Economic Crisis Role Of The Bank Of England Finance Essay
The above assignment deals with the role of the Bank of England during the economic crisis in the UK. A bank is a financial institution that deals with the monetary matters of the country. It is involved in dealing with all the monetary or the financial transactions taking place within and outside the country. A bank plays the role of a mediator in a sense that it links the individuals or the corporate bodies who are in need of capital to those who have it. With the passage of time and with evolving techniques, various banks introduce various schemes and policies to provide satisfaction to their customers. Since the financial sector is the most important aspect of an economy, it is essential that the government of a country deals with its financial resources in a well organized manner. The management of the finances of an economy is a very crucial aspect of controlling the flow of money in the market.
The Bank of England is the official or the central bank of the United Kingdom which controls and operates all the other banks of the country. It has played a very prominent role to evolve the economy from the situation of financial crisis. The financial crisis that affected the country was not restricted only to the United Kingdom but had its adverse effects on almost all the countries of the world. This included both the developed as well as the developing countries, though the developed countries had to face major setbacks and overhauls than the developing countries. Through this assignment, the major role played by the Bank of England in stabilizing the economy of UK during the financial crisis has been analyzed. Various approaches have been utilized to arrive at a correct and an accurate conclusion regarding the above said topic. Since the study and analysis of the role played by the Bank is a very vast and a sensitive criterion, careful mechanisms and evaluating strategies have been adopted to avoid any fallacious results.
The main aim of the research conducted is to find out the role played by the Bank of England during the financial crisis in the economy of UK. Various objectives are designed in order to satisfy the main aim of eh assignment. These objectives have a direct influence in answering the various questions that may arise in the course of the study. The objectives can be summarized as follows:
The primary objective of the assignment is to analyze and understand the role played by the central Bank of the United Kingdom and to assess the various steps taken by it to stabilize the economy in turbulent market conditions.
The objectives also include the assessment of the role of the Bank as a positive or a negative factor for the entire economy of the UK.
Another major objective of the assignment is to find out the hurdles faced by the bank during its course of action in dealing with the financial crisis.
In addition to the above, the most important criterion to be analyzed is the effect caused due to the actions taken by the Bank and the extent to which these actions proved beneficial for the economy as a whole.
For a project to be done or for a survey to be conducted, the most crucial step is the collection of data. The data collected should be such that it supports the criteria of the project or the survey and should be helpful in deriving inference from the research conducted based upon the data. Various research methodologies need to be adopted which fulfill the above said objectives of data collection and inference. To satisfy the purpose of our assignment, the data collected is from two sources; primary data and secondary data.
The Bank of England acts as the central or the main bank for the whole of the United Kingdom. It was established in the year 1694 and was nationalized in the year 1946 and was owned privately. This Bank became an entirely government institution by the year 1997 that was completely owned by the government. The present governor of the Bank is Mervyn King who took over the reins of the Bank from his predecessor Sir Edward George. The headquarters of the bank are located on Threadneedle Street in London. The official currency of the United Kingdom is the pound sterling commonly referred as pound or sterling. Like other banks, the Bank of England deals with all the monetary functions of the economy and is involved in providing stability to the country in times of crisis. The bank plays an important role in stabilizing the economy by controlling the inflation rates and by monitoring and controlling the processes and procedures of the rest of the banks of the country.
In order to understand the economy of UK, it is first essential to understand the meaning of the term 'economy' and the various factors on which it depends. The economy of a country is determined by various factors such as inflation, the Gross Domestic Product of the country, the employment ratio, the per capita income of the people of the country, the resources available in the country, the use of labor, raw materials etc. All these have a profound effect on the overall functioning of a nation in addition to the adoption of various other mechanisms and processes to improve the total standard of the country. The extent of globalization and adoption of new and improved technologies to provide advanced and enhanced methods of functioning of the system also affect the development and self-sufficiency of the nation. A self-sufficient nation would be better able to strive for excellence and to improve the overall standard of the country.
The economy of UK is one of the largest economies in the world. It has high purchasing power parity and a high GDP and was one of the first countries in the world to adopt the industrialization process. The advent of the two world wars ultimately took a toll on the economy of UK which lost its developmental process to the USA. However, the UK economy took initiatives to stabilize its economic condition and is again one of the leading countries in the world in terms of global power. The economy of the United Kingdom has an influence over the other economies of the world specially those of the South Asian countries such as India, China, Bangladesh etc and thus its central bank has the important responsibility to control the functioning of the entire nation in a proper and in a well planned manner. The Bank plays three important functions in the economy of UK. The first and the foremost is providing financial stability to the economy, the second function is to maintain a monetary policy and the third important function is the issue of banknotes.
