Unit I

Importance of Banking System

A developed financial system of the country can ensure scope for attaining economic
development. Banks are one of the most important part of financial system of any country. A
modern bank provides valuable services and helps to attain development. So, a modern bank
plays a vital role in the socio economic matters of the country. Some of the important role of
banks in the development of a country is briefly mentioned below.

I- Promote Saving Habits among People

Bank attracts depositors by introducing attractive deposit schemes and providing rewards or
return in the form of interest. Banks providing different kinds of deposit schemes to its
customers. It enables to create banking habits or saving habits among people.

II- Capital Formation and Promoting of Industries

Capital is one of the most important parts of any business or industry. It is the lifeblood of
business. Banks are helpful to increase capital formation by collecting deposits from depositors
and converting these deposits in to loans and advances to industries.

III- Easiness of Trade and Commerce Functions

In this modern era trade and commerce plays vital role between any countries. So, the money
transaction should be user friendly. A modern bank helps its customers to send funds to
anywhere and receive funds from anywhere of the world. A well-developed banking system
provides various attractive services like mobile banking, internet banking, debit cards, credit
cards etc. These kinds of services fasten and easing the transactions. So, bank helps to develop
trade and commerce.

IV- Generate Employment Opportunities

Since a bank promotes industry and investment, they automatically generate employment
opportunity. So, a bank enables an economy to generate employment opportunity.

V- Promote Agricultural Development

Agricultural sector is one of the integral parts of any economy. Food self sufficiency is the
major challenge and goal of any country. Modern banks promotes agricultural sector by
providing loans and advances with low rate of interest compared to other loans and advances
schemes.

VI- Implementation of Monetary Policy

Monetary policy is an important policy of any government. The major aim of monetary policy
is to stabilize financial system of the country from the dangerous of inflation, deflation, crisis
etc. Banks are helpful to implement policies relating to monetary matters successfully.

VII- Balanced Development

Modern banks are spreading its operations throughout the world. We can see number of big
banks like Citi bank, Baroda bank etc. It helps a country to spread banking activities in rural
and semi urban areas. With the spreading of banking operations around the country, they help
to attain balanced development by promoting rural areas.

Modern bank plays vital role in the social- economic development of the country. A developed
banking system enables the country to attain balanced development without any special
consideration of rich and poor, cities and rural areas etc.

Money Market

Money market basically refers to a section of the financial market where financial instruments
with high liquidity and short-term maturities are traded. Money market has become a
component of the financial market for buying and selling of securities of short-term maturities,
of one year or less, such as treasury bills and commercial papers.

Money market consists of negotiable instruments such as treasury bills, commercial papers.
and certificates of deposit.

Money market consists of various financial institutions and dealers, who seek to borrow or loan
securities.

Objectives of Money Market:

The objectives of the money market are to implement the monetary policy of the country.
Monetary policy has three main objectives growth, equity and price stability.

(i) Monetary integration of the country,

(ii) Directing credit flow according to policy priorities,

(iii) Assisting in mobilisation of the savings of the community,

(iv) Promotion of capital formation

(v) Maintain an appropriate structure of relative prices and demand containment.

Functions of Money Market:

The nature of money market reveals the functions of the money market.

1. A money market by providing profitable investment opportunities for short-term surplus

funds helps to enhance the profit of financial institutions.

2. A money market enhances the amount of liquidity available to the entire country.

3. A well-developed money market helps to avoid wide seasonal fluctuations in the interest
rates.

4. A well-developed money market, through quick transfer of funds from one place to
another, helps to avoid the regional gluts and stringencies of funds.

5. By providing various kinds of credit instruments suitable and attractive for different sections,
a money market augments the supply of funds.

6. A well organised money market is essential for the successful operation of the central
banking policies.

Importance of money markets

Three factors explain the importance of money markets:

1. Their contribution to market efficiency and market discipline;
2. Their impact on financial stability and on financing conditions in the economy at large;
3. Their role as an initial link in the chain of monetary policy transmission.
Deep and liquid money markets, not unlike other markets in the economy, play an important
part in information aggregation and price discovery. Indeed, money market rates, such as
Euribor and Libor, provide benchmark rates for the pricing of fixed-income securities and loan
contracts throughout the economy.

Moreover, interbank money markets play a significant role in providing incentives for banks
to conduct business in a safe and sound manner, thus ensuring market discipline.
Specifically, in the unsecured money markets, where loans are uncollateralised, interbank
lenders are directly exposed to losses if the interbank loan is not repaid. This gives lenders
incentives to collect information about borrowers and to monitor them over the lifetime of the
interbank loan, making the loan repayment more probable. Therefore, unsecured money
markets play a key peer monitoring role. [14]The information banks acquire about each other
may not be readily available to regulatory authorities and central banks. [15]

In the secured money markets, lenders mitigate credit risk exposure by requiring borrowers to
post collateral, and by imposing haircuts on collateral values. While attenuated credit risk
concerns may make it easier for borrowing banks to obtain credit, secured funding comes at
the cost of acquiring and holding collateral, as well as relatively weaker incentives for lending
banks to conduct monitoring.
Developments in money markets can have profound implications for financial stability and the
functioning of the entire economy, for they affect the financing conditions faced by non-
financial corporations and households. Being an essential source of bank funding, money
markets have a significant impact on the size of the balance sheet of financial institutions and
the amount of credit they can extend. As such, money markets can contribute to pro-cyclicality
and the so-called leverage cycles: at times of generalised optimism, high asset valuation, low
haircuts and abundant liquidity in money markets can lead to higher leverage and credit
expansion, whereas when bad shocks hit the economy asset prices drop, haircuts increase and
liquidity can dry up.
If liquidity dries up, it can force banks to de-leverage, thus affecting the supply of bank credit,
or to acquire liquidity by liquidating or selling assets. Asset liquidation can impose externalities
on other players in the financial system through, for example, fire sales and financial
contagion.
From the monetary policy perspective, money markets play a central role in monetary policy
transmission in the euro area. This is because the euro area financial system is largely bank-
based and interbank money market interest rates represent the marginal cost of funding bank
loans. When money markets function normally, the ECB can influence the longer-maturity
rates, which are relevant for determining bank lending rates, by steering very short-term money
market rates to keep them close to its official rates. A smooth functioning of money markets
therefore guarantees that the impulse of monetary policy is transmitted across the financial
system and to the real economy without impairments.

Money Market Instruments:

T-Bills Treasury bills are instrument of short-term borrowing by the Government of India,
issued as promissory notes under discount. The interest received on them is the discount, which
is the difference between the price at which they are issued and their redemption value.

Certificate of deposits Certificate of Deposit (CD) is a negotiable money market instrument

and issued in dematerialised form or as a Usance Promissory Note against funds deposited at
a bank or other eligible financial institution for a specified time period. CD is issued for Rs. 1
Lakh or its multiples

Commercial Paper Commercial Paper (CP) is an unsecured money market instrument issued
in the form of a promissory note. It was introduced in India in 1990 with a view to enabling
highly rated corporate borrowers to diversify their sources of short-term borrowings and to
provide an additional instrument to investors.

Developed Money Market:

The developed money market is a well organised market which has the following main
features:
1. A Central Bank:
A developed money market has central banks at the top which is the most powerful authority
in monetary and banking matter. I controls, regulates and guides the entire money market. It
provides liquidity to the money market, as it is the lender of the last resort to the various
constituents of the money market.
2. Organised Banking System:
An organised and integrated banking system is the second feature of a developed money
market. In fact, it is the pivot around which the whole money market revolves. It is the
commercial banks which supply short-term loans, and discount bills of exchange. They form
an important link between the borrowers, brokers, discount houses and acceptance houses and
the central bank in the money market.

3. Specialised Sub-Markets:
A developed money market consists of a number of specialised sub-markets dealing in various
types of credit instruments. There is the call loan market, the bill market, the Treasury bill
market, the collateral loan market and the acceptance market, and the foreign exchange market.
The larger the number of sub-markets, the more developed is the money market. But the mere
number of sub-markets is not enough. What is required is that the various sub-markets should
have a number of dealers in each market and the sub-markets should be properly integrated
with each other.

4. Existence of Large Near-Money Assets:

A developed money market has a large number of near-money assets of various types such a
bills of exchange, promissory notes, treasury bills, securities, bonds, etc. The larger the number
of near-money assets, the more developed is the money market.

