ACADEMY OF ECONOMIC STUDIES OF MOLDOVA DEPARTMENT OF APPLIED MODERN LANGUAGES A.TALPĂ, A. ZUBIC BANKING SYSTEM (Essence and Particularities) Editura ASEM Chişinău – 2005 CZU 336.7(076.5)=111 T 14 Lucrarea a fost examinată şi recomandată pentru editare la şedinţele catedrelor „Bănci şi Burse de valori” (proces-verbal nr. 5 din 10.01.05), „Limbi moderne aplicate” (proces-verbal nr. 6 din 04.04.05) şi Comisiei metodice a facultăţii „Finanţe” (proces-verbal nr. 5 din 21.04.05) Referenţi: conf. univ. dr. E. Ruga, conf. inter. dr. A. Rotaru Descrierea CIP a Camerei Naţionale a Cărţii Talpă, A. Banking System: (Essence and Particularities) / A.Talpă, A. Zubic; Acad. of Econ. Studies of Moldova. Dep. of Applied Modern Languajes. – Ch.: Dep. Ed.- Poligr. al ASEM, 2005. – 79 p. Bibliogr. p. 73-74 (28 tit.) ISBN 9975-75-308-6 100 ex. 336.7(076.5)=111 A.Talpă, A. Zubic ISBN 9975-75-308-6 © Departamentul Editorial-Poligrafic ASEM 1 CONTENTS INTRODUCTION 1. THE CONCEPT OF BANKING SYSTEM 2. THE HISTORY OF THE BANKING SYSTEM IN THE REPUBLIC OF MOLDOVA 3. THE STRUCTURE OF MODERN BANKING SYSTEMS 4. THE NATIONAL BANK OF MOLDOVA – THE CENTRAL BANK OF THE STATE 5. THE BANK OF ENGLAND 6. THE PRINCIPLES OF BANKING OPERATIONS 7. PASSIVE OPERATIONS OF COMMERCIAL BANKS AND BANK LIABILITIES MANAGEMENT 8. ACTIVE OPERATIONS OF COMMERCIAL BANKS AND BANK ASSETS MANAGEMENT 9. BANKING BEHAVIOUR 10. THE CHARACTERISTICS OF COMMERCIAL BANKS OPERATIONS 11. CONCLUSION 12. GLOSSARY 13. TEST YOUR KNOWLEDGE 14. BIBLIOGRAPHY 15. ENCLOSURES 2 INTRODUCTION The market economy requires the constitution of a sound banking system that would provide its citizens with new payment ways and modern technologies. The main function of an efficient economy is to insure the mobilization of currency means. The goal followed by the banking system is the attraction and concentration of societies’ economies and making investments. It appears as a need of the society we live in. By means of commercial banks, currency is accumulated from natural and legal persons and money is distributed into the economy. The purpose of every commercial bank is to provide a large assortment of bank services. The constitution of the banking system in the Republic of Moldova has undergone more developing stages. Its development depended on the evolution of the currency in the country and on the country’s currency relationships with other countries. Nowadays the banking system is divided into two levels: the Central Bank and other banks existing in the system. The National Bank of Moldova has important functions that are performed only by itself: to issue currency, to elaborate the monetary policy, it is a currency center; it supervises the commercial banks in the country etc. Firms and enterprises’ activities depend, to a great extent, on the efficient activity of the banking system. Banks are functioning in the capacity of agents between capital holders and capital users by collecting financial resources and placing them on the market by means of credit. Banking activities are tightly connected with the economic activity of the country and this fact allows us to take the decisions correctly, in conjunction with the financial – monetary policy of the state. 3 1. THE CONCEPT OF BANKING SYSTEM The financial and monetary space is based on the institutional structure, which highlights the role of the Central Bank and of all financial institutions that deal with the financial and monetary network in any economy. The essence of this concept consists in the constitution of the financial framework of the financial system, which would ensure the differentiation and specialization of financial institutions and instruments. The history of the banking system foundation stems from the past and there are very old proofs that denote the practice of some activities, which in one or another form, can be considered as the first steps taken on the banking practice realm. Scientists have discovered different statements referring to the banks’ origin. Some investigators state that the first evidence of a banking practice was found in Ancient Egypt and in the Near East (Babylon). At that time temples were both a place for making prayers and a place for keeping money and treasuries. Lending those treasuries, priests accomplished one aim: they obtained a small profit and gratitude. The trust inspired by the temples favored the development of monetary intermediation. The notion of the bank is associated with the moment of the appearance of the first bankers who exchanged money, reflecting, in this way, the appearance and circulation of the metallic coin. According to the opinions of other investigators the notion of the bank is associated with the appearance of a group of persons who had the idea to get money availabilities in the form of deposits and in such a way giving loans. In the Republic of Moldova the banking system has two levels and it is structured similarly with the banking systems of other countries such as: Great Britain, Germany, Austria and others, except