Bank of England (BoE)
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    Bank of England (BoE)

    The Bank of England is the central bank of the United Kingdom. The BoE was founded in 1694 as a commercial structure for government financing. And although it became national bank only in the XX century, it is still considered the oldest in the world, for comparison, the Bank of Japan was established in 1882, the Federal Reserve System - in 1913, the European Central Bank- even earlier. Any shareholder can envy such nationalization cause the government was not stingy and exchanged shares for government bonds in the ratio 1:4.

    At the moment, the Bank of England can hardly be called independent, since all its activities are closely intertwined with the Ministry of Finance and other government departments. An assignment to a position of a senior staff comes from the submission of the British Parliament and should be signed by the Queen.

    For the government, BoE is a consultant, and the HM Treasury is the coordinator of BoE, cause it has the right to send recommendations that are binding. Anyway, BoE still take on following tasks: supporting the GBP, the necessary level of inflation and stability of the banking sector as a whole, as well as analyzing the risks of possible global crises and developing plans to minimize their impact, as much as other central central banks do.

    The bank's client isn’t only the government and Great Britain`s commercial banks , but also the central banks of other countries, as well as a number of financial institutions, such as the International Monetary Fund. There are also private clients in the Bank of England, but this right is possessed by extremely important persons or those whose accounts "passed through the centuries".

    The head management of the bank is the Court of Directors. Committees, which are in charge of monetary and financial policies and the stability of the banking sector, are subordinate to the Court of Directors. It's interesting that the Head of the Court of Directors is also the Head of the main committees, although he disposes of deputies in his subordinates in these departments.

    In order to implement the main national bank mission, like achievement of needful inflation level, stability of economy and national currency, the BoE uses following instruments:

    Changing interest rates;

    currency interventions;

    quantitative easing program (QE).

    The Bank of England is located in London and is the central bank for England and Wales. In Scotland and Ireland, there are their own central banks, which have the right to issue their own currency, but at the same time, the volume of bank notes should be backed up by reserves in the pound sterling. Throughout England, the bank has 20 agents who, on the one hand, collect information about the state of the region with further reporting to London, and on the other hand consult the "local elite" and the public about the decisions taken by the bank.

    In its history, the Bank of England has experienced many challenges, such as a decline in the gold reserve to the lows, global crises, the "Black Wednesday", but still, instability in the world and the financial markets, as well as Britain's exit from the European Union, keep management team on their toes . The long-standing sustainable work of the "Old Lady" inspires confidence of investors in the central bank of the United Kingdom.


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    History of the Bank of England

    The Bank of England was one of the first financial institutions of its kind, prototype of which was used by most countries to create their own central banks. For all of its existence, it has changed a lot and most importantly it has become a state one. Since the beginnings , Bank of England was a private joint-stock company and the main goal of it was state treasury funding.

    So, in 1694, after surviving the civil war, England got into a confrontation with France, which lasted for dozens of years, which could not be reflected negatively in the financial well-being of both residents and the state as a whole. In this situation, raising of taxes , could lead to a strong tension inside, so many minds have developed plans to exit the situation. The House of Commons, which was just created to solve the problem, from all options, accepted the proposal of the Scottish trader William Peterson, who saw a decision in granting the government a loan from the elite, which had substantial free funds. In the law, this moment was prescribed as "the creation of an institution with a goal to improve the collection of funds and the transfer of 1.2 million pounds to the Treasury." But such a "kind gesture" naturally demanded certain conditions from the other side, which the government was forced to accept.

    The bank had a unique right to maintain contributions from the government and individuals, as well as to issue new securities, and the most important - to lend amounts that exceeded its fund at times.These banknotes didn’t receive a single legal tender status, but anyway, this happened by itself after half a century.

    Why the bank is called Bank of England and not Bank of Great Britain? The answer is very simple, the foundation of the bank was made even before Scotland was added to England and the state was named differently. Throughout the time the name has not changed.

