheque drawn on another

bankc. when he credits his account with a cheque drawn on another

bank.

14 When a statement is dispatched to a customer, a banker should:a. check the details on the account


17/31

b. not bother to check the details

c. it does not really matter either way.

15 The duty of the customer to the banker is to:

a. maintain an adequate balance and draw cheques carefullyb. comply without question with all the requests of a bank

c. keep the bank advised about all his personal affaires.

16 A customer leaves items in safe custody with a bank. The bank

and customer are named respectively:a. bailor; bailee

b. agent; principalc. bailee; bailor

d. principal; agent.

References

1. Don Wright & Wally Valentine, Business of Banking & Financialservices, Northcote House Publishers Ltd. 1992.

2. F. E. Perry, The Elements of Banking, Routledge & The Chartered

Institute of Bankers London, 1996.

3. N. Dardac, Teodora Vascu, Moneda-Credit, Ed. ASE, 2002

4. Lucian C. Ionescu, English for Banking, Ed. Economica, Institutul

Bancar Roman, 1999.

5. Piata Financiara magazine, 2000-2002


18/31

Glossary Terms

A

Actuary

Someone trained in the calculation of risk and premiums for assurance

purpose.

Access Policy and Access Limits

Policies that govern the use of IMF resources by its members, includingaccess limits set in terms of members quotas. The access policy, including

annual and cumulative limits, under the credit trances and the ExtendedFund Facility (EFF) is reviewed each year. Access under other facilities also

is reviewed periodically. Access under the Supplemental Reserve Facility(SRF) and the Contingent Credit Line (CCL) are not subject to limits inrelation to quotas.

Adequate safeguards

Under the Articles of Agreement, the IMF is to make its general resources

temporarily, available to members under adequate safeguards. The IMFconsiders the principal safeguard of repayment to be strong economicadjustment programs but has also adopted specific measures to protect

against misuse of IMF resources by ensuring that members have in placeadequate accounting, reporting and auditing systems and provide the IMF

timely, accurate and comprehensive information (see also SafeguardAssessment and Non-complying Purchase).

Advance

Loan (bank loan).

Adjustment ProgramA detailed economic program, usually supported by use of IMF resources,that is based on an analysis of the economic problems of the membercountry and specifies the policies being implemented or that will beimplemented by the country in monetary, fiscal, external, and structuralareas, as necessary, to achieve economic stabilization and set the basis forself-sustained economic growth.

Administered Accounts

Accounts established for financial and technical services, which are

consistent with the purpose of the IMF, including the administration ofresources contributed by individual members to provide assistance to othe r


19/31

members. All operations and transactions involving the Administered

Accounts are separate from those of the IMFs other accounts.

Annuity

1) A constant annual payment. 2) A guaranteed series of payments in thefuture purchased immediately for a lump sum. Annuities are described as

certain where payment is specified for a fixed number of years. A lifeannuity payment continues until the death of a person for whom it was

purchased. Annuities may be immediate, where payment commences on

purchase, or deferred, where payment starts at a future specified date.

Appreciation

Increase in the value of an asset; the antonym of depreciation. Appreciation

may occur trough rising prices as a result of inflation, increased scarcity orincreases in earning power.

Arbitrage

The exploitation of differences between the prices of financial assets orcurrency or a commodity within or between markets by buying where prices

are low and selling where they are higher.

Arbitration

The process, which in parties to a dispute allows a third party, which has noother direct involvement, to suggest or impose a solution. Each party will be

more inclined to go to arbitration the better they think their chances is ofwinning and the higher the cost of resolving the dispute by other means.

Arrangement

A decision by IMF that gives a member the assurance that the institution

stands ready to provide foreign exchange or SRD in accordance with theterms of the decision during a specified period of time. An IMF arrangement

which is not legal contract is approved by the Executive Board in

support of an economic program under which the member undertakes a setof policy actions to reduce economic imbalances and achieve sustainable

IMF in accordance with the applicable schedule, and to pay charges onoutstanding purchases and loans.

Asian Development Bank

The bank based in Manila, which was set up in 1966 following the

recommendations of the United Nations Economic Commission for Asiaand the Pacific. It was formed to foster economic growth and cooperation in


20/31

the region of Asia and the Pacific and to contribute to the acceleration of

economic development of the developing countries of the region.

