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FINANCE’S FAILURE TO SELF-REGULATE
A growing economy requires a well-functioning financial system. The financial sector is essential not just for tasks like running the payment systems, ensuring a flow of funds from savers to investors, including small and medium-sized enterprises, and creating information and opportunities for investment. The financial sector is also necessary for diversifying investments, managing risk, and providing liquidity and other resources necessary for growth.

However, finance needs rules, and the 2008 financial crisis revealed once again that financial markets cannot regulate themselves. Certain features of financial markets make them more subject to failure than most other kinds of markets. First, activities people undertake in the financial industry create large externalities, both positive and negative. Financial instability, in particular contagious runs and self-fulfilling panics, can impose massive costs on the economy. Economists at the Dallas Federal Reserve estimate that the costs of the 2008 financial crisis amounted to 40–90 percent of one year’s GDP. Since the beginning of financial deregulation in the United States and around the world, financial crises have been increasing in frequency and severity.

Second, financial markets are plagued with asymmetries of information—situations where one party knows more than the other. The existence of such asymmetries is inevitable, of course, but their magnitude is not, nor is the right to exploit others by taking advantage of these asymmetries. Third, financial markets are lacking in industry competition. In particular, since the 1970s, the concentration, scale, and scope of the largest banks have grown significantly and rapidly, with the share of industry assets held by the top five banks growing from 17 percent to 52 percent.

Starting in the late 1970s, the financial industry lobbied for and policymakers largely delivered a rollback of regulation with the promise that the financial sector would self-regulate. Changes to the rules of finance, many of which were in place since financial collapse sparked the Great Depression, removed the separation of commercial and investment banking, ceilings on deposit rates, and prohibitions on usury— the charging of loan-shark level interest rates. The changes didn’t update the rules for new instruments like derivatives, but they let the financial markets write their own rules as they expanded into securities that packaged mortgages. Enforcement became an issue, with federal regulators appointed who didn’t believe in regulation. They overruled state-level regulations and enforced less than vigorously the limited regulations that remained.
(Шпетный К.И., Калмыкова Е.И., Захарова М.А., Казанчян К.П. Английский язык для экономистов)
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Вариант 2 для направления подготовки 38.03.01 Экономика (Финансы и кредит)

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TOOLS AND TECHNIQUES OF FINANCIAL ANALYSIS
The tools of financial analysis are intended to show and changes. Among the more widely used of these techniques are horizontal analysis, trend analysis, vertical analysis and ratio analysis.

Horizontal analysis. Generally accepted accounting principles call for presenting comparative financial statements that give the current year's and past year's financial information. A common starting point for studying such statements is horizontal analysis, which involves the computation of rouble amount changes and percentage changes from the previous to the current year. The percentage change must be figured to show how the size of the change relates to the size of the amounts involved.

Trend analysis. A variation of horizontal analysis is a trend analysis, in which percentage changes are calculated for several successive years instead of between two years. Trend analysis is Important because, with its long-run view, it may point to basic changes in the nature of business. Besides comparative financial statements, most companies give out a summary of operations and data on other key indicators for five or more years.

Vertical analysis. Vertical analysis uses percentages to the relationship of the different parts to the total in a single statement. Vertical analysis sets a total figure in the statement equal to 100 and computes the percentage of each component of that figure. For example, in the case of the balance sheet this figure would be total assets or total liabilities and stockholders' equity. The resulting statement of percentages is called a common-size statement. Generally, current assets and current liabilities are given only in total, because ratios are used to analyse their components very carefully. Vertical analysis is useful for comparing the importance of certain components in the operation of the business. It is also useful for pointing out important changes in the components from one year to the next when comparative common-size statements are presented. Common-size statements are used to make comparisons between companies. They also allow an analyst to compare the operating and financial characteristics of two companies of different sizes in the same industry

Ratio analysis. Ratio analysis is an important means of stating the relationship between two numbers. To be useful, a ratio must represent a meaningful relationship but use of ratios cannot take the place of studying the underlying data. Ratios are guides or short cuts that are useful in evaluating the financial position and operations of a company and in comparing them to previous years or to other companies. The primary purpose of ratios is to point out areas for further investigation. They should be used in connection with a general understanding of the company and its environment.
(Шпетный К.И., Калмыкова Е.И., Захарова М.А., Казанчян К.П. Английский язык для экономистов)