The role of the Bank of England in providing monetary and financial stability ensures a greater influence on the entire economy when compared to its third function i.e. the issue of banknotes. The monetary policy helps the Bank to check the rates of inflation by governing the prices of goods and commodities in the country. As inflation is not a criterion that is determined by one or two factors but is governed by a variety of factors, keeping the inflation in check is a very crucial aspect of maintaining the monetary stability in the country. The UK gains a huge amount of revenue from its oil and gas reserves which ultimately are used to regulate the prices of goods and commodities in the country.
The literature review holds a very important place in carrying out any project or assignment. The literature review helps to understand the various research works carried out in that particular field and to derive conclusions that would form the basis of the new research work. The analysis of the literature work of the Bank of England shows the work of Frank and Mayer shows the various functions performed by the bank during its initial stages. Further research work done by McKinnon and Levine gives an insight into the financial abilities of the bank and the role of the economy in developing the financial sector. This research work however does not provide satisfactory answers to the objectives of our assignment, thus encourages further advanced studies and analysis on the subject.
The first criteria to understand the role of the Bank of England during the financial crisis is to understand the types of financial crises and their effects on the various sectors of the economy including the financial sector. Various types of financial crises are as follows:
Banking crisis- In this type of crisis, the bank faces a situation where in large amount of depositors simultaneously rush to withdraw their money from the accounts, thus rendering the bank to be incapable of liquidity.
Stock market crisis- This type of crisis deals with the fluctuations in the stock market when huge amount of traders follow a similar pattern of buying the stocks continuously to be sold at a later time thus creating a bubble. Similarly, large numbers of buyers simultaneously sell their stocks thus leading to the crash of the bubble, thus making both the conditions to be highly risky.
Currency crisis- This is a type of financial crisis when the currency of a country faces huge amount of fluctuations in the currency value due to the external environmental conditions.
Recession and depression- These are the two most severe types of financial crises which cause the complete downturn of the economy of a country.
The Bank of England being the central bank of the UK has a greater responsibility towards managing the situation of financial crisis in the country. The bank has an internal dimension through which it regulates the business operates taking place in the country and also controls the foreign entities entering into the UK for the purpose of starting a business operation. A meeting is held at the Cabinet Office Meeting Room (COMR) in times of operational crisis during which various events are coordinated to arrive at a suitable solution. The Bank of England does not have its responsibilities restricted only to the financial operations in the country but also oversees the across-the-border relations related to the financial aspects.
Few of the steps taken by the Bank of England to deal with the financial crisis in the UK can be summarized as follows- the bank slashed the interest rates from 5% in October 2008 to 0.5% in March 2009. Apart from this, the bank used the policy of quantitative easing which is the printing and circulation of new and fresh bank notes in the market to overcome the shortage of money across various sectors. this step helps the bank in various ways such as it makes the Bank capable of gilt purchases, ensures greater money supply to the general public thus facilitating greater deposits from them and thirdly it boosts the confidence of the people in the economy of the country.
Though the bank of England played a major role in stabilizing the economy of UK during the financial crisis, it had to face various hurdles in dealing with the situation. The most important hurdle faced by the bank was regarding the slash in the interest rates, as the country's think-tank thought it inappropriate to reduce the interest rates with such a large margin in such a short time span. Reducing the fiscal deficit was another obstacle faced by the bank due to the fluctuating and improper amount of cash flows in the monetary system. Moreover, the UK had limited amount of information related to the Euro crisis which made it difficult for the bank to take the necessary bold steps to counter the crisis. In addition to all the above, the smaller banks and other financial intermediaries had a smaller interest margin thus aggravating the problem of crisis.
The performance of a bank depends on various factors such as technical efficiency, the level of output achieved by taking the steps required, the amount of revenues generated and the efficient and effective use of the labor and capital of the country. One of the performing measures of the Bank was to keep the inflation rate in control so as not to hamper the already weakened economy. The achievements of the bank of England can be witnessed in the bank's external balance sheet that shows the assets and liabilities worth 3.5 trillion pounds.
The research methodology used for evaluating the above assignment uses a variety of sources of data. These sources can be grouped as primary sources and secondary sources. The primary source of information is mostly the information which is gathered from direct sources such as the concerned individuals and authorities. The secondary sources of data include collecting information from sources who are not directly related to the project or the assignment but who have relevant and reliable information. The research methodology includes a variety of tools and techniques to arrive at a reliable and accurate solution for the research. This mainly includes designing of questionnaires and conducting interviews to compare the interest lending rates and the growth of the GDP. This kind of information has been obtained from the leading bankers of the UK economy.