    It is necessary to point out, that the king and the members of the ruling party immediately became the BoE's shareholders , which for centuries secured this institution, de facto a monopoly in the banking sector: the emergence of competition was quickly and rigidly suppressed, as an example - the issue of banknotes and the organization of such institutions with the number of employees more than 6, was punished by death.

    Therefore , in the kingdom, only small institutions could exist, they were called "country", which, generally speaking, served to a small part of the local population and were required to keep their reserves in BoE. In view of this, the bank keept not only the government's gold reserves, but all financial reserves, this fact enabled the further development and strengthening of bank’s status within the country. Although, after the end of warfare, the kingdom was marked by the rapid growth and development of the banking sector, and yet, due to given preferences, the Bank of England remained the only mastodon in the market.

    Over the centuries, this institution has suffered a lot of ups and downs, but still, it is the most important event since the beginning of nationalization, which occurred in 1946, (bank was created in 1694, kind of the game figures). Nationalization sounds scary for these days, but in the old Europe everything went without radical measures and skirmishes, all shareholders received a refund, which, for a minute, was 4 times higher than the nominal value of their shareholding. So the Treasury became the sole owner, bank became a full-fledged Central Bank and the highest link in the banking sector and was given the right to request any information from other financial institutions and give them recommendations, as well as the possibility of issuing directives in order to implement the same recommendations.

    At the moment, the Bank of England, or how it is also called the "Old Lady", because of the long existence and conservativeness of the solution of all issues, serves not only "domestic customers", but also other financial institutions and the Central Banks of other countries.

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    Bank of England. Main function


    For more than 300 years, the Bank of England has been entrusted with various functions that have been constantly changing depending on the current realities. At first, as it was mentioned earlier, the main goal was to finance the state budget, then issue banknotes, free exchange of them for gold coins (by the way, this function was often canceled in order to save the position and financial stability of the structure), as well as the storage of gold reserves state. Along with that, the bank performed normative functions of lending and deposits for private clients. At the moment, inasmuch as the Bank of England became a state bank, it was deprived of some opportunities.

    Like other Central Banks, BoE builds its policy in order to achieve two main goals, which are - the stability of the national currency and the entire financial sector of the country. Yes, there are collateral goals too, but they are temporary and are pursued with a goal to resolve the emerged situations. For example, the promotion of London as a global financial center - it’s a collateral goal.

    In order to achieve these goals, the Bank of England takes certain functions:


    - implementation of monetary policy. This direction is dealt with by the Monetary Policy Committee, which sets the interest rate and achieve necessary level of inflation;
    - opening and servicing of public accounts. In fact, the bank performs a partial role of the Treasury, but the Ministry of Finance manages and distributes funds for them;

    - control of money Supply. I would like to note, that the main word here is CONTROL, since the direct issuance of new banknotes and coins, as well as the replacement of obsolete and inadequate ones, is carried out by the Royal Mint, which is an independent agency. BoE constantly analyzes the released money quantity and determines the need for emissions, depending on the economic situation. At the moment, in the UK, people are increasingly talking about the need to abandon cash, and if in such a conservative country they started talking about it, most likely, this is inevitability and a matter of time;

    - registration of bonds and bills, as well as their buying-out. Valuable government securities are long-term loans of the state, a bill is short-term ones belonging to treasuries, which are used in order to ensure the implementation of the country's budget. In fact, the Bank of England continues to finance the needs of the state, but at the same time provides the same opportunity for " exterior" investors;

    - maintaining the exchange rate. The bank has an "equalizing" account, which contains all the gold and foreign exchange reserves, and at the expense of these funds, the bank can directly influence the value of the pound sterling relative to other currencies, buying up or selling it, depending on the circumstances. This approach is called intervention, it doesn’t always lead to the desired result and very often requires serious financial inflows. An example of how the intervention failed to help the national currency - the black Wednesday, 1992, when a lot of speculators brought down the pound, regardless of all the actions of the Bank of England.