5. Integrated Interest-Rate Structure:

Another important characteristic of a developed money market is that it has an integrated
interest-rate structure. The interest rates prevailing in the various sub-markets are integrated to
each other. A change in the bank rate leads to proportional changes in the interest rate
prevailing in the sub-markets.

6. Adequate Financial Resources:

A developed money market has easy access to financial sources from both within and outside
the country. In fact, such a market attracts adequate funds from both sources, as is the case with
the London Money Market.

7. Remittance Facilities:
A developed money market provides cash and cheap remittance facilities for transferring funds
from one market to the other. The London Money Market provides such remittance facilities
throughout the world.

8. Miscellaneous Factors:
Besides the above noted features, a developed money market is highly influenced by such
factors as restrictions on international transactions, crisis, boom, depression, war, political
instability, etc.

Underdeveloped Money Market:

Since the majorities of the people in underdeveloped countries lives in rural areas and are poor,
the undeveloped market controls a major portion of the money market. The main characteristics
of such a market are:

1. Personal Touch:
The lenders have a personal touch with the borrowers. The lender knows every borrower
personally in the village because the latter sides there.

2. Flexibility in Loans:
There is no rigidity in loan transactions. The borrower can have more or less amount of loan
according to his requirements depending upon the nature of security or his goodwill with the
moneylender.

3. Multiplicity of Lending Activities:

Mostly people do not specialise is money-lending alone. They combine money-lending with
other economic activities. A merchant may supply goods on loan instead or money in cash.

4. Varied Interest Rates:

There is multiplicity of interest rates. Interest rates are much higher than rates in the developed
sector of the money market. The interest rates are not even uniform. The rate depends on the
need of the borrower, the amount of loan, the time for which it is required and the nature of
security. The greater the urgency, the higher will be the interest rate.

5. Defective System of Accounting:

In the unorganised sector of the money market, the system of maintaining accounts is highly
defecate. Proper accounts are never maintained. Formal receipts are not issued for interest and
the principal repaid by the borrowers. Besides, there is utmost secrecy in maintaining accounts
and lending procedures in the undeveloped money market. The accounts of the moneylenders
are not liable to checking by any higher authority.

6. Absence of Link with the Developed Money Market:

The undeveloped sector is not linked with the developed sector of the money market in such
countries. The former works independently of the latter and is also not under the control of the
developed market. This has the effect of reducing the volume of monetary transactions and
savings, and prevents their use in productive investments.

Bank of England

Founded in 1694, the Bank of England is the central bank of the United Kingdom. Sometimes known
as the Old Lady of Threadneedle Street, the Banks mission is to promote the good of the people of
the United Kingdom by maintaining monetary and financial stability.

Origin:

The present organisation has developed from the original Act of Parliament and Royal
Charter of 1694-under which the 1,268 subscribers to the capital stock of the Bank were
incorporated as " The Governor and Company of the Bank of England ". In addition to
the Governor and Deputy Governor there were twenty-four Directors. Business commenced on
1st August 1694 with a staff of nineteen, the three senior officials being the " First Cashier
", the "First Accomptant " and the "Secretary and Sollicitor ". These appointments settled
the organisation of the Bank for more than two hundred years. At first the Court of Directors
met daily, assuming responsibility for many of the administrative decisions that were later dealt
with by the three senior officials. Soon, however, the Court adopted the present practice of
meeting weekly and of appointing committees from amongst their own number to deal with
and report on specific matters. As the Bank's operations and responsibilities grew so the staff
increased: by 1734 it numbered 96; during the Napoleonic Wars it rose to about 900; and by
the First World War 1918 it had reached 1,500. In 1932 a special internal committee
recommended changes that laid the foundation of the present organisation. The increasing
variety of the Bank's activities, both at home and abroad, had imposed heavy responsibilities
upon the Governor and Deputy Governor, and full-time Executive Directors were appointed to
assist them. In addition, the policy-begun in 1926---of appointing Advisers was continued,
and their number gradually increased. Finally, the departmental structure was modified. In
1946 the Bank of England Act, mentioned earlier, brought the Bank into public
ownership; and a new Royal Charter was granted.