The secondary research methodology used the source of information from the website of the bank of England which gives an analysis of the various segments of the bank and their functioning. One of the crucial aspects of the analysis of the data obtained from secondary sources is the lending activities of the bank of England to the various sectors. The lending activities primarily focus on the amount of money lent to businesses in various sectors for their business operations. Various categories of comparisons have been done in order to effectively analyze the role of the Bank of England in supporting the businesses across its country during the times of financial crisis. For easy analysis and understanding, these comparisons have been made in the form of a table along with their graphical representation. A closer look reveals various types of steps taken by the bank during the financial crunch along with the bank's capabilities to lend money to various sectors of operative businesses.
The comparative study summarizes the use of three charts and three corresponding graphs each concentrating on a particular class of comparison. The comparison has been done mostly on a three year basis with detailed information on all four sectors. However, in some cases, only a two year analysis has been done as is convenient for deriving a conclusion. The tabular and the graphical representation can be analyzed from their respective point of views as is discussed below. Each conclusion gives an accurate picture of the position of the Bank during the various stages of the financial crisis.
The first chart or table focuses on the lending capabilities of the Bank of England to businesses across various sectors. These sectors are classified as manufacturing, construction, whole sale, real estate, transport and other sectors which include sectors that are not included in the previous categories. These sectors might be education, retail, pharmaceuticals etc as these also form an important part of the economy. As is evident from the table, a comparison between the various sectors during the first quarter of 2007 shows that real estate was a boon to the economy and the bank lending a comparatively huge amount of money to this sector, where as the field of construction saw a negative figure in terms of money lending by the bank. Interestingly, with the passage of time it can be analyzed that the various sectors improved in their business with the bank supporting these sectors heavily as can be seen in the third quarter of 2007 which shows the highest total lending value by the bank for the year 2007. However, the start of recession can be witnessed during the second quarter of 2008 which slowed down the growth of all the sectors in addition to decreasing the lending capacity and lending capabilities of the bank. These and the subsequent quarters of 2009 saw a decline in the figures of money lent to the different sectors thereby indicating conditions of debt and bankruptcy as shown by negative figures in the table. The same data has been represented in the form of a graph and shown similar conclusions with negative data shown below the horizontal axis.
The second table shows a comparative study of the lending activities of the bank with the sector of real estate with the other sector. This table is a detailed comparison of only these two sectors during the four quarters of all the three years of 2007, 2008 and 2009. The tabular as well as graphical representation of this data shows that the performance of the two sectors showed a positive growth till the first quarter of 2008 thereby declining rapidly till the last quarter of 2009 which reported a negative figure indicating bankruptcy. The graphical representation of this data shows an additional interesting fact regarding the performance gap of the two sectors. This gap indicates that the close performance of the two sectors and the close figures of money lent by the bank for their business operations. Both these sectors show the highest or peak growth during the first quarter of 2008 where in the money lent to these sectors by the Bank of England touches an all-time high value. However, with the advancement of time these sectors also show effects of recession and indicate negative figures in the table as well as in the graph.
In addition to the comparative study, another criterion that is effective in understanding the role of the bank of England during the financial crisis is the mortgage lending by the bank during the above said period. The tabular and the graphical representation indicate various purposes of mortgage lending as fulfilled by the bank along with a detailed comparative study of the same. The re-mortgage and the gross lending values show a marked difference during the two year study of 2008 and 2009 when compared to the other purposes. A common noticeable fact is the decreased values for all the purposes during the year 2009 indicating the turbulent market conditions and the financial difficulty faced by the bank in supporting the businesses and in lending and mortgage operations.
Further study led to the preparation of the tabular and graphical representation highlighting the secured credit availability and the change in the number of products advertised for mortgage. The graph representing this data shows the steep decline in the latter category which gradually gained momentum during the year 2009. The graphical stats of the former category indicate slow or negligible growth in the various performance measures of the said category.
The last table shows the quoted interest rates on a 75% loan to value ratio fixed-rate mortgages. This study has been done for three years of 2007, 2008 and 2009 on a two-year, three year and a five-year basis plan. As per the inference drawn from the graphical representation, the comparative study for the three years for the 2-year plan does not show much variation for the years 2007 and 2008 however, the year 2009 saw a decrease quotation of interest rates by a huge margin. Similarly, the 3-year period also showed varied differences in the quotation of interest rates with a fluctuating margin of more than 60-80 basis points. On the other hand, the 5-year mortgage plan showed a more consistence quotation rates for all the three years when compared to the other two plans.
Thus a detailed and comparative analysis of the various aspects related to the functioning of the Bank of England helped us to understand, analyze and evaluate the role of the Bank of England in the economy of UK during the financial crisis. All the data collected through the medium of primary and secondary sources gives a clear indication about the position of the UK economy and the various obstacles and hindrances faced by the Bank in dealing with such situations. Moreover, the above study hugely achieves and satisfies the objectives stated in the assignment.
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