THE BANK OF ENGLAND

The Bank of England (formally the Governor and Company of the Bank of England) is, despite its name, the central bank of the whole of the United Kingdom and is the model on which most modern, large central banks have been based. The Bank's headquarters has been located in London's main financial district, the City of London, on Threadneedle Street, since 1734. Hence the Bank is sometimes known by the metonym The Old Lady of Threadneedle Street or simply The Old Lady. The Bank of England was founded in 1694 to act as the English Government's banker. The Bank was privately owned and operated from its foundation in 1694 until it was nationalized in 1946. In 1997 it became an independent public organisation, wholly-owned by Government, with operational independence over monetary policy.

The roles and functions of the Bank of England have evolved and changed over its three-hundred year history. Today standing at the centre of the UK's financial system, the Bank is committed to promoting and maintaining two core purposes - monetary and financial stability as its contribution to a healthy economy. Monetary stability means stable prices - low inflation - and confidence in the currency. Financial stability is a key ingredient for a healthy and successful economy. People need to have confidence that the system is safe and stable, and that it functions properly. It is also important that problems in particular areas do not lead to wider disruption across the financial system.

The Bank of England performs the following functions of a central bank:

1.     note issue

2.     government's bank

3.     banker’s bank

4.     lender of last resort

5.     management of gold and foreign currency reserves

6.     relations with other central banks and international institutions

7.     management of the monetary policy

The Bank of England used to be responsible for the supervision of the banking industry, although this responsibility was transferred to the Financial Services Authority in June 1998.

Note issue

The Bank of England has issued banknotes since 1694. Notes were originally hand-written. They became fully printed from 1855. Until 1928 all notes were "White Notes", printed in black and with a blank reverse. The Bank produces approximately 7.5m new notes every day at its printing works and destroys about the same number. (Coin is issued by the Royal Mint on behalf of the Treasury, and is not a responsibility of the Bank of England.)

Bankers' bank

The Bank of England acts as banker to the main banks and discount houses who themselves have accounts at the Bank. They need these accounts for two main purposes:

Operational balances to settle the debts each bank owes the others at the end of a day’s banking. The banks merely settle their debts with each other through accounts which they maintain at the Bank of England.

Non-operational balances. Since 1981 the banks have had to keep 0.5 % of their total liquid liabilities in accounts with the Bank. These accounts earn no interest; they are designed to control the credit-creating abilities of the banks.

Finally the bank offers highly valued advice to other banks. It keeps the clearing banks informed over its intentions, and the clearers let the Bank know of any potential problems.

Government's bank

This function was the founding principle of the bank. Nowadays the main account of the government, the Exchequer, is kept at the Bank as are the accounts of many departments. One more activity of the Bank of England – management of the National Debt was transferred to the new UK Debt Management Office in 1998.

Lender of last resort

The bank of England serves as the lender of last resort to the financial institutions that are experiencing financial difficulty and cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy.

Management of gold and foreign currency reserves

Britain's gold and foreign currency reserves are held in the Exchange Equalisation Account and are managed by the Bank. By operating this account the Bank is able to influence the value of sterling and other currencies in the foreign exchange market.

It is important for business that the value of the pound is kept reasonably stable. The Bank constantly monitors the value of the pound. It steps into the foreign exchange market and buys pounds with gold and foreign currency when its value is falling, and sells pounds when its value is rising too quickly.

Relations with other central banks and international institutions.

The Bank of England maintains regular contact with other central banks and international organisations to improve the international monetary and financial system.

Management of the monetary policy

The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment.