Bank of England

Central bank of the UK

Bank of England (BoE)

The Bank of England (BoE) is the central bank of the United Kingdom and a model on which most central banks around the world are built. Since its inception in 1694, the bank has changed from being a private bank that loaned money to the government, to being the official central bank of the United Kingdom. The bank started during a period of economic turbulence when the national debt was growing at a steady rate. The Bank of England became the official central bank of the UK in 1946. It is owned by the Treasury Solicitor, on behalf of the government. Previously, it was a property of stockholders from its foundation.

The bank’s central offices are in London’s financial district, along Threadneedle Street. It is from this street that the bank got the name “Old Lady of the Threadneedle Street,” a name derived from the legendary Sarah Whitehead, who previously 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

 

Bank of England (BoE)

 

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. One of the non-executive members is appointed by the Chancellor of the Exchequer to chair the court. It sets and monitors the bank’s 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 at 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 their successor. The current occupant of the position is Mark Carney, a Canadian and the first non-British person 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 of English forces by the French and spurred by the need to establish England 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 monopoly power on the issuing of bank notes in England and Wales, a significant step toward becoming the official government banker. The bank had the sole right to issue bank notes, except for a few smaller banks that had already been granted such rights and that were required to be headquartered 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 independence in setting interest rates. 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 inflation 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 offering potential 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 as the custodian of the official gold reserves in the United Kingdom.

 

Monetary Stability

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. Also, as the central bank of the UK, the Bank of England is responsible for maintaining confidence that the currency in circulation is genuine.

The bank has 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, the 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 developments in the economy.

 

Financial Stability

Financial stability involves monitoring the financial system so that there is confidence in the financial institutions, markets, and the overall financial system. It also entails protecting the financial system against threats by detecting them through surveillance and market intelligence functions, as well as finding solutions when problems arise. Threats to the financial system include bribery, corruption, counterfeiting, and money laundering.

The Financial Services Act of 2012 established two institutions to deal with financial stability, i.e., the 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.

 

Official Gold Reserves  Custodian

The Bank of England acts as the official gold reserves custodian for the UK and other countries. It is estimated that the bank holds approximately 3% of all the gold mined in the history of the world. As of April 2014, the bank had nearly 400,000 gold bullion 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 for commercial banks that suffer a cash shortfall. This role helps maintain liquidity and confidence in the financial system. In a famous example, when Northern Rock Bank in the UK suffered severe financial hardships, it had to borrow funds from the BoE.

 

Learn more about banking

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To continue learning and advance your career, see the following free CFI resources:

  • Cryptocurrency
  • IBD; Investment Banking Division
  • Commercial Banking Interview Questions
  • NIBC Investment Banking Competition

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!