Unit 3 Banking system of the UK

Warming up

Respond to the following statements stressing complexity of the issues under consideration.

Banking systems do not need any regulation and should be let alone. Market fundamentals prove to be the best regulators for any industry. Deregulation of banking sector can be quite damaging both for banking and for real economy. Regulation cannot stop banking fraud and other kinds of wrongdoing. Regulation makes banking sector more efficient.

Conversational formulae box

You see, it’s a contentious issue… It is a highly disputable point… It’s a kind of two-edge sword… On the one hand….on the other hand… It’s hard to say but if you press me on that I would say …

Topical vocabulary

1. Show similarity or difference between the words in each group.

Regulation – supervision – oversight - restriction

Regulator – regulating authority – watchdog – supervision agency

On-sight examination - off-sight examination – monitoring- surveillance

In compliance with – in line with – in correspondence with – in terms of

Stability – soundness – sustainability – stabilization

2. Study the meanings of the word account which is polysemantic and can be difficult for understanding
	Definition:   1. report: a written or spoken report of something 2. explanation: an explanation of something that has happened, especially one given to somebody in authority 3. banking bank arrangement: an arrangement in which a customer keeps money in a bank or other financial institution and is offered financial services in exchange 4. banking money in bank: the money that a customer keeps in a bank 5. finance financial arrangement: an arrangement with a store, company, stockbroker, or other business, in which financial services are provided, e.g. credit 6. online network access contract: a contractual agreement between a user and an Internet or e-mail service provider establishing a directory and other system information and giving the user access to a network, e.g. the Internet, in return for a fee or other consideration 7. business customer: a customer who has a regular business relationship with a company plural noun ac·counts  Definition:   accounting list of financial information: a detailed list of everything that a person or company earns or spends, kept primarily for tax purposes transitive verb  (past and past participle ac·count·ed, present participle ac·count·ing, 3rd person present singular ac·counts) Definition:   consider: to consider somebody or something to have a particular quality ( formal ) We would account it a privilege to serve you. [14th century. < Old French aconte "a counting up" < aconter< Latin computare "sum up"] by all accounts according to what most people say call somebody to account to demand that somebody explain what he or she has done give a good account of yourself to do something in a way that does justice to your abilities or character of no account of no importance on account on credit on account of because of on no account for no reason, whatever the circumstances on somebody's account out of concern for somebody's well-being take account of somebody or something to consider somebody or something when making a decision turn something to good account to use or deal with something in a way that puts it to good use
	Упражнение на парафразу

3. Make word partnerships and use them in the sentences of your own.

To issue	A loan
To perform	Growth
To service	Stability
To rely on	Independence
To promote	The rate
To meet	Banknotes
To maintain	The target
To grant	The industry
To supervise	The market
To adjust	Functions

Reading

Read the text below and make a gist of it along the following lines:

• historical background;

• main functions;

• banknote issue.

Bank of England

The Bank of England (formally the Governor and Company of the Bank of England) is the central bank of the United Kingdom and is the model on which most modern, large central banks have been based. Since 1946 it has been a state-owned institution. It was established in 1694 to act as the English Government's banker, and to this day it still acts as the banker for the UK Government. The Bank has a monopoly on the issue of banknotes in England and Wales, although not in Scotland or Northern Ireland. The Bank's Monetary Policy Committee has been given devolved responsibility (sometimes called independence) for managing the monetary policy of the country.

The Bank's headquarters has been located in London's main financial district, the City of London, on Threadneedle Street, since 1734. It is sometimes known by the metonym The Old Lady of Threadneedle Street or simply The Old Lady. The current Governor of the Bank of England is Mervyn King, who took over on 30 June 2003 from Sir Edward George. As well as the London offices, the Bank of England also has secondary offices on King Street in Leeds.

History

The bank was founded by the Scotsman William Paterson in 1694 to act as the English Government's banker. He proposed a loan of £1.2m to the government; in return the subscribers would be incorporated as The Governor and Company of the Bank of England with long-term banking privileges including the issue of notes. The Royal Charter was granted on 27 July through the passage of the Tonnage Act of 1694. Public finances were in so dire a condition at the time that the terms of the loan were that it was to be serviced at a rate of 8% per annum, and there was also a service charge of £4000 per annum for the management of the loan.

When the idea and reality of the National Debt came about during the 18th century this was also managed by the bank. By the charter renewal in 1781 it was also the bankers' bank — keeping enough gold to pay its notes on demand until 26 February 1797 when war had so diminished gold reserves that the government prohibited the Bank from paying out in gold. This prohibition lasted until 1821.

