The Roles of The Bank of England

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The roles of The Bank of England

The bank of England was founded in 1694 as privately owned organization but was nationalized in 1946 and has the nick name of “Old Lady of Threadneedle Street”.

The bank of England has two main purposes that they serve through which they fulfill their roles, functions and responsibilities of being the central bank of England. Their primary purpose is to deliver the stability of price and currency assurance. This is done through sticking to the inflation target given by the government which is accomplished through various decisions of Monetary Policy Committee.

The secondary purpose fulfilled by the bank via flowing appropriate amount of funds to keep financial institutions confident and economy stable as well. The bank does this by the Prudential Regulation Authority(PRA) which controls 1700 banks, credit unions, insurers, major investment firms and building societies, on the other hand it has an aim to provide the wellbeing and dependability of these firms, where insurers specially. The bank is the lender of last resort and has Financial Policy Committee (FPC) to take action against systemic risks to defend and enhance the elasticity of the UK financial system, moreover it has another objective to help maintain the government’s economic policy. Some others functions of the bank to hold the financial stability the bank acts as the resolution authority and overlooks and guides for key payment, clearing and settlement infrastructure.

The roles of the Bank of Canada with comparisons

The bank of Canada is its nation’s central bank founded in 1934 as a privately owned corporation but became a Crown corporation in 1938 belonging to the federal government.

The bank of Canada’s roles and functions are divided in four major subjects. First is the monetary policy where since the year 1991 its policy is very well defined with a stable and low inflation target rate.

Then is the responsibility towards the nation’s currency where the bank replaces worn notes, issues notes when required and educates about the notes via different programs.

The bank has a clear and strong financial system globally with its key payment, clearing & settlement systems, it acts as the lender of last resort similarly as the bank of England, assesses risks for financial stability and helps to develop financial system policies. It provides liquidity to banks, credit unions, and more similar organizations where bank of England’s financial institutions are specifically listed; moreover it also provides emergency liquidity service.

The last function it does is the management of funds with treasury management advising for the foreign exchange reserves and public debt, and it serves as the ‘fiscal agent’ of the Government of Canada which having the function of managing public funds, providing advice to the Department of Finance for the retail debt program and completing the operations for implementing the program. The bank also manages the government’s foreign exchange reserves. The bank of England shares very less information about managing funds for the government.

In comparison bank of England has very precise and pin pointed objectives and bank of Canada has very general and simply described roles which gives a good summary.

Answer no. 2b

Monetary Policy of Bank of England

The bank of England fulfills its monetary stability through its main monetary policy. The decisions of Monetary Policy Committee (MPC) are taken to achieve the government’s inflation target rate as it is the price at which money is lent in whole of England. After the recent financial crisis in 2008 the MPC decided to start quantitative easing method wherein they announced to reduce the bank rate down to 0.5% so that they could purchase a series of assets. This low rate is actually implemented to for long-term constancy in the economy. The MPC authorized purchases since March 2009 to bring in money into the economy to boost insignificant amount of demand. The reaction of investors would be to buy corporate bonds and shares to yield a good return rather than holding the money which will, in effect, lower borrowing costs in the long run and inflation will be on track to meet the 2 % inflation target given by the government. The monetary policy therefore implemented on the basis of economic policy.

The bank fulfill its need for liquid assets via monthly Indexed Long-Term Repo(ILTR) auctions, which is the open market operations(OMOs), and it is offered each calendar month where the funds have a maturity of about six-month.

In order to set the target balance participants have their rights to choose their average targets of reserve with minimum of ₤0 which are set in multiples of ₤10 million. Ceilings are 5% of sterling qualified liabilities or an amount of ₤2.5 billion and there it is rounded up to nearest ₤10 million.

The interest on reserves is calculated on the reserve average target balance which is set before the start of a new maintenance phase, compared against the average balance that is held on the reserve account. Usually it is calculated on the end of a calendar year. The percentage of balance that is kept to be in reserve is 2% which is the bank rate as after 1981 reserves are hold at this rate.

The bank of England provides a two-sided on-demand facility for banks which are experiencing a market-wide or firm-specific shock are allowed to borrow high amounts of liquid assets in return for a small amount of liquid security for a variable period known as the discount window facility (DWF).

Monetary Policy of the Bank of Canada and comparison

The monetary policy is all about how the money flows through the economy and what the value of money is. The root of the policy is the inflation-control system which needs to be stable in the government given target rate of 2% which is the same as the bank of England. The bank carries out the policy by fluctuating the target for the overnight rate, which is the rate at which major financial institutions borrow and lend one-day funds to each other where the central bank sets the target level for the rate. Changes in this rate also influence other interest rates for the consumer loans, mortgages and also exchange rates. This is a unique feature of the central bank of Canada.

The bank does market operations like Special Purchase and Resale Agreements (SPRA) and Sale and Repurchase Agreements (SRAs) to implement Large Value Transfer System(LVTS) which is a standing liquidity facility to provide loans to direct participants whereas bank of England uses DWF. It also facilitates overnight standing purchase and resale agreement, term repos, bank of Canada margin call practice for domestic market operations and securities lending program too. The bank has no reserve balance ratio as it has abolished it in 1992. The bank of England has fixed long-term repo not variable like of Canada and has reserve ratios of 2% to 3%.

The bank of Canada also implements quantitative easing, but long before than of England. The bank of Canada also has been purchasing private sector assets which is known as credit easing to reduce the risk premiums for a better flow of credit and expansion of the economy as a whole. There are also government securities such as treasury bills and marketable bonds of the bank of Canada; it also issues savings bonds and premium bonds. The bank of England well described its market issues with few market operations compared to Canada but lacks in acquiring new techniques of financial stability.

Answer no. 2c

The Independence of the Bank of England

The bank is controlled by the governor who is designated for eight years and deputy governors who are designated for five years by the Crown. There is also nine non-executive directors of the court of directors designated for three years and who are appointed by the Crown. The objective of the court of directors is to protect and enhance the financial systems’ stability of the United Kingdom by ensuring useful discharge of the bank’s functions and use its resources most efficiently.

The court delegates day to day management to the governor of the bank and to other members through him. The court reviews closely each year by the report of effectiveness review submitted to it by the oversight committee, remuneration committee, audit and risk committee, nominations committee, financial policy committee, financial system advisory committee and monetary policy committee.

The Independence of the Bank of Canada and comparison

Instead of a court of directors Canada has a board of directors to review the general policies for approving objectives, plans and annual budget. There is a governor but only one senior deputy governor who is the chief executive officer of the bank and is appointed for seven years by the directors who in turn need the approval of the governor to be in the board of directors for three years where one has no right to vote, the deputy minister of finance. The governor like the bank of England needs to have specific knowledge about the financial market and the economy to be appointed. The bank of Canada clearly needs some review committee along with the yearly audits to know about its effectiveness, as the bank of England has one for each department

Recently in July 2013 famous governor of the Bank of Canada, Mark Joseph Carney, joined the bank of England after years of shielding the financial system of Canada now he is serving in England.

A sound and effective financial system is essential for economic growth of a nation and the bank of Canada is one of several banks which this criteria.

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