Objectives:

To ensure the continuity of banking services in the United Kingdom and of critical
functions;
To protect and enhance the stability of the financial system of the United Kingdom;
To protect and enhance public confidence in the stability of the financial system of
the United Kingdom;
To protect public funds, including by minimising reliance on extraordinary public
financial support;
To protect depositors and investors covered by the UK financial services
compensation scheme (FSCS);
To protect, where relevant, client assets; and
To avoid interfering in property rights, in contravention of the European Court of
Human Rights.

Organisational Structure:

The affairs of the Bank are administered by the Court of Directors, appointed by the
Sovereign and comprising a Governor and Deputy Governor, each appointed for five years,
and sixteen Directors, each appointed for four years. The Court may appoint four of their
members as Executive Directors, who, together with the senior officials and a number of
specialists as advisers, assist the Governors in the day-to-day management of the Bank.

The Court of The Act of 1946 lays down Directors that the Court of Directors shall comprise
the Governor, Deputy Governor and sixteen Directors, all of whom shall be appointed by the
Crown. Not more than four Directors may be employed as full-time Executive Directors. The
term of office of both the Governor and Deputy Governor is five years, that of a Director four
years; all are eligible for reappointment in the same or any other capacity. Directors retire
in rotation; four at the end of February each year. A member of the Court must be a
British subject, and may not be a member of the House of Commons, a Minister of the
Crown, or a person serving in a government department and being remunerated out of
moneys provided by Parliament. The powers of the Court are defined by the Charter, which
also requires the Court to meet at least once a week: this is traditionally on Thursdays.
Standing committees of Directors meet regularly, while special committees are appointed when
necessary. The principal standing committee is the Committee of Treasury, which normally
meets every Wednesday. It consists of the Governor and Deputy Governor ex-officio and five
other members of the Court chosen by ballot. It is the policy-making committee of the lBank
and reports directly to the Court; and it receives the reports of all other committees before they
are submitted to the Court. The other standing committees are concerned with internal
administration; one deals with the administration of the Bank's Printing Works, and the others
with matters such as staff, premises and domestic expenditure. The Governor and Deputy
Governor and the Executive Directors, of whom since 19'46 there have always been four, are
required to render their exclusive services to the Bank. Broadly speaking, the responsibilities
of the Executive Directors are divided into home finance, overseas finance and exchange
control, economic and statistical services, and the ,Bank's internal affairs. The other
twelve Directors have a wide variety of interests-in industry and commerce, trade union
affairs, and in banking, both at home and overseas. In addition to their attendance at Court
and their work on the standing committees, they may be called upon by the Governors for
advice on any problem in which their special qualifications or experience would be helpful.
Senior The day to day administraofficials tion of the Bank rests primarily with the Heads of
Department. The senior Head of Department, and chief executive officer of the Bank, is the
Chief Cashier.

The There are eight departdepartments ments, most of which are divided into a number of
offices. The principal department is the Cashier's, which deals with the banking functions,
manages the E.E.A., and is responsible for all the Bank's operations in the money, gilt-edged,
foreign exchange and gold markets. Information about the economy and the balance of
payments, and about developments overseas, is provided by the Economic Intelligence and
Overseas Departments; the latter also covers the administration of exchange control. The note
issue is the main concern of the Printing Works, while the Accountant's Department maintains
the register of government and other stocks. Finally, there are those departments which are
concerned with the internal administration of the BankSecretary's, Establishment and Audit.

1. Cashier's Department The principal office in the department is the Chief Cashier's
Office. Here is handled the acceptance or delivery of stock or bills resulting from the
Bank's market operations, or from opera- 240 tions on behalf of central bank or other
customers, and the settlement for them.
2. Economic Intelligence Department: The Economic Intelligence Department provides
information about events and prospects in the domestic economy and in the balance of
payments. It is also responsible for the publication of this Bulletin and the Bank's
Annual Report. Much of the work involves the collection and analysis of statistical and
other information, supplied largely by banks and other financial institutions, both for
use within the Bank and for publication. The Bank compile several of the series of
financial statistics which appear in the annex to this Bulletin and in official publications.
3. Overseas Department The Overseas Department is concerned with developments
overseas, relations with other central banks and the administration of exchange control.
4. Printing Works The Printing Works are under the control of a General Manager and
are responsible for printing Bank notes;(l) for general printing for other departments
(such as this Bulletin, as well as dividend warrants, prospectuses for new issues,
cheques, account books, and forms);
5. Accountant's Department The work of the Accountant's Department does not differ
basically from that of many company registrars. Unusual features, however, are that the
registers are not closed prior to the payment of interest and that income tax is not
deducted from all interest payments.
6. Secretary's Department The Secretary's Department supplies secretarial services to
the Court, the committees, and the Governors and Directors. It keeps the Bank's own
accounts, handles press relations and is responsible for organisation and method work.
7. Establishment Department The Establishment Department is responsible for the
domestic affairs of the Bank other than those of the Printing WorksJI} The total staff
of the Bank is at present about 7,000, of whom 3,000 are either industrial staff at the
Printing Works or ' technical and services ' staff elsewhere. The ' banking staff ' is
composed of about 1,600 men and 2,500 women.
 8. Audit Department The Audit Department is responsible directly to the Governors for
internal audits throughout the Bank. A firm of accountants is also employed on audit
work.

