Bank of England (BoE)
The Bank of England (BoE) is the central bank of the United Kingdom, and a model bank onto which most central banks around the world are built. Since its inception in 1694, the bank has grown from being a private bank that lent money to the government, to the official Central Bank of the United Kingdom. The bank started during a period of economic turbulence, and the national debt was growing at a steady rate. The Bank of England became the official Central Bank of the UK in 1946 and is owned by the Treasury Solicitor on behalf of the government. Previously, it was a property of stockholders from its foundation who lent money to the government.
The bank’s central offices are in London’s financial district along Threadneedle Street. It is on this street that the bank got the name “Old Lady of the Threadneedle Street,” a name derived from the legend Sarah Whitehead, who lived at the current location of the bank’s headquarters.
Here is a link to the Bank of England BoE -> http://www.bankofengland.co.uk
The Governance of the Bank of England
The Court of Directors oversees the operations of the bank and the court members are appointed by the Queen, but on the recommendation of the Chancellor and the Prime Minister. The court has five executive members and nine non-executive members. Only one of the non-executive is appointed by the Chancellor of the Exchequer to chair the court. It sets and monitors the bank strategy as well as making important decisions on resource utilization. Also, there are several subcommittees, each tasked with handling specific responsibilities of the bank.
The most senior position in the bank is that of the governor. Unlike the Court of Directors, the appointment for the post of the Governor comes from within the bank, with the incumbent governor grooming the successor. The current occupant of the position is Mark Carney, a Canadian and the first non-British to hold the Governor’s position. However, he committed to take up British citizenship before the end of his first term.
History of the Bank of England
The Bank of England started in 1694 following a crushing defeat by France and the need to establish itself as a global power. The government’s coffers were depleting at a fast rate during the war, and they had to find new avenues to borrow money and finance the growing national debt. At its inception, the bank was a private institution with the power to raise funds through the issuance of bonds.
Following the enactment of the Bank Charter Act in 1844, the bank got the monopoly powers on the issuing of bank notes in England and Wales, a significant step towards becoming the official government banker. The bank had the sole rights to issue bank notes, except a few banks that previously had the right, provided that their headquarters were outside London.
After the 1997 general election, the Chancellor of the Exchequer announced that the Bank of England would be granted independence over monetary policy. The announcement gave the bank the independence in setting the interest rates for economic reasons. The bank’s Monetary Policy Committee is responsible for setting the interest rate to meet the Consumer Price Index (CPI) inflation target of 2%. In a scenario where it increases or decreases by 1% beyond the target inflation rate, the Governor is required to write a letter to the Chancellor of the Exchequer explaining the situation and probable solutions.
Functions of the BoE
The Bank of England’s primary functions are to maintain monetary stability and oversee financial stability of the UK financial system. The bank also acts as the lender of last resort and also as the custodian to the official gold reserves in the United Kingdom.
Monetary stability relates to maintaining stable prices and confidence in the currency. The BoE has been tasked with the responsibility to issue bank notes in the United Kingdom for over 300 years now. It has the monopoly on the issuance of banknotes in England and Wales. Also, as the Central Bank of UK, the Bank of England is responsible for maintaining confidence that the currency in circulation is genuine.
The bank maintains price stability by ensuring that price overshoots or undershoots meet the government target. The bank delegated the role of formulating monetary policy to the Monetary Policy Committee (MPC), a nine member committee led by the Governor. Other members include three deputy governors, BoE’s chief economist and four members appointed by the Chancellor of the Exchequer. The MPC meets regularly to discuss the need to alter the interest rate policy to achieve the inflation target. It also monitors the developments in the economy.
Financial stability involves monitoring the financial system so that there is confidence in the financial institutions, markets, and the whole financial system. It also entails protecting the financial system against threats, by detecting them through surveillance and market intelligence functions, and finding immediate solutions. The threats include bribery, corruption and money laundering.
The Financial Services Act of 2012 established two institutions to deal with financial stability, i.e., Financial Policy Committee (FPC) and the Prudent Regulation Authority (PRA). The role of the FPC is to identify, monitor and take action against risks that threaten the resilience of the UK financial system. The PRA regulates commercial banks, building societies, credit unions, insurers and investment firms in the UK. With over 1700 firms to supervise, the PRA ensures their safety as well as the protection of policyholders in the case of insurance firms.
Official Gold Reserves Custodian
The Bank of England acts as the official gold reserves custodian of the UK and other countries. It is estimated that the bank holds approximately 3% of the gold mined in human history. As at April 2014, the bank had nearly 400, 000 bars valued at £142 billion.
Lender of Last Resort
As the central bank of the UK, the Bank of England acts as a lender of last resort to commercial banks that suffer a cash shortfall. This role helps maintain liquidity and confidence in the financial system. In a famous example, Northern Rock Bank in the UK underwent financial hardships. To stabilize the bank, it had to borrow funds from the BoE.