for the USA. According to the Law of the Republic of Moldova – “The Law of Financial Institutions” No. 550 – 13 of the 21st of July 1995, the Banking System of the Republic of Moldova includes: − The National Bank of Moldova. − Commercial Banks and other Financial Institutions. The National Bank of Moldova that is the Central Bank of the Republic forms the first level. Being the sole body of issuing national money, it elaborates the policy in the field of money and credit circulation, ensures banking control and puts it into operation. The National Bank of Moldova is supervised by the Parliament of the Republic of Moldova and it operates in accordance with the Law of the Republic of Moldova “With reference to the National Bank of Moldova”. Commercial banks form the second level of the banking system and they perform banking operations for people, enterprises and organizations. According to Article 3 of the Law “With regard to Financial Institutions”, "a bank is a financial institution that attracts from natural or legal persons, deposits or their equivalents transferable through different payment instruments and that uses these means totally or partially in order to grant credits or to make investments on its own account and risk”. “A commercial bank is an institution that attracts from natural and artificial persons money and it distributes it on its behalf in the conditions of reimbursement, solvency and other terms”. Financial – Credit Institutions in the contemporary economy are participants with full rights on the market, chief-accountants of accumulated resources and they determine on their own the ways of access to the monetary and stock exchange market. Financial-Credit Institutions comprise not only banks but also loan associations, pension funds, investment companies and insurance companies. The competition to attract money and a more reasonable investment of it contributes to the maintenance of the adequate quality of services and the introduction of modern technologies in the field of financial services. In order to provide an efficient activity of industrial enterprises and other economic fields, a very big importance has their credit relationship and settlements of accounts with the banks intended to strengthen their economic relationship, to expand the production of consumer goods, to stimulate small business and the development of the technical and scientific progress in the Republic of Moldova. At present there are officially recorded 16 commercial banks and two branches, and this fact reflects the specifics of the banking system in the country and can be shown in the following diagram: 4 The Banking System in the Republic of Moldova The National Bank of Moldova The Banking System in the Republic of Moldova Commercial Banks and other Financial Institutions Giving loans and taking deposits are the main functions of commercial banks. They receive and distribute deposits, attract and give credit, settle the accounts at the customers’ and correspondent banks’ request and provide pay desk services. Banks can perform other operations that do not contravene the legislation of the Republic of Moldova, stipulated in its charter. Banks are forbidden to operate in the field of material goods and do business in precious goods, as well as to provide all kinds of insurance except for currency and credit risk insurance. The juridical framework of banking activities includes the following laws and other legislations: − The Law “With regard to the State National Bank of Moldova”; − The Law “With regard to Financial Institutions”; − Bank charters; − Other legislative Acts of the Republic of Moldova. Banks represent one of the most spread types of credit institutions that today provide the majority of credit and financial services. The market economy supposes the existence of a solid banking system that would ensure the mobilization of money availabilities of the economy and direct it towards certain efficient economic activities. 2. THE HISTORY OF THE BANKING SYSTEM IN THE REPUBLIC OF MOLDOVA The development of commerce and the acquisition of capital have lead to the appearance of modern banks. In a modern economy the distribution of credit is a basic function of the specialized institutions that are called banks. At present, the place and role of banks in the economy is tightly connected with their function of principal go-betweens in the relationship: savings – investments that is a decisional relationship in the economic growth. Banks have proven themselves to be financial institutions, whose main characteristic is the possibility to put in circulation commercial papers on their own by increasing the quantity of payment means and the volume of monetary circulation. The significant characteristic of these go- betweens is the transformation of money assets into money. The first banks appeared in Bassarabia in the second half of the 19th century. After a short time when the State Bank in Russia was founded (in 1864), one of its branches was opened in Chişinău.