Bank of England by Imran Hossain

8/3/2019 Bank of England by Imran Hossain

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Central banking remains an art to be perfect by practice: A case study of Bank of England

PART - 1


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1.1Introduction:

A bank administered by a national government. A central bank issues money and carries out thecountry's monetary policy. The Bank of England is the central bank of the England. The study on Centralbanking remains an art to be perfect by practice: A case study of Bank of England is assigned by

Saud Ahmed, lecturer of dpt. of finance. Here we have focused on the functions, operations, activities,rules, contributions of Bank of England and recommendations for Bangladesh.Specifically, The study examines the functions of Bank of England as a central bank of United Kingdom.We have collected data regarding the study then analyzed the related field of this.

1.2 Literature view of the study:

The report is assigned by our course teacher Saud Ahmed as a part of ourLaw and Practice ofBanking course. The topic of the study is Central banking remains an art to be perfect by practice:

A case study of Bank of England. By conducting this study we can enhance our knowledge and skill toapply various research methods in professional life. By completing this report we can boost ourapplicability in job market and develop our real life knowledge.

To understand the major functions of a central bank, one should examine the interdependent amongpolicy and operations. When we think about central bank functions, it is important to know that theirfunctions are governed by Act/Law etc. The act determines what a central bank should do, objectives etc.This is because central banks are created by governments and legislation is a way to tell the bank what todo and what not to do.

It is in everybody's interest to keep prices stable and to maximize the job creation that accompanies

growth. It not only is good economics, it also is good social policy. For better or worse, the task ofkeeping to this appropriate policy path often falls to the central bank. This is because the goals and long-term objectives of monetary policy can be more immune to political concerns, particularly near-termelection considerations. That is why so many studies show that countries whose central banks have a highdegree of independence from day-to-day political interference have had a far better record in terms oflower inflation and stronger growth.

As a central bank, Bank of England should have performed some activity that every central bankdoes. And all the activities of central bank is not so easy. A central banks decision influences almostevery sector of economy in a country. So, central bank has to take decision very wisely and being do so, ithas to perform all of its duty very perfectly.

In our study, we examine all the activities done by the Bank of England as a central bank ofUnited Kingdom. We also examined the banks operations, functions, rules & regulations, structure andtry to make a recommendation for our central bank that is Bangladesh Bank.


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1.3 Objectives of the study:

Primary objective:

To prepare a case study on Bank of England.

Secondary objective:

To understand the activity and operation of a central bank.

To identify the functions of central bank.

To understand how a central bank take measures against inflation and unemployment.

To determine how a central bank like Bank of England make monetary policy decision.

1.4 Scope:

There were huge scopes to work in the arena of the report. The study Central banking remains anart to be perfect by practice: A case study of Bank of England has covered overall functions,activities, operations, rules and regulations, structure etc of the Bank of England. And through this wecame to know that, how a central bank remains an art to be perfect by practice. By preparing this report it

becomes more understandable about the policy, recommendations, initiatives and measures that ourcentral bank, Bangladesh Bank should take.

1.5 Methodology:

Methodology used in this investigation was an observational study of Bank of England. The study

employed the contrived observation technique which is a unique means of observing work performanceunder real condition. We divided our group into two parts, one group worked for data collection andanother is for analysis. We analyses our study through hypothetical way.

1.6 Sources of data:

We have collected data from several sources. All of them are secondary. The sources of ourcollected data are followings:

1.6.1 Secondary sources:


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Secondary sources for data collection are given below:

Web site of Bank of England.

Financial Express Magazines.

Newspaper.

Internet.

1.7 Limitations of the study:

In this short time, we have tried to give our maximum effort to provide the information about thetotal activities of Bank of England. To prepare this report we face some limitations,

Unavailable data.

Inadequate knowledge about central banking.

Privacy of the Bank.

Limited analytical power as we are novice.


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PART -2


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2.1Introduction:

A bank that is constituted by a government or international organization to issue and regulate currency,regulate banks under its jurisdiction, act as a lender of last resort, and generally ensure a sustainablemonetary policy is called central bank. Oftentimes, central banks are charged with one or more specificduties such as attempting full employment or a certain exchange rate for the currency. Most commonly,however, central banks are charged with finding the balance between maintaining low inflation and higheconomic growth. They do this primarily by setting interest rates at which they lend to banks under its

jurisdiction which, in turn, highly influences interest rates throughout the country or region.

The Bank of England is the central bank of the United Kingdom. Sometimes known as the 'Old Lady' ofThread Needle Street, the Bank was founded in 1694, nationalized on 1 March 1946, and gainedindependence in 1997. Standing at the centre of the UK's financial system, the Bank is committed to

promoting and maintaining monetary and financial stability as its contribution to a healthy economy.

The Bank's roles and functions have evolved and changed over its three-hundred year history. Since itsfoundation, it has been the Government's banker and, since the late 18th century, it has been banker to the

banking system more generally - the bankers' bank. As well as providing banking services to itscustomers, the Bank of England manages the UK's foreign exchange and gold reserves.

The Bank has two core purposes - monetary stability and financial stability. The Bank is perhaps mostvisible to the general public through its banknotes and, more recently, its interest rate decisions. The Bankhas had a monopoly on the issue of banknotes in England and Wales since the early 20th century. But it is

only since 1997 that the Bank has had statutory responsibility for setting the UK's official interest rate.