B

Balance of payments

A tabulation of the credit and debit transactions of a country with foreigncountries and international institutions, drawn up and published in a similar

form to the income and expenditure accounts of companies.

Balance sheet.

A statement of the wealth of business, other organization or individual on agiven date, usually the last day of the financial year, not to be confused with

the profit and loss account, which records changes in the companys wealthover one year.

Bank deposits

The amount of money standing to the credit of a customer of a bank. Bankdeposits are assets of its customers and liabilities of the bank. Deposits may

arise from the payments of cash or a check to a bank for credit to a customeror by transfer into an account from another account, including a loan from a

bank to its customer.

Bank loanA sum borrowed from a bank, normally for a fixed period of two to three

years or more for a specific purpose, usually by a commercial concern. Thephrase bank loan is also loosely used to include overdrafts and personal

loans. In this broader sense bank loans are more commonly known as bankadvance, while total bank lending includes commercial papers andacceptances.

Bank rateA now obsolete term for the rate of interest at which the central bank lendsto the banking system, which in practice meant the rate at which it wouldrediscount eligible paper presented by the discount houses or make loans tothem.

BankingThe business of accepting deposits and lending money. Banking defined in

this way, however, is carried out by some other financial intermediaries that


21/31

perform the functions of safeguarding deposits and making loans. Building

societies and finance houses, for example, are not normally referred to asbanks and are not regarded as being part of the banking system in thenarrow, traditional sense.

Banknote

A note issued by a bank undertaking to pay the bearer the face value of thenote on demand.

Bankruptcy

A declaration by a court of law that an individual or company is insolvent,

that is, cannot meet its debts on the dates.

BillA document giving evidence of indebtedness of one party to another. A billmay simply be a written order for goods, which can be used as security for a

loan to the supplier from a bank, or it may be a security such as a Treasurybill or Bill of Exchange.

Bill of exchange

An instrument used in international trade by which the drawer makes an

unconditional undertaking to pay to the draw a sum of money at given date,

usually three months ahead.

BIS

Bank for international settlements

Bretton Woods

An international conference was held at Bretton Woods, New Hampshire,

USA, in July 1944 to discuss alternative proposals relating to post-warinternational payments problems put forward by US, Canadian and UKgovernments.

C


22/31

Capital

Assets which are capable of generating income and which have themselvesbeen produced. Capital is one of the four factors of production, and consistsof the machines, plant and buildings that make production possible, but

excludes raw materials, land and labor.

Capital nominal

Authorized capital

Capital registeredAuthorized capital

Capital sources

Business finance

Capital working

Working capital

Capital account

Balance of payments

Capitalization

The amount and structure of the capital of a company. The conversion ofaccumulated profits and reserves into issued capital. Market capitalization is

the market value of a companys issued share capital, the quoted price of itsshares multiplied by the number of shares outstanding.

Cash

Coins or banknote. Legal tender in the settlement of debt.

Cash ratio

The ratio of a banks cashes holdings to its total deposit liabilities.

Certificate of deposit

A negotiable claim issued by a bank in return for term deposits. CDs aresecurities, which are purchased for less than their face value, which is the

banks promise to repay the deposit and thus offer a yield to maturity.

Certificate of incorporation

A document issued by registrar of companies certifying the legal existenceof a company after certain legal requirements for registration have been met.


23/31

Cheque

An order written by drawer to a commercial bank or central bank to pay ondemand a specified sum to a bearer, a named person or corporation.

Although still very important, the use of cheques is gradually giving way toother forms of credit transfer, credit cards and electronic payments system

Clearing banks

Members of the London Bankers clearing-house. Often used as a synonym

for commercial banks or joint-stock banks.

Commercial banks

Privately owned banks operating cheque current accounts, receiving

deposits, taking in and paying out notes and coin and making loans.

Commercial bills

Bill of exchange

Commercial paper

Promissory note

Conditionality

Economic policies that members intend to follow as a condition for use ofIMF resources. These are often expressed as performance criteria (for

example, monetary and budgetary targets) or benchmarks, and are intendedto ensure that the use of IMF credit is temporary and consistent with theadjustment program designed to correct a members external payments

imbalance.

Credit

The use or possession of goods and services without immediate payment.

