Bank and its classes

Bank — an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans and derive a profit from the difference in the interest rates. They also have the power to create money. The two major classes of banks are commercial and central banks. Commercial banks accept savings deposits, make loans and other investments, and offer financial services that facilitate the exchange of funds among individuals and institutions. In addition to the profit derived from the difference in the interest rates, commercial banks charge fees for various services. Central banks are involved in the issue of money and maintain the country’s foreign currency reserves. Central banks maintain the accounts of other banks and supervise their activities. Central banks act as bankers to governments, as the designers of monetary and credit policies, and as lenders of last resort to commercial banks in the case of a financial crisis. Central banks also play a significant psychological role as guarantors of the monetary system. Central banks may be nationalised organisations and are subject to government control, but some of them can have independence from governmental supervision.

1) What is meant by the term “bank”? 2) What do banks accept? 3) What do banks make? 4) What do banks derive a profit from? 5) What power do banks have? 6) What are the two major classes of banks? 7) What do commercial banks accept? 8) What do commercial banks make? 9) What do commercial banks offer? 10) What are central banks involved in? 11) What do central banks maintain? 12) What do central banks supervise? 13) What do central banks act as? 14) What role do central banks play? 15) Are central banks subject to government control or not?

Bank of England

The central bank in the UK is the Bank of England. Established in 1694 by Royal Charter, it had a capital of £1 200 000. This charter was renewed periodically and over the course of time, the Bank of England very gradually moved from being a commercial to being a central bank. The Bank of England was divided into departments — the Banking Department and the Issue Department. Both these departments had to issue a balance sheet each week and still do. The Bank of England acquired the note issuing monopoly in England and Wales. Its present functions are

a) banker to the government;

b) bankers’ bank;

c) managing the Exchange Equalisation Account¹;

d) the issue of Treasury bills;

e) supervision of the banking institutions in the UK;

f) maintenance of the sterling accounts of other central banks and international organisations;

g) lender of last resort;

h) the note issuing authority in England and Wales.

¹ Exchange equalisation account — an account held at the Bank of England for the Treasury that contains the country’s foreign currency and gold reserves. This account is used to stabilise the value of sterling against other international currencies, so that if the Bank of England considers that sterling is drifting too low, it will buy sterling with funds from the account, or if sterling is becoming expensive the Bank of England will sell sterling and receive foreign currency and replenish the account.

1) What bank is the central bank in the UK? 2) When was it established? 3) What was it established by? 4) What capital did it have? 5) How was that charter renewed? 6) How did the Bank of England move over the course of time? 7) How was the Bank of England divided? 8) What did those departments have to do? 9) What did the Bank of England acquire? 10) What are its present functions?