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Interest rate decisions are taken by the Bank's Monetary Policy Committee. The MPC has to judge whatinterest rate is necessary to meet a target for overall inflation in the economy. The inflation target is seteach year by the Chancellor of the Exchequer. The Bank implements its interest rate decisions through itsfinancial market operations - it sets the interest rate at which the Bank lends to banks and other financialinstitutions. The Bank has close links with financial markets and institutions. This contact informs a greatdeal of its work, including its financial stability role and the collation and publication of monetary and

banking statistics.

The Bank of England is committed to increasing awareness and understanding of its activities andresponsibilities, across both general and specialist audiences alike. It produces a large number of regularand ad hoc publications on key aspects of its work and offers a range of educational materials. The Bankoffers technical assistance and advice to other central banks through its Centre for Central BankingStudies, and has a museum at its premises in Thread needle Street in the City of London, open tomembers of the public free of charge.

2.2 History:

The history of the Bank is naturally one of interest, but also of continuing relevance to the Bank today.Events and circumstances over the past three hundred or so years have shaped and influenced the role andresponsibilities of the Bank. They have molded the culture and traditions, as well as the expertise, of theBank which are relevant to its reputation and effectiveness as a central bank in the early years of the 21stcentury. At the same time, much of the history of the Bank runs parallel to the economic and financialhistory, and often the political history, of the United Kingdom more generally.

If you want to get closer to the Bank's history and are visiting London, the Bank's Museum provides aunique insight into the history of the Bank and its business, alongside a great deal of material about theBank today.

The Bank of England

Headquarters Threadneedle Street, London,

England

Established 1694 and nationalized in 1946.


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Governor Sir Mervyn King

Central bank of United Kingdom

Currency Pound sterling

ISO 4217 Code GBP

Reserves 7,334,000,000 (in gold)

229,599,000,000 (total assets)

Base rate 0.5%

The Bank of England Website:http://www.bankofengland.co.uk

Table: Bank of England at a glance

Throughout its history the Bank has always seen itself as a public institution, acting in the national

interest. Although privately owned, for much of its life, the activities which it undertook were determined

by it governing legislation and by the relationship with government. Nationalization in 1946 did not

greatly affect that; but it meant that the Bank was owned by the Government, rather than by private

stockholders, and gave the power to appoint the Governors and Directors to the Crown. The

nationalization Act also gave the Government the power to issue "directions" to the Bank: thus far, the

power has not been used.

PART -3
http://en.wikipedia.org/w/index.php?title=ISO_4217http://en.wikipedia.org/w/index.php?title=ISO_4217


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3.1 Core Purposes

In pursuing its goal of maintaining a stable and efficient monetary and financial framework as itscontribution to a healthy economy, the Bank has two core purposes; achieving them depends on the workof the Bank as whole. This part of the website describes and explains each core purpose and some of thework that is undertaken to achieve them. This material adds to that provided on the 'About the Bank' main

page. Other parts of the website provide more information about each of the Bank's activities.

The Bank's Core Purposes are determined by Court as part of its role in setting the Bank's objectives andstrategy. The statement opposite was endorsed by Court in May 2010.

The Bank of England exists to ensure monetary stability and to contribute to financial stability.

Core Purpose 1 - Monetary Stability

Monetary stability means stable prices and confidence in the currency. Stable prices are defined by theGovernment's inflation target, which the Bank seeks to meet through the decisions delegated to theMonetary Policy Committee, explaining those decisions transparently and implementing them effectivelyin the money markets.


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Core Purpose 2 - Financial StabilityFinancial stability entails detecting and reducing threats to the financial system as a whole. This is

pursued through the Bank's financial and other operations, including lender of last resort, oversight of keyinfrastructure and the surveillance and policy roles delegated to the Financial Policy Committee.

In pursuit of both purposes the Bank is open in communicating its views and analysis and works closelywith others, including:

Other central banks and international organizations to improve the international monetary andfinancial system.

HM Treasury and the Financial Services Authority, under the terms of the Memorandum ofUnderstanding, to pursue financial stability.

The Bank will also play its part in promoting an open and internationally competitive financial centre inthe United Kingdom, using its expertise to help make the United Kingdom financial system more

efficient, where such efforts would be in the public interest and provided that they do not conflict with itsprimary responsibilities or those of other agencies.

3.2 The Bank's Strategy

The strategic priorities endorsed by Court for 2011/12 are:

Core Purpose 1 - Monetary Stability

Strategic priority 1. Keep inflation on track to meet the 2% target.

Remain at the forefront of the theory and practice of monetary policy. Advance the Bank's understanding of the changing nature of the inflation process and the impact

of unconventional monetary instruments. Develop understanding of the interface between monetary and macro prudential policy. Embed enhanced suite of models for forecasting and analysis.

Strategic priority 2. Ensure the Bank has the policies, tools and infrastructure in place to implementmonetary policy and issue banknotes.


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Have available appropriate instruments for implementing monetary policy, especially when BankRate is close to zero, and ensure that those policies are fully communicated.

Be prepared to implement and communicate any future decision by the MPC to withdraw orexpand the exceptional level of monetary stimulus.

Meet demand for the required volume and denomination of banknotes efficiently and effectively.

Strategic priority 3. Sustain public support for the monetary policy framework and the benefits of lowinflation.