Credit account

An account against which purchase may be made and paid monthly. A form

of revolving installment credit offered by some retail stores in which theconsumer makes fixed regular monthly payments into an account andreceives in return credit to purchase goods up to the limit of certain multiple

of the monthly payments, normally eight or twelve. A service charge, whichis in effect an interest charge, is normally made as a percentage of value of

each purchase. Bank and agency credit cards in which the consumer payshis account monthly are also a form of credit account.


24/31

Credit bank

Commercial bank

Credit cardA plastic, personal magnetized card with the name and account number of

the holder and the expiry date embossed. Purchases up to a prescribed limitmay be credited on signature of a voucher franked by the card. The vendorrecovers the cash from the issuer on receipt of a monthly statement.

Credit union

A non-profit organization accepting deposits and making loans operated as acooperative. Credit unions exits in the USA and some European countries.

Creditor

One to whom an amount of money is due. A firms creditors are other firms,

individuals and perhaps the governments to which it owes money in returnfor goods supplied, services rendered and taxes for which it is liable.

Credit Trance policies

Policies under which members may make use of IMF credit. The amount of

such use is related to a members quota. Early in its history, the IMF made

credit available in four trances (segments), each equal to 25 percent of amembers quota. Provided a member is making reasonable efforts to solve

its balance of payments problems, it can make use of IMF resources up tothe limit of the first credit trance on fairly liberal terms. Requests for usemore resources (upper credit trance purchase) require substantial grounds

for expecting that the members balance of payments difficulties will beresolved within a reasonable period of time. Such use is almost always made

under a Stand By or Extended arrangements, entailing phasing ofpurchases, performance criteria, and reviews.

Creditor (or Reserve) Position in the IMF

A member has a creditor (or reserve) position in the IMF if it has lent

reserve assets to the IMF under a loan agreement, and/or the member hasprovided reserve assets to the IMF either as a result of its initial quotapayment or through IMF use of the holdings of the members currency to

provide financial assistance to other members. More precisely, the creditor(or reserve) position is the sum of outstanding borrowing by the IMF from

the member, if any, and the members reserve trance position.


25/31

Currency

Notes and coin that are the current medium of exchange in a country. Goldand, to a lesser extend, national currencies that act as a reserve currencies,such as the dollar, are referred to as international currency because they are

regarded as acceptable for the settlement of international debts.Current account

The most common type of bank account, on which deposits do not earninterest, but can be withdrawn by cheque at any time. That part of the

balance of payments accounts recording current, non-capital, transaction.

D

Debt

A sum of money or other property owed by one person or organization toanother. Debt comes into being through the granting of credit or throughraising loan capital. Debt servicing consists of paying interest on a debt.

Debt is an essential part of all modern, capitalist economies.

Deficit

An excess of liabilities over assets, or of expenditure flow over incomeflow, budget deficit, and balance of payments deficit.

Deposits

Money placed in an account at a bank and constituting a claim on the bank.The term bank deposit includes deposits on all types of account including

current accounts.

E

Equity

The residential value of company assets after all outside liabilities has beenallowed for. In a mortgage or hire purchase contract, equity is the amount

left for the borrower if the asset concerned is sold and the lender repaid. Theequity in a company under liquidation is the property of holders of ordinaryshares; hence these shares are popularly called equities. Equity yields and

prices, although fluctuating, have historically delivered returns about 8 percent higher than risk free stocks.

Endorsement

Signature of payee or holder on a bill of exchange or cheque, for the

purpose of transferring it to another person.


26/31

Eurobond

Long-term fund raised against the issue of bonds on the international capitalmarkets in different currencies.

Euro cheque

An agreed system of cheques issued by European banks to be used inconjunction with an euro cheque card. Despite the name the use of thesystem is not solely restricted to Europe.

Eurocurrency

Any currency held by banks, companies or individuals outside its countryorigin, for example, Eurodollars.

F

Factoring

Service provides by specialist companies against a firms debtors servicesinclude sales ledger accounting, credit insurance and finance.

Finance house

Financial intermediary specializing in the provision of finance for hire

purchase, leasing and factoring.

Financial intermediary

Any institution which provides a services of bringing together lenders and

borrowers such as banks and buildings societies and their customers.

Fixed assets

Long-term assets of a business; the means of production-premises,machinery and vehicles, for example.

