Question

Appraise the effectiveness of the Bank of England, as compared to the Federal Reserve in the US, in performing the functions of central bank in the UK.

Answer 1

The Bank of England (BoE) is the central bank for the United Kingdom. It has a wide range of responsibilities, similar to those of most central banks around the world. It acts as the government's bank and the lender of last resort. It issues currency and, most importantly, it oversees monetary policy.

Sometimes known as "the Old Lady of Threadneedle Street" in honor of its location since 1734, the BoE is the UK's equivalent of the Federal Reserve System in the United States. Its function has evolved since it was established in 1694, and has been responsible for setting the UK's official interest rate only since 1997.

The BoE was established as a private institution in 1694, with the power to raise money for the government through the issuance of bonds. It also functioned as a deposit-taking commercial bank. In 1844, the Bank Charter Act gave it, for the first time, a monopoly on the issuance of bank notes in England and Wales, thus taking a major step toward being a modern central bank.

The gold standard was temporarily abandoned during WWI, and fully abandoned in 1931. The BoE was nationalized in 1946, following the conclusion of WWII. In 1997, monetary policy authority was transferred from the government to the BoE, and prohibiting other banks from issuing their own banknotes - making it politically independent for the first time.

Monetary Policy Committee

Interest rate policy is set by the Monetary Policy Committee (MPC), which has nine members. It is led by the Governor of the Bank of England; this is a civil service post with the appointment usually going to a career bank employee. The three deputy governors for monetary policy, financial stability, and markets and policy serve on the committee as well as the BoE's chief economist. The final four members are appointed by the Chancellor of the Exchequer, who is equivalent to the Secretary of the Treasury in the United States.

The MPC meets eight times a year to consider the need to change interest rate policy to achieve the government's inflation target. Each member of the committee has one vote, and a consensus of opinion is not required. The BoE raises and lowers the bank rate, which is the rate charged to domestic banks.

When the global financial market crisis hit in October 2008, the bank rate was 5%. It was reduced to 0.5% by March 2009, but the cuts failed to stimulate the economy. The MPC added additional stimulus through the Asset Purchase Facility, a process known as quantitative easing (QE).

Financial Services Act of 2012

After the global financial crisis of 2008, the government adopted new regulatory reforms through the Financial Services Act of 2012. With these measures, the bank created the Financial Policy Committee (an independent committee modeled after the MPC), and a new subsidiary of the bank called the Prudential Regulation Authority. The bank also began to supervise financial market infrastructure providers such as payment systems and central securities depositors.

Brexit

With the possibility that Britain could exit the European Union, a scenario known as Brexit for British Exit, the BoE has been charged with developing plans to deal with potential economic fallout. Possible developments include inflationary pressure from a collapse of the British pound or a weakening economy that could require interest rate cuts.

There are many similarities and in many respects the US Federal Reserve System, like most other central banks around the world, was modeled on the Bank of England, but there are important differences.

I'll just address ownership differences now and let others address other things: The Bank of England was originally established, in the pre-dawn of capitalism in 1694, as a private bank which existed for the purpose of mediating mediating between private money lenders (which were usually at that time noble landowners and foreign nobility but increasingly also included common burghers and wealthy peasants from small towns who had gained vast treasures from highly speculative investments in spice voyages to what is now Indonesia), and it was only much later nationalized by the British government in 1946.    The U.S. Federal Reserve System has never been a privately owned bank and was instead established from the beginning, a little over a century ago, as independent Federal agency, much like the Federal Trade Commission and the FDA, which means agent of Congress -- the legislative branch -- and not the Executive Branch. The Federal Reserve Banks -- 11 of them -- do actually have shareholders and might seem like privately owned enterprises, but this is not the case and never has been. Owning shares in a Federal Reserve Bank is merely a requirement for being regulated by the Federal Reserve and provides "National Bank" status, which is useful for marketing purposes as well as some regulatory purposes. The shares should be viewed as much more like health club memberships, since they convey no actual control over Bank governance and only tiny symbolic distributions of "profits," which was borrowed completely unnecessarily from the Bank of England model

Functions of the bank of England

Deciding interest rates

In order to keep UK inflation at a specific rate of 2% (+/- 1%), the Bank of England has sole responsibility for deciding the level of base interest rates. The Bank produces its own statistics and undertakes detailed monetary analysis to help it create financial stability.

The actual rate that is manipulated is the repo rate, which is short for repurchase agreement rate, is the rate at which the Bank of England buys back securities it has previously sold in the money markets. The money markets include banks, building societies, and specialist securities dealers. Altering the repo rate affects short-term liquidity in the monetary system, which eventually has an effect on all other rates.

Overseeing the money supply

The Bank of England oversees the supply of money in the economy to ensure that there is just sufficient liquidity in the economy.

Managing foreign reserves

The Bank of England also manages the UK foreign exchange reserves to ensure that the country settles its international debts.

Providing banking facilities

The Bank also provides banking facilities to the high street banks, and all credit banks in the UK must keep an account with the Bank of England. The Bank also provides facilities to the UK government, which keeps its accounts with the Bank.

Regulating the UK banking system

An increasingly controversial feature of the Bank of England’s role is the regulation of the UK banking system. The current regulatory structure in the UK involves three separate organisations, the Bank of England, the UK Treasury, and the Financial Service Authority (FSA). However, the recent banking crisis has raised serious questions about the effectiveness of banking regulation, and the role of the Bank in this process.

Lender of last resort

The Bank also acts as lender of last resort, which means that, given a liquidity shortage in the banking system the Bank of England will provide funds ‘as a last resort’.

Issuing notes and coins

Finally, the Bank is responsible for controlling the issue of new notes and coins.