Continue to make the case for inflation targeting and the framework for monetary policy, andanchor inflation expectations.

Influence the international debate on monetary policy, and the international monetary system.

Core Purpose 2 - Financial Stability

Strategic priority 4. Maintain stability and improve the resilience of the financial system.

Identify systemic threats including from financial infrastructure, regulatory policies andinternational events.

Integrate and develop market intelligence and analytical tools to improve the analysis of thestability and resilience of the financial system.

Continue to develop the United Kingdom's resolution regime, including through a bail-in tool andthrough banks' recovery and resolution plans.

Complete the deployment of the Bank's enhanced facilities for liquidity insurance. Influence domestic and international efforts to improve the structure and regulation of the

financial system

Strategic priority 5. Develop the framework and instruments for the Bank's new role in macroprudential policy, operating through the Financial Policy Committee.

Working with HMT, develop objectives, functions and possible instruments for macro prudentialregulation in the United Kingdom.

Provide effective secretarial, analytical and data support to the 'interim FPC'. Develop an effective interface between macro and micro prudential regulation, including the role

of market intelligence. Develop analysis on the functioning and regulation of the non-bank financial sector, including

insurance.

Strategic priority 6. Prepare for the transition to the Bank of responsibility for micro prudentialsupervision (through the Prudential Regulation Authority) and infrastructural oversight.

Design the new supervisory framework and the PRA's operating model, working closely withFSA.

Undertake practical preparations for integrating the PRA into the Bank. Design an operational framework for the regulation of central counterparties and securities

settlement systems.

Strategic priority 7. Build and sustain public support for the micro and macro prudential frameworks.

Promote public understanding of the role of FPC and PRA.


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Contribute actively to developing appropriate accountability mechanisms for FPC and PRA.

Supporting Core Purposes 1 and 2:

Strategic priority 8. Ensure the Bank has the right people and processes to carry out its core purposes.

Develop talent management and rewarding career paths for staff. Create a working environment that protects the time devoted to longer-term analysis and research

in order to enhance the Bank's capability to achieve its core purposes. Foster a culture of creativity and challenge so that the Bank focuses on the big issues and risks. Maintain budget discipline and ensure value for money. Improve information assurance business practices and controls. Communicate effectively to staff how micro and macro prudential supervision will be conducted

and interact with monetary policy.

Strategic Priority 9. Promote public trust and confidence in the Bank's activities

PART -4


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Functions of a central bank may include:

Issuing Banknotes. Implementing monetary policies. determining Interest rates controlling the nation's entire money supply the Government's banker and the bankers' bank ("lender of last resort") managing the country's foreign exchange and gold reserves and the Government's stock register regulating and supervising the banking industry setting the official interest rate used to manage both inflation and the country's exchange rate

and ensuring that this rate takes effect via a variety of policy mechanisms


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The bank of England performs all of these activities. Here all the functions of Bank of England are givenbelow

4.1 Issuance of Banknotes

The Bank of England has been issuing banknotes for over 300 years. During that time, both the notesthemselves and their role in society have undergone continual change. From today's perspective, it is easyto accept that a piece of paper that costs a few pence to produce is worth five, ten, twenty or fifty pounds.Gaining and maintaining public confidence in the currency is a key role of the Bank of England and onewhich is essential to the proper functioning of the economy.

Under legislation dating from 1844, banknotes and the assets backing them are held by a separate

department of the Bank - the Issue Department. The Bank's other assets and liabilities are held in its

Banking Department. The existence of these two Departments does not affect the impact that the Bank's

transactions have on financial markets or the wider economy. For that reason the charts above show the

consolidated balance sheet of the two Departments. But the allocation of assets and liabilities between the

two Departments does affect the distribution of risk and the Bank's finances. HM government receives the

net profit from Issue Department and makes good losses. To cover risk on its other activities, the Bank

holds capital in Banking Department.

The Gold Standard: the Bank's notes backed by gold

Regarded by some as the first move towards nationalization, the 1844 Bank Charter Act was also the keystep towards the Bank achieving the monopoly of the note issue. There were to be no new issuers of notesand those whose issues lapsed, or who were taken over, forfeited their right to issue. But the crucialclause of the Act was a monetary one: it provided that beyond the Bank's capital of 14 million, its noteswere to be backed by gold coin or bullion. This, together with a fixed price for standard gold, laid thefoundation for the gold standard which, during the nineteenth century, spread worldwide and created along period of price stability with monetary policy, in effect, on auto-pilot.

4.2 Monetary Policy

One of the Bank of England's two core purposes is monetary stability. Monetary stability means stable

prices - low inflation - and confidence in the currency. Stable prices are defined by the Government's


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inflation target, which the Bank seeks to meet through the decisions taken by the Monetary PolicyCommittee.

A principal objective of any central bank is to safeguard the value of the currency in terms of what it willpurchase. Rising prices inflation reduces the value of money. Monetary policy is directed to achievingthis objective and providing a framework for non-inflationary economic growth. As in most otherdeveloped countries, monetary policy usually operates in the UK through influencing the price at whichmoney is lent the interest rate. However, in March 2009 the Bank's Monetary Policy Committeeannounced that in addition to setting Bank Rate, it would start to inject money directly into the economy

by purchasing assets - often known as quantitative easing. This means that the instrument of monetarypolicy shifts towards the quantity of money provided rather than the price at which the Bank lends orborrows money.