The 1844 Bank Charter Act tied the issue of notes to the gold reserves and gave the bank sole rights with regard to the issue of banknotes. Private banks which had previously had that right retained it, provided that their headquarters were outside London and that they deposited security against the notes that they issued. A few English banks continued to issue their own notes until the last of them was taken over in the 1930s. The Scottish and Northern Irish private banks still have that right. Britain remained on the gold standard until 1931 when the gold and foreign exchange reserves were transferred to the Treasury. But their management was still handled by the Bank. In 1870 the bank was given responsibility for interest rate policy.

During the governorship of Montagu Norman, which lasted from 1920 to 1944, the Bank made deliberate efforts to move away from commercial banking and become a central bank. In 1946, shortly after the end of Norman's tenure, the bank was nationalised by the Labour government.

On 6 May 1997, following the 1997 general election which brought another Labour government to power, it was announced by the Chancellor of the Exchequer, Gordon Brown, that the Bank of England would be granted operational independence over monetary policy. Under the terms of the Bank of England Act 1998, the bank's Monetary Policy Committee was given sole responsibility for setting interest rates to meet the Government's stated Retail Prices Index (RPI) inflation target of 2.5%. The target has now changed to 2% since the Consumer Price Index (CPI) replaced the Retail Prices Index as the treasury's inflation index. If inflation overshoots or undershoots the target by more than 1%, the Governor has to write a letter to the Chancellor of the Exchequer explaining why, and how he will remedy the situation.

More recently, since 2007 the Bank of England has, in its role as lender of last resort, been supporting Northern Rock, a specialist mortgage lender that suddenly became unable to rely on wholesale market borrowing to finance its lending operation following the 2007 subprime mortgage financial crisis and the subsequent reluctance of lenders to take on more mortgage debt.

Functions of the Bank

The Bank of England performs all the functions of a central bank. The most important of these is supposed to be maintaining price stability and supporting the economic policies of the British Government, thus promoting economic growth. There are two main areas which are tackled by the Bank to ensure it carries out these functions efficiently:

Monetary stability

Stable prices and confidence in the currency are the two main criteria for monetary stability. Stable prices are maintained by making sure price increases meet the Government's inflation target. The Bank aims to meet this target by adjusting the base interest rate, which is decided by the Monetary Policy Committee, and through its communications strategy.

Financial stability

Maintaining financial stability involves protecting against threats to the whole financial system. Threats are detected by the Bank's surveillance and market intelligence functions. The threats are then dealt with through financial and other operations, both at home and abroad. In exceptional circumstances, the Bank may act as the lender of last resort by extending credit when no other institution will.

The Bank works together with several other institutions to secure both monetary and financial stability, including:

• HM Treasury, the Government department responsible for financial and economic policy.

• The Financial Services Authority, an independent body that regulates the financial services industry.

• Other central banks and international organisations, with the aim of improving the international financial system.

The Bank of England acts as the Government's banker, and as such it maintains the Government's Consolidated Fund account. It also manages the country's foreign exchange and gold reserves. The Bank also acts as the bankers' bank, especially in its capacity as a lender of last resort.

The Bank of England has a monopoly on the issue of banknotes in England and Wales. Scottish and Northern Irish banks retain the right to issue their own banknotes, but they must be backed one to one with deposits in the Bank of England, excepting a few million pounds representing the value of notes they had in circulation in 1845. The Bank decided to sell its bank note printing operations to De La Rue in December 2002, under the advice of Close Brothers Corporate Finance Ltd.^[9]

Since 1997 the Monetary Policy Committee has had the responsibility for setting the official interest rate. However, with the decision to grant the Bank operational independence, responsibility for government debt management was transferred to the new UK Debt Management Office in 1998, which also took over government cash management in 2000.

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

Banknote issues

The Bank of England has issued banknotes since 1694. Notes were originally hand-written; although they were partially printed from 1725 onwards, cashiers still had to sign each note and make them payable to someone. Notes were fully printed from 1855. Until 1928 all notes were "White Notes", printed in black and with a blank reverse. In the 18th and 19th centuries White Notes were issued in £1 and £2 denominations. During the 20th century White Notes were issued in denominations between £5 and £1000. The Bank issued notes for ten shillings and one pound for the first time on 22 November 1928 when the Bank took over responsibility for these denominations from the Treasury which had issued notes of these denominations three days after the declaration of war in 1914 in order to remove gold coins from circulation.

During the Second World War the German Operation Bernhard attempted to counterfeit various denominations between £5 and £50 producing 500,000 notes each month in 1943. The original plan was to parachute the money on Britain in an attempt to destabilise the British economy, but it was found more useful to use the notes to pay German agents operating throughout Europe — although most fell into Allied hands at the end of the war, forgeries frequently appeared for years afterwards, which led banknote denominations above £5 to be removed from circulation.

In 2006, a sum in excess of £53 million in banknotes belonging to the bank was stolen from a depot in Tonbridge, Kent.

Closer reading