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Вариант 3 для направления подготовки 38.03.01 Экономика (Финансы и кредит)

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FREE BANKING
An alternative school of thought advocates free banking. In the 19th century, free banking was unregulated by government authorities, they did not need a charter or licence to operate, and issued their own bank notes. There were periods of free banking in Scotland (1716–1844), Sweden (1831–1903), Switzerland (1826–1907) and Canada (1867–1914). Cameron (1972) argued that Scottish free banking fostered economic growth because of the intense competition between the banks, which forced them to innovate. He credits the banks as being the first to introduce branch banking, interest paid on deposits, and overdraft facilities. Dowd (1993) argued the free banking episodes in Scotland, Sweden and Canada were highly successful.

Modern-day usage of the term ‘‘free banking’’ refers to a highly competitive system operating without a central bank or regulations. Proponents of free banking claim central banks have the potential to encourage collusive behaviour among banks, thereby increasing their monopoly power. In the absence of government regulation, private banks have a collective interest in devising a framework to prevent runs. It could take the form of private deposit insurance and/or a private clearing house, which acts as lender of last resort. See, among others, Dowd (1993), Friedman and Schwartz (1986), White (1986). However, a private clearing house could also encourage collusion among banks. In Chapter 1, recall Cruickshank (2000) claimed that the private settlements system in the UK has resulted in the big banks exercising monopoly power, resulting in higher settlement charges for banks and customers. Furthermore, private deposit insurance and/or lender of last resort institutions merely replicate what a central bank does, so the same monitoring problems exist, creating incentives to free-ride.

Free banking also raises macroeconomic issues, because banks issue their own notes. No bank should have an incentive to issue too many notes because they will be exchanged for specie at that bank, thus running down its reserves. However, Nelder (2003) argues the above is only true if holders of the notes have to return to the bank where they are issued. However, if the notes issued by the different banks are perfect substitutes (or perceived to be by the public), then smaller banks have an incentive to issue an excessive supply of notes because there is a greater chance they will be redeemed at the larger banks. He argues that in the Swiss case, this resulted in an over-issue of notes, causing the depreciation of the Swiss franc. As a result, the banks agreed to give up their right of issue, and approved the establishment of a central bank, controlled by the federal government. Nelder argues Sweden and Scotland also experienced periods of excess issue, but Canada escaped it because there was little in the way of effective price competition between the banks. Though the free banking idea is interesting in theory, it is very unlikely that the regulatory systems of western countries will be dismantled to allow an experiment. For this reason, the issue is not explored any further. The rest of this chapter is devoted to issues related to the global regulation of banks.
(Шпетный К.И., Калмыкова Е.И., Захарова М.А., Казанчян К.П. Английский язык для экономистов)

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Вариант 1 для направления подготовки 38.03.01 Экономика (Экономика предприятий и организаций)

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THE E-LANCE ECONOMY
Despite the wave of big mergers and acquisitions over the past few years, the days of the big corporation – as we know it – are numbered. Because modern communications technology makes decentralized organizations possible, control is being passed down the line to workers at many different levels, or outsourced to external companies. In fact, we are moving towards what can be called an 'e-lance economy', which will be characterized by shifting coalitions of freelancers and small firms using the Internet for much of their work. Twenty-five years ago, one in five US workers was employed by one of the top 500 companies. Today, the ratio has dropped to fewer than own in ten. Large companies are far less vertically integrated than they were in the past and rely more and more on outside suppliers to produce components and provide services, with a consequent reduction in the size of their workforce.

At the same time, decisions within large corporations are increasingly being pushed to lower levels. Workers are rewarded not for carrying out orders efficiently, but for working out what needs to be done and doing it. Many large industrial companies – ABB and BP Amoco are among the most prominent – have broken themselves up into numerous independent units that transact business with one another almost as if they were separate companies. What underlies this trend? The answer lies in the basic economics of organizations. Business organizations are, in essence, mechanisms for coordination, and the form they take is strongly affected by the co-ordination technologies available. When it is cheaper to conduct transactions internally, with other parts of the same company, organizations grow larger, but when it is cheaper to conduct them externally, with independent entities in the open market, organizations stay small or shrink.