Low inflation is not an end in itself. It is however an important factor in helping to encourage long-termstability in the economy. Price stability is a precondition for achieving a wider economic goal ofsustainable growth and employment. High inflation can be damaging to the functioning of the economy.

Low inflation can help to foster sustainable long-term economic growth

4.3 Monetary Policy Framework

The Banks monetary policy objective is to deliver price stability low inflation and, subject to that, tosupport the Governments economic objectives including those for growth and employment. Pricestability is defined by the Governments inflation target of 2%. The remit recognizes the role of pricestability in achieving economic stability more generally, and in providing the right conditions forsustainable growth in output and employment. The Government's inflation target is announced each year

by the Chancellor of the Exchequer in the annual Budget statement.

The 1998 Bank of England Act made the Bank independent to set interest rates. The Bank is accountableto parliament and the wider public. The legislation provides that if, in extreme circumstances, the nationalinterest demands it, the Government has the power to give instructions to the Bank on interest rates for alimited period.

The inflation target

The inflation target of 2% is expressed in terms of an annual rate of inflation based on the ConsumerPrices Index (CPI). The remit is not to achieve the lowest possible inflation rate. Inflation below thetarget of 2% is judged to be just as bad as inflation above the target. The inflation target is thereforesymmetrical.

If the target is missed by more than 1 percentage point on either side i.e. if the annual rate of CPIinflation is more than 3% or less than 1% the Governor of the Bank must write an open letter to theChancellor explaining the reasons why inflation has increased or fallen to such an extent and what theBank proposes to do to ensure inflation comes back to the target.

A target of 2% does not mean that inflation will be held at this rate constantly. That would be neitherpossible nor desirable. Interest rates would be changing all the time, and by large amounts, causingunnecessary uncertainty and volatility in the economy. Even then it would not be possible to keepinflation at 2% in each and every month. Instead, the MPCs aim is to set interest rates so that inflationcan be brought back to target within a reasonable time period without creating undue instability in the

economy.


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The Monetary Policy Committee

The Bank seeks to meet the inflation target by setting an interest rate. The level of interest rates is decidedby a special committee the Monetary Policy Committee. The MPC consists of nine members fivefrom the Bank of England and four external members appointed by the Chancellor. It is chaired by theGovernor of the Bank of England. The MPC meets monthly for a two-day meeting, usually on theWednesday and Thursday after the first Monday of each month. Decisions are made by a vote of theCommittee on a one-person one-vote basis.

4.4 How Monetary Policy Works:

When the Bank of England changes the official interest rate it is attempting to influence the overall levelof expenditure in the economy. When the amount of money spent grows more quickly than the volume ofoutput produced, inflation is the result. In this way, changes in interest rates are used to control inflation.

The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then

affects the whole range of interest rates set by commercial banks, building societies and other institutionsfor their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds andshares, and the exchange rate, which affect consumer and business demand in a variety of ways.Lowering or raising interest rates affects spending in the economy.

A reduction in interest rates makes saving less attractive and borrowing more attractive, which stimulatesspending. Lower interest rates can affect consumers and firms cash-flow a fall in interest rates reducesthe income from savings and the interest payments due on loans. Borrowers tend to spend more of anyextra money they have than lenders, so the net effect of lower interest rates through this cash-flowchannel is to encourage higher spending in aggregate. The opposite occurs when interest rates are

increased.


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Lower interest rates can boost the prices of assets such as shares and houses. Higher house prices enableexisting home owners to extend their mortgages in order to finance higher consumption. Higher share

prices raise households wealth and can increase their willingness to spend.

Changes in interest rates can also affect the exchange rate. An unexpected rise in the rate of interest in theUK relative to overseas would give investors a higher return on UK assets relative to their foreign-currency equivalents, tending to make sterling assets more attractive. That should raise the value ofsterling, reduce the price of imports, and reduce demand for UK goods and services abroad. However, theimpact of interest rates on the exchange rate is, unfortunately, seldom that predictable?

Changes in spending feed through into output and, in turn, into employment. That can affect wage costs by changing the relative balance of demand and supply for workers. But it also influences wagebargainers expectations of inflation an important consideration for the eventual settlement. The impacton output and wages feeds through to producers costs and prices, and eventually consumer prices.

Some of these influences can work more quickly than others. And the overall effect of monetary policy

will be more rapid if it is credible. But, in general, there are time lags before changes in interest ratesaffect spending and saving decisions, and longer still before they affect consumer prices.

We cannot be precise about the size or timing of all these channels. But the maximum effect on output isestimated to take up to about one year. And the maximum impact of a change in interest rates onconsumer price inflation takes up to about two years. So interest rates have to be set based on judgmentsabout what inflation might be the outlook over the coming few years not what it is today.

Setting interest rates

As banker to the Government and the banks, the Bank is able to forecast fairly accurately the pattern of

money flows between the Government's accounts on one hand and the commercial banks on the other,and acts on a daily basis to smooth out the imbalances which arise. When more money flows from the

banks to the Government than vice versa, the banks' holdings of liquid assets are run down and the moneymarket finds itself short of funds. When more money flows the other way, the market can be in cashsurplus. In practice the pattern of Government and Bank operations usually results in a shortage of cash inthe market each day.