    - control of the banking industry. Previously, this control was carried out on "voluntary ambushes" and wasn’t regulated by law, but after the 1990 these functions were prescribed and now all commercial banks are periodically obliged to provide their financial statements, and if something doesn’t satisfy the central bank, then he has the right to present reasons for the prompt elimination of the unsatisfactory situation, up to the cancellation of the license. Similarly, all banks in the UK are required to keep in BoE 0.35% of their customers' deposits in cash or securities, this amount is a "reserve requirement". The Bank of England can act as a creditor for commercial banks if it’s need, although this isn’t done directly but through accounting houses, anyway, it still has in its arsenal a similar instrument of "saving" the banking sector;

    -cooperation with other central banks. At the moment, the BoE has accounts of other central banks, which operate in the UK through BoE, and also keep their gold reserves there. BoE also constantly consults with "colleagues" in order to coordinate actions in the event of a certain situation in the global financial sector;

    - management of public tie. Now the function is transferred to the newly created institute - UK Debt Management Office.
    __________________________________________________ __________________________________________________ __________________________________________________ _


    For the last century, the policy of Central Bank directly depended on the economic model that existed in the world too. Conventional, all these stages can be divided into several periods:

    Keynesian economics. The main goal of the Bank of England was reducing of public debt and providing access to relatively cheap loans;

    Neo-Keynesian economics. During this period, the bank began directly influence the economy, by changing interest rates, in particular, raising it in order to slow the development and quick decline of it with the appearance of the rudiments of inhibition;

    Monetary economics. Simply put, monetarism represent control over the money supply. The main instrument of influence was the purchase of non-public bills, thereby conducting lending against bail of goods or other means;

    Open market operation were started in 1990. These operations became the main tool of monetary policy.

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    BoE. The Court of Directors

    In order to complete all of the abovementioned functions, the Bank of England has a number of committees and subcommittees, which are responsible for a certain direction. The coordinating and controlling department in the bank is the Court of Directors . The bank has a very large management system and we will not go into it deeply, we will consider only the main divisions. (Who will be interested in, you can see the full list of functions on their official website _http: //www.bankofengland.co.uk).

    Executive management team meets at least once per month and holds meetings on current issues and analysis of accomplished work in accordance with the previously established plan. the Court of Directors consists of:

    Governor is appointed for five years by a decree of the Queen, after approval by Parliament. Can be elected for a second term;

    four deputy governors, each responsible for a certain direction: monetary policy, financial stability, prudential regulation, markets and banking. Alternates are also appointed for five years with further extension of service term;

    the operational director is responsible for the bank's viability: human resources, security, IT. By status is equivalent to the deputy manager;

    the 16 members of the council, whose charges are also very sector-specific, have 4 years service term.

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    Bank of England. Committees

    After the Court of Directors, the next link in the chain of the Bank of England is the committees that are already more proficient in their activities. Consider the main ones:

    The Monetary Policy Committee (MPC)
    The main function of this department is to achieve the level of inflation, established by the government. The main instrument for this is the interest rate. The committee itself consists of nine members, the chairman is the Governor himself of the Bank of England, four more members are bank employees (deputy governors), the other four are representatives of the Ministry of Finance. The meeting is held every month on the first Wednesday / Thursday, where the issue of changing interest rate is considered, the decision is taken collectively by voting. The decision is announced public the next day after the meeting, and in two weeks - a full protocol. A quarterly report is published on the inflation rate and the expected growth rate, as well as the Quarterly Bulletin, which contains old decisions and analyze the state of the UK economy and possible influences from the world economy and forecast on inflation for the next two years.

    The Financial Policy Committee (FPC)
    The Financial Policy Committee implements the BoE policy about the stability of all financial system of the country. Generally, it consists of 13 members: a bank manager + four deputies + an executive director for financial stability + five independent experts, who are drawn from experienced experts in the field. The head of the Financial Management Department and the Treasury representative, which are included to FPC without the right to vote.
    The main FPC functions are:
    - Monitoring of the current financial situation in the UK and the world markets
    - Risk Management. Analysis of possible adverse situations and development of plans for this case.
    - Control of payment systems. Analysis of all payments and payment systems that are used in Britain.
    - Crisis management. Analysis of global financial stability, as well as mitigation or complete exclusion of influence.