Functions:

First, it maintains the central accounts of the Government-the accounts of H.M. Exchequer and
of the National Loans Fund-to which all receipts of the central Government are credited and
from which all payments authorised by Parliament are made. The Bank also holds the accounts
of many Government Departments-these, together with the central Government Accounts,
form the bulk of Public Deposits in the weekly Bank Return.

Second, the Bank makes arrangements for the Government's fluctuating needs for short-term
finance to be met by borrowing; in this connection it receives the tenders for each week's issue
of Treasury Bills, allots and issues the Bills and redeems the Bills presented for payment on
maturity.

Third, the Bank manages the Government Stocks which form the bulk of the National Debt.
Not only does the Bank issue these Stocks, but it keeps the register of stockholders to whom it
pays dividends on the due dates. This work as registrar is a gigantic task and in terms of staff
ranks as the largest of the Bank's activities. As well as managing Government Stocks the Bank
acts as Registrar for certain other borrowers, principally the nationalised industries, and some
Commonwealth Governments and local authorities. In round figures the Bank manages nearly
200 stocks with a total nominal value of 20,000 million held on three million accounts,
involving more than six million dividend payments and many hundreds of thousands of stock
transfers each year. This large task is undertaken in premises at New Change, in the shadow of
St. Paul's Cathedral.

Fourth,. the Bank is responsible for the issue of Bank notes. For this purpose the Bank has a
large modern printing works at Loughton in Essex, where millions of notes are printed each
week; these are distributed to the public throughout the country with the assistance of the
commercial banks. The various processes of designing, printing, circulating, withdrawing and
finally destroying the notes after their useful life is over, present a considerable responsibility
.

Finally, on behalf of H.M. Treasury, the Bank manages the Exchange Equalisation Account, a
Government account established in 1932 with the objects of checking undue fluctuations in the
exchange value of sterling and maintaining the country's reserves of gold and foreign
currencies, and administers the Exchange Control Regulations. These tasks have important
implications, not least because sterling is an international currency in which a large part of the
world's trade is transacted.

As Banker:

Bankers to The Government's main the Government accounts are held with the Bank. A large
number of subsidiary accounts are kept with the commercial banks, because the Bank have few
branches outside London. But wherever government revenue may be collected initially
throughout the country. in due course it normally passes through the central Exchequer account
at the Bank; for to this account virtually all the Government's receipts are ultimately credited
and from it government payments originate.

The bankers' Bank The Bank of England are bank bankers to the commercial banks and, as
described later. act as lender of last resort to the discount houses, and thus to the whole banking
system. Nearly all the domestic commercial banks have an account with the Bank, as do the
discount houses and accepting houses and a few of the overseas banks in London-making
nearly one hundred in all. The most important accounts are those of the London clearing banks
who. by custom, keep a substantial part of their total cash
Bankers to other The Bank have about ninety central banks accounts for overseas central
banks and for such bodies as the International Monetary Fund. the International Bank for
Reconstruction and Development. the International Development Association and the Bank for
International Settlements. Many central banks. particularly those in the sterling area. hold the
bulk of their external reserves in London. and others keep substantial working balances in
sterling. Most of these funds are placed with the Bank. which may arrange and advise upon
their investment.