The Bank supplies the cash which the banking system as a whole needs to achieve balance by the end ofeach settlement day. Because the Bank is the final provider of cash to the system it can choose the interestrate at which it will provide these funds each day. The interest rate at which the Bank supplies these fundsis quickly passed throughout the financial system, influencing interest rates for the whole economy.

When the Bank changes its dealing rate, the commercial banks change their own base rates from whichdeposit and lending rates are calculated.

4.5 Implementation of Monetary Policy


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The Bank's monetary operations implement the decisions made by the Monetary Policy Committee(MPC). Since March 2009, when Quantitative Easing was initiated, this has involved both keeping short-term market rates stable and in line with Bank Rate and undertaking a targeted amount of asset purchases,which are financed by the creation of central bank reserves.

Short-term market interest rates are kept in line with Bank Rate by paying Bank Rate on all cash held inthe reserves accounts at the Bank. The asset purchase target is achieved by purchasing or, in the eventthat the target is reduced, selling assets through the Asset Purchase Facility.

Prior to March 2009, monetary policy was solely implemented by keeping short term market rates stableand in line with Bank Rate. This was achieved through a 'reserves averaging' regime. Under this system,

banks set a monthly target for their reserves balances. The Bank used its Open Market Operations tosupply the correct amount of reserves to meet the banks' aggregated demand. Banks that maintained

balances close, on average, to their target received interest on their balances at Bank Rate. But they werecharged if their reserves balance was on average either excessively over or under their monthly target. A

bank could avoid that charge by making use of the Operational Standing Facilities to meet their target.

Given the day-to-day payments between banks are to some extent unpredictable, banks had an incentiveto lend to, or borrow from, each other in the inter-bank market to recycle reserves around the system sothat each individual institution could meet its target. And because the banking system as a whole had thecorrect amount of reserves, this recycling activity tended to keep market rates close to Bank Rate.

Since the initiation of Quantitative Easing, the supply of reserves has varied in response to the MPC'spolicy decisions, rather than the changes in the demand for reserves. This potential imbalance in thedemand and supply of reserves could have resulted in loss of control over market interest rates had banks

been required to continue to set and meet targets. The Bank therefore suspended reserves averaging inMarch 2009. Banks are not currently required to set targets for their reserves accounts and all reserves

balances are remunerated at Bank Rate. As a result there is no incentive for banks to borrow from or lendto each other at rates materially away from that, so that market rates stay close to Bank Rate.


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4.6 The Bank's Financial Stability Role

A stable financial system is a key ingredient for a healthy and successful economy. People need to haveconfidence that the system is safe and stable, and functions properly to provide critical services to thewider economy. It is important that problems in particular areas do not lead to disruption across thefinancial system.

The Bank has a statutory objective to contribute to protecting and enhancing the stability of the financialsystems of the United Kingdom. The Bank does this through its risk assessment and risk reduction work,market intelligence functions, payments systems oversight, banking and market operations, including, in

exceptional circumstances by acting as lender of last resort, and resolution work to deal with distressedbanks.

In 2010 the Government outlined plans for reform of the UK regulatory framework, including thecreation of an independent Financial Policy Committee at the Bank of England and a new prudentialregulator as a subsidiary of the Bank.


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Figure: The role of bank of England in keeping financial stability

Bank rate:A committee of nine experts the Monetary Policy Committee (MPC) meets each month to set theofficial Bank interest rate, known as Bank Rate. They each have an independent vote to decide whatinterest rate to set. There is no Government influence on the MPCs interest rate decisions.

Looking into the future:Interest rates can take up to two years to affect inflation. So todays Bank Rate decision is based on wherethe MPC thinks inflation is heading over the next few years. That is always uncertain because unexpectedthings will happen.So nobody knows what the interest rate will be in the future. Each month the MPC looks at how the

economy is faring and whether the outlook for inflation has changed.

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Rate

Low

inflatio

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Spen

-ding

Market

interest

rate

Loans

Saving

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Higher interestrates takemoneyout of theeconomy by

increasingthe amount wepay on our loansand the interestwe receive fromour savings. Thisinfluences whatpeople andcompaniesspend andsave. Lessspending putsdown-

ward pressure onprice increases

Lower interestrates are used toincreasespending wheninflationlooks likely to bebelow the target


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How do interest rates affect inflation?The interest rate set by the MPC affects interest rates on mortgages, loans and savings.Low inflation helps businesses and people plan ahead without thinking that interest rates and inflation aregoing to be 10% or 15%.

4.7 Controlling Inflation:

In economics, inflation is a rise in the general level of prices of goods and services in aneconomy over a period of time. When the general price level rises, each unit of currency buys fewergoods and services. Consequently, inflation also reflects erosion in the purchasing powerof money aloss of real value in the internal medium of exchange and unit of account in the economy. The central

bank plays a vital role to control inflation.

The Bank's quarterly Inflation Report was first published in 1993. The Report sets out thedetailed economic analysis and inflation projections on which the Bank's Monetary Policy Committee

bases its interest rate decisions, and presents an assessment of the prospects for UK inflation.

The Report starts with an overview of economic developments; this is followed by five sections:

analysis of money and asset prices analysis of demand analysis of output and supply analysis of costs and prices assessment of the medium-term inflation prospects and risks
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4.8 Banking system liquidity management:

There are various ways of designing the Banks operational framework so that it meets the

liquidity needs of the banking system efficiently, safely and flexibly whilst still achieving the Banks

rate-setting objective. The dimensions include what maintenance requirement the Bank specifies as

banker to the banks and how it meets variations in demand for central bank money, both day to day

and during the day in the RTGS payment system.

