The Role Of The Bank Of England

The role of the Bank of England

The bank was founded by a group of very wealthy London Merchants in 1964, and later is was granted a Royal Charter by our very own William the third. The bank of England has developed a unique relationship with the Crown and with Parliament. This relationship was officially formalised in 1946 (after the Second World War), it was nationalised and become the United Kingdom central bank. A central bank can be defined as "an organisation that acts as banker to the government, will supervise the economy and will regulate the money supply". In the United States US, for example, these tasks are the responsibility of the US central bank, which is known as the Federal Reserve. Within the euro zone of the European Union, the European Central Bank (ECB) acts as a central bank for those states in that zone.



The bank of England has several important roles in the UK in relation to the UK economy; its main functions are as follows



• It will issue bank notes – the bank of England is the central note-issuing authority, and is responsible of ensuring that there is an adequate supply of notes in circulation. (N.B. The Royal Mint is responsible for the UKs coins)



• It will act to banker to the elected government – the governments own bank account is held at the Bank of England. The bank will provide finance to cover any deficit by making automated loans to the government. One way of raising funds to finance the government’s spending is through gilt-edged securities. If there is a surplus, the bank may lend it our as part of its debt management policy.



• Banker to the banks – all major banks in the UK have accounts with the bank of England, for depositing or obtaining cash, settling or clearing, and other transactions. In this capacity the Bank can wield considerable influence over the rates of interest in various money markets, by changing the rate of interest it charges to banks that borrow or the rate it gives to banks that deposit their funds



• Adviser to the government – the bank of England, having built up a specialised knowledge of the UK economy over many years, is able to advise the government and help it formulate its monetary policy. The banks role in this regard was significantly enhanced in May 1997 (Tony Blair wins the election) it got the full responsibility of setting the UKs base rate under the bank’s monetary policy committee MPC. This committee meets once a month to set the UKs base rate and will adjust it to ensure the bank meets the government’s inflation rate.



• Foreign exchange market – the bank of England manages the UKs reserves of gold and foreign currencies on behalf of the treasury.



• Lender of last resort – the bank traditionally makes funds available when the banking system is short of liquidity, in order to maintain confidence in the UK banking system.



The bank of England was also formerly responsible for managing new issues of gilt-edged securities. This function has now been transferred to the Debt management Office within the treasury, in order to avoid conflicts of interests that might arise from the banks responsibility for setting interest rates. Gilt-edged securities, also known as gilts, are loans to the government. There are a wide variety of loans on different terms and for varying periods, including some with no fixed redemption date. These securities are called gilt-edged because the government guarantees their income and redemption amount.



In addition to the functions described above, the Bank of England was previously charged with responsibility for the supervision and regulation of those institutions that make up the banking sector in the UK. This responsibility was transferred to the Financial Services Authority with effect from 1 June 1998. The Bank, however, maintains its traditional responsibility for maintaining the stability of the financial system as a whole.



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