    Financial Sector Advisory Council is a division of FPC and performs functions that are not related to the main committee, as an example - analysis of the banking sector and their main counterparties.

    The Prudential Regulation Committee (PRC)
    PRC monitors the protection of depositors of the bank from the possible termination of each financial structure and also monitors and analyzes the possible consequences of the "chain reaction" in the collapse of large banks in the UK. PRC also monitors other financial institutions: insurance companies, credit unions, investment companies, which, are counted circa 2000 units at the moment. Ultimately, his task - not to allow certain institutions to violate standards and financial stability.

    Independent Evaluation Office (IEO)
    IEO is a kind of controller, that evaluates the performance of all committees in accordance with previously established plans and objectives in monetary and financial policies and any other conditions, that were settled by the Board of Directors.
    Secondary committees:

    The Audit and Risk Committee is a consultant to the Court of Directors and other committees on compliance with both UK laws and other global regulations. He also audits internal reporting and compliance with the rules of the Bank of England.

    The remuneration committee is a kind of combination of the personnel department with the accounting department. The main function is effective stimulation of all members of the Bank of England in accordance with the scope of their work. Simply put, it establishes the level of wages, which depends on the working conditions, the position held, personal contributions, etc, strictly within the budget of the bank, which was agreed by the Board of Directors.

    Nomination Committee - preparation of reports on nominees for vacant positions in the Bank of England, with further transfer of information to the Board of Directors or to the government, depending on who decides on "hiring".

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    Bank of England. Monetary Policy


    At this stage, the Bank of England's monetary policy is reduced to several areas: the stability of the national currency and prices, as well as supporting the economy and providing the government with the means for budget implementation. Let's try to stay at each one in more detail:



    A stable pound. We have already touched this area a little bit, when we considered the main functions and found out that the bank has an equalizing account, on which all the gold and foreign exchange reserves of the central bank are registered and if it is necessary to support or weaken the exchange rate, the bank can conduct operations in the open market - intervention. Yes, the in UK the practice of easing interest rate was not noticed, because the country is not strictly export-oriented and the low rate of pound is not needed to majority of economic agents. Theoretically, everything looks simple: the pound rate falls - the bank throws foreign currency onto the market and starts buying for it the national one, thereby creating an artificial shortage and pushing the pound towards growth. As it was already mentioned, this method is not always effective and can often require an excessive infusion of funds.




    I would like to note one very important case, that occurred in the last year, there are rumors and they are in principle noticeable on the currency market that the heads of the G-7 countries agreed to stop currency interventions, as they badly affect other market participants and can launch a chain reaction, it is difficult to say whether this is true or not.

    Another tool for pound rate stabilization is the statements of the head of the Bank of England - Mark Carney, sure, he is not as powerful as the previous one, but still can stop panic and unfold the established trend that began after the release of poor economic data in the UK. Very often there are enough words that everything is fine and everything is under control.

    Stable prices. Although, if you understand, zero inflation, as well as negative (deflation) is not good. Yes, we, who grew up in the post-Soviet space, do not fit this fact into the head, but nevertheless, when prices for goods fall, demand falls, as everyone is waiting for a more favorable price, as a result, warehouses accumulate goods, turnover decreases or the process stops altogether, and this leads to the closure of enterprises and unemployment. Therefore, inflation, although small, is still needed, since this is a signal to the fact that the economy is alive and developing normally.

    The main instrument in the hands of central banks for inflation regulation is the interest rate, the lowering of which entails opening access to cheaper loans for both- producers and buyers, and this is an increase in both - supply and demand, and as a consequence - higher inflation. At the moment, the Government has set a "reasonable level of inflation" at 2% and the Bank of England works in this direction.