The Bank does not intend that use of the standing facilities should form part of a banks routineliquidity management. The standing facilities will, however, be available to a broad range of banks ondemand. It is proposed that use of the standing lending facility should not (as now) be limited to theBanks forecast of the banking systems net liquidity shortage. This will enhance the flexibility of theframework in response to extraordinary circumstances by allowing banks to borrow from the Bank(against routinely eligible collateral), or to deposit funds with the Bank, throughout the day.

Currently, reserve balances held at the Bank are not remunerated and amounts held are small. Inconsequence, the much larger balances needed to accommodate routine intraday variations in demandfor central bank money, as settlement banks make payments to each other across the Banks books, are

provided through intraday loans by the Bank (via reverse repo of high-quality securities) that must be

repaid by the endof each day. Routine day-to-day variations in demand for central bank money, principally reflecting changes in notes in circulation, are offset through changes in the size of the


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Banks lending in its daily open market operations. One possibility would be to continue with thisapproach.

As an alternative, the Bank is considering offering banks the opportunity to hold remunerated reservesovernight, which could be drawn down in order to make payments during the day. In managing their

payments-related liquidity needs in RTGS, existing and any new RTGS banks would, therefore, have thechoice of utilizing overnight reserve balances (cash), obtained either in the Banks open marketoperations or from the money market, or of holding high-quality securities that could be used ascollateral for borrowing from the Bank during the day (as now).

If it were to offer remunerated reserves, the Banks intention would be to broaden the tools available forliquidity management in the banking system. They would not be used as a mechanism for monetarycontrol, nor imposed in order to tax the banking system. For this reason, any reserves held at the Bankwould be remunerated close to or at the MPC repo rate.

In advance of a maintenance period, scheme banks would need to have committed to holding a specified

positive level of reserves. If they failed to do soby holding too much or too littlethey would faceinterest rate penalties. Remuneration might be set by the Bank at a slightly lower rate than the MPC reporate, with scheme banks choosing the quantity held. Or the Bank could remunerate reserves at the MPCrepo rate, but set a ceiling on the amount of reserves that scheme banks could choose to hold. Anothervariant might be for the Bank to auction a fixed value of reserves, with a maximum rate of remunerationequal to the MPC repo rate.

If the Bank continued with the present same-day maintenance requirement, banks would be required tohold their agreed level of reserves each day. This level could be reset periodically, for example monthlyor quarterly


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As stated above, the Bank is also considering specifying the maintenance requirement for banks as aperiod-average rather than a same-day requirement. In such a system, banks would be able to vary theirlevel of reserves day to day within the maintenance period as well as during the day. Such averagingwould allow day-to-day variations in demand for central bank money to be accommodated throughchanges in reserves rather than daily open market operations. Any maintenance period would run fromone MPC decision date until the next, so that speculation about changes in the MPC repo rate should notinfluence banks decisions about their demand to hold reserves on particular days within a maintenance

period.

As described in Section IV, under aperiod-average requirement, the Bank would control market interestrates within a narrow interest rate corridor on the final day of the maintenance period in order to achieveits rate-setting objective. As well as being designed to ensure that market expectations of the final-dayrate were equal to the MPCs repo rate, the corridor would also limit actual volatility in overnight marketrates on the final day of the maintenance period. On other days, however, the interest rates on thestanding facilities would not be performing arate-setting function in the same way. So they could be setat a wider spread around the MPCs repo rate, such as plus and minus 100 basis points. By applying a

clearly penal rate to use of the Banks standing facilities, this would encourage banks to manage theirliquidity prudently.

Under either a same-day or period-average scheme, the Bank envisages making access to central bankmoney more widely available throughout the banking system. If a period-average system wereintroduced, the Bank would especially want to ensure that the ability to average reserves was used by a

broad range of banks. In principle, all UK banks could be invited to hold reserves with the Bank andgiven access to the standing facilities, although the Bank would reserve the right to exclude banks on

prudential or risk grounds. The Bank would hope that, having elected to bank with the Bank, manybanksespecially those that have significant sterling business or are otherwise significant participants incapital marketswould also become direct participants in the sterling RTGS payment system. This

would aid efficient settlement and also reduce residual intraday credit exposures in the UK paymentssystem, helping to underpin the stability of the UK financial system as a whole.

4.9 Banking supervision and other activities:

In some countries a central bank through its subsidiaries controls and monitors the banking sector. Inother countries banking supervision is carried out by a government department such as the UK Treasury,or an independent government agency (for example, UK's Financial Services Authority). It examines the

banks' balance sheets and behavior and policies toward consumers. Apart from refinancing, it alsoprovides banks with services such as transfer of funds, bank notes and coins or foreign currency. Thus itis often described as the "bank of banks".

Many countries such as the United States will monitor and control the banking sector through differentagencies and for different purposes, although there is usually significant cooperation between theagencies. For example, money center banks, deposit-taking institutions, and other types of financialinstitutions may be subject to different (and occasionally overlapping) regulation. Some types of bankingregulation may be delegated to other levels of government, such as state or provincial governments.

Any cartel of banks is particularly closely watched and controlled. Most countries control bank mergersand are wary of concentration in this industry due to the danger of groupthink and runaway lending

bubbles based on a single point of failure, the credit culture of the few large banks.