The co-ordination technologies of the industrial era – the train and the telegraph, the car and the telephone, the mainframe computer and the fax machine – made transactions within the company not only possible but advantageous. Companies were able to manage large organizations centrally, which provided them with economies of scale in manufacturing, marketing, distribution and other activities. Big was good. But with the introduction of powerful personal computers and electronic networks – the co-ordination technologies of the 21st century – the economic equation changes. Because information can be shared instantly and ic equation changes. Because information can be shared instantly and inexpensively among many people in many locations, the value of centralized decision-making and bureaucracy decreases. Individuals can manage themselves, co-coordinating their efforts through electronic links with other independent parties. Small becomes good. In the future, as communications technologies advance and networks become more efficient, the shift to e-lancing promises to accelerate. Should this happen, the dominant business organization of the future may not be a stable, permanent corporation but rather a flexible network of individuals and small groups that might sometimes exist for no more than a day or two. We will enter the age of the temporary company.
(Шпетный К.И., Калмыкова Е.И., Захарова М.А., Казанчян К.П. Английский язык для экономистов)

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Вариант 2 для направления подготовки 38.03.01 Экономика (Экономика предприятий и организаций)

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BANK HOLDING COMPANIES
Until the 1960s, bank holding companies (BHCs) were a minor part of the US banking scene, controlling about 15% of total bank deposits. By the 1990s, 92% of banks were owned by BHCs. They became popular in the 1950s when banks found they could establish a bank holding company to circumvent the regulations: only wholly owned banking subsidiaries were required to conform to banking regulations. The Bank Holding Company Act, 1956, defined a BHC as any firm holding at least 25% of the voting stock of a bank subsidiary. It required BHCs to be registered with the Federal Reserve. The purpose of the Act was to restrict BHC activity but by granting them legal status, it actually encouraged their growth. BHCs could circumvent the interstate branching laws, via ‘‘multi-bank’’ holding companies. The BHC organisational framework also meant banks could diversify into non-bank financial activities such as credit card operations, mortgage lending, data processing, investment management advice and discount brokerage.

They were also attractive for tax reasons. However, they could not engage in certain financial businesses (for example, securities) excluded by Glass Steagall, or in businesses not closely related to banking, as specified in the regulations. The Amendment (1970) to the 1956 Act increased control by the Federal Reserve over BHCs, which in turn tried to limit BHCs to offering banking products, and engaging in non-banking financial activities. However, the bank holding company structure continued to expand, with BHCs acquiring domestic and overseas banks. In 1987, the Supreme Court ruled that section 20 of the Glass Steagall Act did not extend to subsidiaries of commercial banks. It meant they could offer investment banking services, provided they were not ‘‘engaged principally’’ in the said activities. In 1987, the Federal Reserve allowed BHCs (see below) to create section 20 subsidiaries which could undertake securities activities if the revenues generated did not exceed 5% (later raised to 10%, then 25% in 1996) of total BHC revenue. These subsidiaries captured substantial market share in some areas. For example, in 1997, JP Morgan and Chase were in the top 10 underwriters of domestic equity and debt.

Pressure to repeal the Glass Steagall Banking Act increased, especially in the 1990s. In June 1991 a key House of Representatives Committee, considering a Banking Reform Bill, voted in favour of breaking down barriers between banking and commerce. But most aspects of this legislation collapsed in November 1991. In October 1993, Lloyd Bentsen, the Treasury Secretary, set out an agenda for banking reform. Unlike the failed attempt at reform in 1991, the Bentsen agenda did not call for a repeal of Glass Steagall, but did support reforms for interstate banking (see below). The Chairman of the House banking committee (Mr Leach) claimed his top priority was to repeal Glass Steagall. Finally, in November 1999, the Gramm Leach Bliley Financial Modernisation Act (GLB) was signed into law by President Clinton.

The GLB Act was passed at a time when technology and other factors were eroding the boundary between commercial and investment banking. Investment banks had been able to enter retail banking through money market funds, cash management accounts and non-bank banks – though legislation put an end to the latter (see below). Merrill Lynch, an investment bank, owns two thrifts, and together with other subsidiaries engages in a limited amount of deposit taking and lending. From 1987, commercial banks began to offer some investment banking services through section 20 subsidiaries. According to Sweeney (2000), 43% of banks offered insurance products in 1998, a year before the new legislation (see below) was passed. Perhaps the greatest pressure was competitive: it was increasingly difficult for US banks to compete in global markets with the European universal banks.
(Шпетный К.И., Калмыкова Е.И., Захарова М.А., Казанчян К.П. Английский язык для экономистов)