Foreign exchange market

A market for the purchase and sale of foreign currencies, now and in the

future. See also Spot rate and forward exchange contract.


27/31

Futures

Contracts made in a future market for the purchase or sale of commoditiesor financial assets, on a specified future date. Many commodity exchange,wool, cotton, wheat, have established futures markets which permit

manufactures and traders to hedge against changes in price of the rawmaterials they use or deal in.

G

General crossing

Two parallel lines across the face of a cheque, with or without the words

and company and not negotiable. See also special crossing.

GuaranteeCollateral security involving three parties in which a guarantor makeshimself secondarily liable for the debts of the second party if he doesnt pay

the first party.

H

Holder

Person in legal possession of a Bill of Exchange or cheque.

Home banking

Banking service operated through a home television set and linked to thebanks computer system by telephone; service handles account balances,

statements, standing order details and allows transfer to be made betweenaccounts.

I

IndemnityA security involving two parties in which the indemnified is primarily liableto the lender for the debts of another.

Inflation

A fall in the value of money: too much money chasing too few goods withthe result that prices of goods and services rise.


28/31

Inter-bank market

Wholesale/parallel money market in bank deposits where the dealing ismainly between banks.

InterestPrice paid for borrowing money.

International money transfer

International method of payment for non-urgent transfer of funds: the

payment instructions are sent by airmail, or through the swift network asswift message.

Investment trusts

A company which buys shares in other companies to hold for investmentpurpose.

Issue department

Functional department of the bank of England concerned with issuingbanknote: note issue is backed by Government and other securities.

J

Joint and several liabilityTerm usually found on joint account and partnership mandates; each party is

jointly liable for any monies owning to the back, and also liable for the fullamount as individuals.

L

Leasing

Form of business finance under which the ownership of equipment remainswith the lessor but the lessee has use of the item, provided that regular

leasing payments are made.Legal tender

Notes and coins which must, by law, be accepted when offered in payment.

Lender of last resort

Function of a central bank whereby it undertakes, if necessary, to lend fundsto certain financial intermediaries. In Britain the Bank of England is a lender

of last resort to the discount houses and, indirectly, to the banks.


29/31

Lessee

One who is granted use of an asset by a lessor for a set period of timeagainst rental payments.

Lessor

One who owns an asset and rents it to a lessee for a set period of timeagainst rental payments.

Liabilities

Items owned: in connection with a business balance sheet, they are divided

between long term liabilities such as debentures and mortgage loans, andcurrent liabilities such as creditors and bank overdraft.

Lien

A right to retain the property of another until legal demands against the

owner have been satisfied.

Liquidation

Winding up, or closing of a business-surplus funds are returned to theowners after all the debts are paid.

M

Merchant bank

Specialist bank mainly involved in corporate finance: services include theacceptance of bills of exchange, the financing of foreign trade, the

underwriting of new issues, the management of investments and theadvising of companies.

Mortgage

Transfer of an interest in land or property to a lender as a security for a debt.

N

Negotiable instrument

Instrument representing money, which can be transferred to another person

by delivery or by endorsement and delivery.


30/31

Not negotiable

Words added to the crossing of a cheque, which prevent negotiation but nottransfer.

P

Partnership

The relation who subsists between persons carries on a business in commonwith a view of profit.

Payee

Person named on a cheque or bill of exchange to whom, or to whose order,payment is to be made.

Paying bank

Bank which pays customers cheques drawn on it.

Promissory note

An unconditional promise in writing, signed by the promisor, to pay a

certain sum of money to another at a fixed or determinable future time.

Public sector

Central Government, local authorities and public corporation.

R

Retail banks

Banks which has extensive branch networks and are the main participants inthe clearing system.

Retail deposits

Smaller deposits on current and deposits account usually contributed by the

public.

S

Safe custody

When a bank customer leaves items for safekeeping with the bank, acontract of bailment arises.


31/31

Safe deposit

Special type of safe in which a customer may rent a compartment to keepitems of value.

SavingsThe part of a persons income not spent on immediate consumption.

T

Telegraphic transfer

International method of payment for urgent transfers of funds.

Trustee

Person who holds an estate in trust for another.

6. the Banker-customer Relationship

Documents

Transcript of 6. the Banker-customer Relationship