Private customers Although a central bank the Bank still keep a few accounts for individuals
and for private and public companies-a legacy from the days when the Bank were active in
general banking; they also provide banking facilities for members of their staff. This small
private business has the merit of giving the Bank direct experience of some of the banking
problems that other banks face.

The note issue The Bank are the central note-issuing a uthon.tyJ1) The Bank of England's note
issue is almost entirely fiduciary i.e. backed not by gold but by government and other securities;
the amount of the fiduciary issue is authorised by Parliament. As already mentioned, the profits
of issue-the Issue Department's earnings on its holdings of securities less its operational costs
-go to the Government, being paid over to the E.E.A. in accordance with the Currency and
Bank Notes Act 1939.

Registrar of government stocks: The Bank act as registrar of government stocks and of those
issued by the nationalised industries; and they also manage stocks of some local authorities,
public boards and Commonwealth governments.

Agent for the Government:

Exchange control The chief object of exchange control is to protect and conserve the gold and
foreign exchange reserves. The legal basis for exchange control is the Exchange Control Act
1947 and statutory instruments issued under this Act. Exchange control is not applied to
transactions between U.K. residents and residents of the sterling area.

The Bank's operations in the markets By their market operations-and. through their various
contacts, in other ways-the Bank seek to implement the Government's monetary policy.

Financial advice Daily operations in the money, gilt-edged and foreign exchange markets
provide the Bank with the technical knowledge of, and practical experience in, these markets
which together contribute greatly to the Bank's ability to give financial advice. Close contact
with the commercial banks and other financial institutions, and with the industrial and business
world in general, and observation of financial and economic conditions at home and abroad,
also contribute.

London Money Market

Features:

1. Highly Organized
2. Well Developed
3. Satisfies all conditions of good money market.
4. Well developed banking system.
5. Bank of England is the central bank
6. Many submarkets and each sub market consisting number of dealers.
7. Highly integrated structure.

Constituents:

1. Bank of England
2. Joint Stock banks: most of the banking business in England is concentrated with few banks
called BIG FIVE, Midland, Barclays, Llyods, Webministor, National Provincial.
3. Acceptance Houses: Unique institutions throughout the world (only in England). They accept
Bills of exchange on behalf of their customer and such accepted bills can be discounted in
London Money Market at low rate of interest and a small commission is charged by the
acceptance house.
4. Discount Houses: Deals in T-bills and commercial bills, borrow from banks at low interest and
invest in discounting
5. Bill Brokers: Acts between individual who wants to discount and who wants to invest in bill.

London Market:

1. Euro Dollar Market

2. Local Authorities Market
3. Interbank market

Euro Currency
The euro (sign: ; code: EUR) is the official currency of the eurozone, which consists of 19 of
the 28 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland,
France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The currency is also officially used by the institutions of the European Union and used daily
by some 337 million Europeans as of 2015. Outside of Europe, a number of overseas territories
of EU members also use the euro as their currency. Additionally, 210 million people worldwide
as of 2013 use currencies pegged to the euro.

The euro is the second largest reserve currency as well as the second most traded currency in
the world after the United States dollar. As of January 2017, with more than
1,109,000,000,000 in circulation, the euro has one of the highest combined values of
banknotes and coins in circulation in the world, having surpassed the U.S. dollar at one point.

The name euro was officially adopted on 16 December 1995 in Madrid. The euro was
introduced to world financial markets as anaccounting currency on 1 January 1999, replacing
the former European Currency Unit (ECU) at a ratio of 1:1 (US$1.1743). Physical euro coins
and banknotes entered into circulation on 1 January 2002, making it the day-to-day operating
currency of its original members, and by May 2002 had completely replaced the former
currencies.

Features of Euro Currency:

The euro is a currency used by many of the member states of the European Union, or EU. Not
all EU member countries use the euro as their basis of trade, and notably, the United Kingdom,
or UK, has elected to keep its own currency, Sterling, and does not use the euro as its national
currency. The initial member countries electing to use the euro, including Germany and France,
introduced the currency on 1 July, 2002, at which time their individual currencies, such as the
Mark and the Franc, ceased to exist.