Price stability;


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Inflation is defined either as the devaluation of a currency or equivalently the rise of prices relative to acurrency.

Since inflation lowers real wages, Keynesians view inflation as the solution to involuntaryunemployment. However, "unanticipated" inflation leads to lender losses. Thus, Keynesian monetary

policy aims for a steady rate of inflation.

In opposition to Keynes, the Austrian School of economics views inflation simply as a transfer of wealthfrom currency holders to those who inflate the currency.

Economic growth

Economic growth is enhanced by investment in technological advances in production. Savings can supplyfunds for investment. However, low interest rates and concomitant high inflation typically provide adisincentive for saving

Interest rate stability

Free markets can sometimes include volatile interest rates. This volatility can generate costs to lendersand borrowers. So, central banks set interest rates in order to control the price of money.

Financial market stability

Foreign exchange market stability

Conflicts among goals

Goals frequently cannot be separated from each other and often conflict. Costs must therefore becarefully weighed before policy implementation.

Interest rate interventions

Typically a central bank controls certain types of short-term interest rates. These influence the stock- andbond markets as well as mortgage and other interest rates. The European Central Bank for exampleannounces its interest rate at the meeting of its Governing Council; in the case of the U.S. FederalReserve, the Board of Governors.

Both the Federal Reserve and the ECB are composed of one or more central bodies that are responsiblefor the main decisions about interest rates and the size and type of open market operations, and several

branches to execute its policies. In the case of the Federal Reserve, they are the local Federal ReserveBanks; for the ECB they are the national central banks.

High employment

Frictional unemployment is the time period between jobs when a worker is searching for, or transitioningfrom one job to another. Unemployment beyond frictional unemployment is classified as unintendedunemployment.


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For example, structural unemployment is a form of unemployment resulting from a mismatch betweendemand in the labor market and the skills and locations of the workers seeking employment.Macroeconomic policy generally aims to reduce unintended unemployment.

Keynes labeled any jobs that would be created by a rise in wage-goods (i.e., a decrease in real-wages) asinvoluntary unemployment:

Men are involuntarily unemployed if, in the event of a small rise in the price of wage-goods relatively tothe money-wage, both the aggregate supply of labor willing to work for the current money-wage and theaggregate demand for it at that wage would be greater than the existing volume of employment.

PART -5


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5.1 Bank of England Legislation

The Bank was established as a corporate body by Royal Charter under the Bank of England Act 1694.Since then there have been a number of enactments directly affecting the Bank and its organization.Various statutory provisions remain in force which is concerned with the Banks organization,governance, powers and functions.

The 1844 Act obliges the Bank to separate its issue and banking functions and to keep them in distinctdepartments. Probably the most important piece of legislation until the passing of the 1998 Act was the


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1946 Act. This was the Act by which the Bank was nationalized and its capital stock transferred to theTreasury. At that time a revised Charter was granted and the 1946 Act and the Charter contained various

provisions relating to the management of the Bank. Importantly, section 4(l) of the 1946 Act enabled theTreasury from time to time to give directions to the Bank as, after consultation with the Governor, theythought to be necessary in the public interest.

The 1998 Act introduced several important changes:

Part I and Schedule 1 replaced the provisions relating to the constitution and operation of Court inthe 1946 Act and the 1946 Charter. As a result much of the 1946 Charter became redundant andhas been replaced by the 1998 Charter.

Part I and Schedule 2 imposed formal reporting requirements on the Bank and placed the fundingon a statutory basis.

Part II and Schedule 3 conferred operational responsibility for monetary policy on the Bank andestablished the Monetary Policy Committee (the MPC) as a Committee of the Bank with

responsibility for the exercise of its powers in relation to the formulation of monetary policy.Section 4(l) of the 1946 Act has been amended to exclude monetary policy from the matters inrelation to which the Treasury can give directions.

Part III deals with the transfer of the Banks supervisory functions to the FSA and Part IV withmiscellaneous matters.

The 2009 Act introduces a number of important changes regarding the responsibilities, powers and role ofthe Bank. It includes provisions regarding the governance of the Bank, including a new statutory financialstability objective and the establishment of a Financial Stability Committee, as a sub-committee of asmaller Court. It creates a new Special Resolution Regime (SRR) for dealing with distressed banks and

building societies. It confers a statutory oversight role on the Bank in relation to inter-bank payment

systems recognized by HM Treasury and creates a new framework for the issuance of banknotes inScotland and Northern Ireland to be overseen by the Bank. The Act also grants the Bank immunity in itscapacity as a monetary authority (including its central bank and financial stability-related functions) andauthorizes the Bank to disclose financial stability-related information to certain bodies.

Thus, the constitution of the Bank now comprises:

the 1694 Act, which provides for the incorporation of the Bank; the 1694 Charter, insofar as it incorporates the Bank, constitutes its capital stock and authorizes it

to have a common seal, to hold land and other property, and to sue and be sued; the 1844 Act, which provides for the separation of the issue and banking departments; the 1946 Act which, apart from keeping in force sections 4(l) and 4(3), contains amended

provisions relating to the payment of distributions by the Bank to the Treasury; the 1998 Charter which, apart from continuing the 1694 Charter, contains provisions relating to

the transfer of capital stock and the declaration required of Governors and Directors; the 1998 Act, which deals with the constitution and functions of Court and the MPC, reporting,

funding and related matters; and the 2009 Act, which amends certain provisions of the 1998 Act regarding the governance of the

Bank, introduces a new statutory financial stability objective and confers immunity on the Bank inits capacity as a monetary authority.