    A stable economy. For the development of the enterprise, it certainly needs funds, which are taken in the form of loans. We do not speak about the fact that the transparency of the legislative base and the absence of sticks in the wheels on the part of state officials are not a prerequisite. Credits ... as it was mentioned earlier, accessibility improves with a lowering of the interest rate, but it can not be reduced to infinity, and very low interest rate leads to an outflow of deposits, and as a result - the lack of funds for the issuance of the same loans.

    Therefore, in the last decade, was invented another tool for maintaining the economy - quantitative easing, the essence of which is the purchase of securities from commercial banks and other private investors, such as pension funds and insurance companies. Resources for this procadure bank makes by itself, in simple words - prints, although they are only available electronically, yet this is also an option issue. As a result, banks receive funds to issue new loans, and this, as it was mentioned above, leads to increase of demand and supply. Private investors, through these funds, invest in new projects, and this means development, competition and job creation.

    Budget surplus. Even for such a developed country as the UK, a surplus is an unattainable utopia, since over the years, the deficit is only exacerbated. Therefore, for the implementation of the plan there are needed funds, that are attracted from outside, through the sale of securities (bonds) and treasury bills.

    On this, in principle, the Bank of England's monetary policy ends. There is no one-sided opinion, on my part, about how correctly it is realized - and such opinion could not exist, because for this there are a hundred employees in the bank who work day and night, making the best decisions for the situation. Taking into account bank’s goals and the fact that since the beginning of the year the inflation rate has already reached 1.37%, we can say that BoE is moving in the right direction. The only thing that confuses is QE, since this soap bubble can sometime burst, causing irreversible consequences both in the UK itself and in the world.

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    Interesting facts and legends


    At the conclusion to the topic, I would like to move away from boring and abstruse financial expressions and relax a little bit, because this message contains interesting facts about the Bank of England and its national currency.






    The pound is not backed up!

    We all know that the pound sterling is one of the main reserve currencies in the world, and this proves its stability and reliability. But, in fact, the Bank of England at one time made a revolution in the financial sphere, as it issued a money mark, the value of which was not tied to precious metals as a result, the pound is not backed up.
    If you go back to the history of the bank’s emergence, you can recall the moment when private investors demanded from the government privileges, one of which was the possibility of free and uncontrolled lending to individuals, which subsequently led to an increase in the loan portfolio, that exceeded the bank's fund. Yes, this led to critical situations, when customers massively began exchange pounds for gold coins, but the same support from the government - in the form of legal suspension of this opportunity, saved the Bank of England from collapse more than once.






    The gold reserve of the Bank of England is "rotted"

    About ten years ago, the media reported that gold, which is stored in the central bank's repositories of the United Kingdom, is cracking and breaking. This information could be considered a fake, since access to the repositories is strictly limited and nobody actually saw it, but still the Heads of the Bank confirmed this fact, with the proviso that only the appearance of ingots and not the "purity" of gold itself was spoiled and in further melting is possible with minimal losses. It is necessary to mention, that some ingots, which are stored ther, are about 70-80 years old.

    Regarding the repository, there are many legends about being robbed or that it is empty. There is no official confirmation of this, but there is no possibility to refute it either, since it is unrealistic to get into it, and the protection is so complex that it is not even described. The storage itself is located in old tunnels and wells, previously feeding London with water, directly under the streets of the city. That’s why we can say, that the capital of England stands on gold!




    The Old Lady from Threadneedle Street

    This name has been attached to the Bank of England for a long time, and many associate it with the fact that the central bank has a very long "old" history and constantly adheres to conservative views.

    But there is another legend, which is connected with the fact, that one day one of the employees of the bank was caught on fraud, as a result, his punishment was the death penalty. The only relative of the clerk was a sister, who after having noticed the loss, went to look for him to the workplace and when she found out the truth, she went mad. Since then, every day, dressed in mourning, she came to Threadneedle Street. Her further fate is not known. But the story for a long time fixed the playful nickname "Old Lady" for the Bank.

    Today, this phrase is not a mockery, but a kind of praise, for the long and stable work of the Bank.

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