Banknote Security

Euro banknotes contain features that aim to make it difficult to make realistic copies of them.
If you have a euro banknote and want to check that it is genuine, you should first feel the
surface of the note. The print on genuine euro notes is raised, and the lettering of the initials of
the European Central Bank, along with the numerals indicating the value of the note, will have
a slightly rough feel. Hold the note up to the light to check for a see-through register, a security
thread and a watermark. The watermark appears in the non-printed areas of the paper and
features an architectural image. The security thread is embedded in the paper during the
banknote manufacturing process and shows as a dark line, running from the top to the bottom
of the note. The see-through register can be found in the top left corner of the front of the note.
Shapes are printed on the front and the back of the note, so that when the note is held up to the
light, they show as a complete numeral.

Design and Denomination of Coins

Coins of the euro currency are the responsibility of member governments, and individual
governments are allowed to create coins bearing nationally relevant images, surrounded by the
12 stars representing the EU. Whenever a country wishes to issue a coin with a new image, it
must inform the European Central Bank, which then publishes the details of the new coin in
the Official Journal Of the EU.

While each euro coin has a side bearing the design of the country that issued it, all coins have
a common side that must be the same for all issuing countries. The image on the common sides
of the euro coins was designed by Luc Luycx, from the Belgian mint.

Euro coins come in eight denominations, representing 1, 2, 5, 10, 20 and 50 cents, along with
coins representing 1 and 2 euros.

Banknote Features

Euro banknotes are available in denominations of 5, 10, 20, 50, 100, 200 and 500. Each
denomination comes in a specific color to make them easy to identify quickly, and each
denomination contains images representing a specific architectural style. For example, all 20
euro notes are predominantly blue in color and feature architectural images in the Gothic style.
All 500 euro notes are purple and contain images representing modern 20th Century
architecture.

CHARACTERISTICS OF EURO-CURRENCY (OFFSHORE) MARKET:

1. Transactions in each currency take place outside the country of origin of that currency.
2. Even though the transactions are recorded outside the country of issue, it continues to be
held in the country of issue. This is because a currency cannot be used for settlement of
commercial liability outside its domestic area. (The existence of the foreign exchange market
is based on this feature.)

3. Euro-Currency deposits and loans fall outside the regulatory and supervisory control of the
monitoring authority in the country of origin.

4. Euro-Currency market is distinct from the foreign exchange market. It is a market for
deposits and for loans between banks and between banks and their customers. It is a market in
which foreign currencies are lent and borrowed whereas in the foreign exchange market,
foreign currencies are bought and sold. This market therefore converts short term deposit
resources into short and medium term loans for financing projects. While the Euro- Currency
market operates on interest rates, the foreign exchange market operates on exchange rates.

5. Due to absence of regulation, deposits in this market are unsecured. Due to this deposits are
received only on short term basis (max: one year) whereas loans are demanded on medium to
long term basis. This creates an asset-liability mismatch which results in Euro-banks being
exposed to both liquidity and interest rate risks.

6. To eliminate interest rate risk Euro-banks developed the credit roll-over concept which
involves resetting the interest rates on loans at fixed pre-decided intervals. To achieve this
loans/credits are provided on floating rates of interest. To ensure that the Interest rates are
reset on a fair and equitable basis the concept of reference rates called LIBOR. (LIBOR
London Interbank Offered Rate) was developed.

7 Each Euro-Currency credit (loan) specifies the periodicity of the roll-over and the LIBOR to
which it is referenced. To provide a uniform profit margin for the lender a MARKUP is
specified over and above the LIBOR. The interest cost to the borrower is therefore the
applicable LIBOR + Mark-up. The mark-up normally remains constant through the life-span
of the loan.

8. Financial assets and liabilities in a currency by way of deposits, loans and instruments can
be traded only in the domestic market of that currency. Such markets are called the Domestic
or Onshore markets. However in the case of freely convertible currencies, it is possible to
trade in assets and liabilities in such currencies outside their home country. Such markets are
called Euro-Currency or Offshore markets. Consequently such markets deal only in freely
convertible currencies such as USD, GBP, EUR, JPY, CHF, CAD, AUD etc. The predominant
currency is USD.

9. It is essentially a wholesale market dealing only is standardised deposit amounts and large
volume Euro-credits involving substantial credit risk. Lending in this market is therefore done
on a Consortium basis, i.e. a syndicate of banks collectively finance a project on uniform
terms and conditions thereby distributing the risk among the syndicate members.