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As a chartered corporation, incorporated pursuant to a Statute, the powers of the Bank have to bedetermined by reference to the 1694 Charter and Statute and subsequent Charter and legislativeamendments.

The 1998 Act was brought into force on 1 June 1998. A list of the Orders made under the 1998 Act,together with the dates on which they came into force, is set out in the document headed 'Orders'. Variouschanges to the 1998 Act and related Orders have been made since 1998, in particular when the FinancialServices and Markets Act 2000 came fully into force on 1 December 2001. These too are shown in therelevant documents.

The 2009 Act was introduced on a phased basis during 2009. The SRR provisions and the Bank immunityprovisions came into force on 21 February 2009. The new governance provisions relating to the Bankcame into force on 1 June 2009. The inter-bank payment systems provisions came into force on a phased

basis on 4 August, 12 November and 31 December 2009. The provisions relating to the issue ofbanknotes in Scotland and Northern Ireland came into force on a phased basis on 12 and 23 November2009. The statutes accessible above reflect the changes introduced by the 2009 Act to the 1998 Act and

also reproduce the Bank immunity and information disclosure provisions introduced by the 2009 Act.

5.2 The Banks relationship with Parliament


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As a public organization, wholly-owned by Government, and with a significantpublic policy role, the Bank is accountable to Parliament. The Banks AnnualReport and Accounts are laid before Parliament each year before they are madeavailable publicly.

The principal means of accountability for the Bank is via the House of CommonsTreasury Committee.

Through regular hearings on the Banks Inflation Report at whichMonetary Policy Committee (MPC) members give evidence

Through appointment hearings for new MPC members in order to satisfyitself that they meet the criteria of professional competence andindependence

The Treasury Committee has no statutory power of veto on MPC appointments but it does report toParliament on its assessments of appointees.

In 2001 the House of Lords appointed the Select Committee on Economic Affairs following theconclusion of the work of its predecessor, the Select Committee on the Monetary Policy Committee of theBank of England. Although this Committee has a wide-ranging remit, it announced that it would continueto monitor the MPC and the monetary policy framework.

Click on the links to find out more about the UK Parliament, details of committee hearings andpublications.

While the Bank appears before other select committees from time to time on a number of different issues,it is its engagement with committees of both Houses on monetary policy that is the principal feature of

the relationship. The key piece of legislation is the Bank of England Act 1998.

5.3 Governance

The framework for governance and accountability is set by the 1998 Bank of England Act. In somerespects the framework was modified by the 2009 Banking Act.

The Court of Directors

The Court of Directors is responsible for managing the affairs of the Bank, other than the formulation of

monetary policy. Court's responsibilities under the Bank of England Act 1998 ('the 1998 Act') includedetermining the Bank's objectives and strategy, and ensuring the effective discharge of the Bank'sfunctions and the most efficient use of its resources. Since the 2009 Banking Act ('the 2009 Act'), theBank has had a statutory objective to 'contribute to protecting and enhancing the stability of the financialsystems of the United Kingdom' and the Court, consulting HM Treasury and on advice from the FinancialStability Committee (see below), determines the Bank's strategy in relation to that objective.

The members of Court are appointed by the Crown. The nine Directors are all non-executive. One ofthem is designated by the Chancellor of the Exchequer to chair Court.

The Governors are appointed by the Crown for periods of five years, and the Directors for three years.


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Court delegates the day-to-day management of the Bank to the Governor and through him to othermembers of the executive. But it reserves to itself the right to agree:

The Bank's strategy and objectives. The Bank's expenditure budget. Major capital projects. The Bank's financial framework. The Bank's risk management policies. Approval of the accounts and the appointment of auditors. The remit for management of the Bank's balance sheet. The Bank's facilities in the money market. Senior appointments within the Bank. Changes in remuneration and pension arrangements. The Bank's succession plan. The establishment of sub-committees of Court, their terms of reference and membership.

And Court is consulted about financial support for institutions through the Financial Stability Committee.

Court keeps its procedures under close review and each year an annual Effectiveness Review isconducted on which a report is made to Court.

Members of Court have been indemnified by the Bank against personal civil liability arising out of thecarrying out or purported carrying out of their functions, provided they have acted honestly and in goodfaith and have not acted recklessly. These indemnities were granted in 2000 and approved by HMTreasury in accordance with the practice of the Government in relation to board members of Non-Departmental Public Bodies.

Financial Stability Committee (FSC)

The FSC was created by the Banking Act 2009. It consists of the Governors, the four members of Courtnominated by the Chairman of Court, and a Treasury observer (who may not vote). The Committee mayco-opt further members.

Under the 2009 Act the Committee has the following functions:

To make recommendations to the Court of Directors, which they shall consider, about the natureand implementation of the Bank's strategy in relation to the financial stability objective.

To give advice about whether and how the Bank should act in respect of an institution, where the

issue appears to the Committee to be relevant to the financial stability objective. In particular, to give advice about whether and how the Bank should use stabilization powers

under Part 1 of the Banking Act 2009 in particular cases. To monitor the Bank's use of the stabilization powers. To monitor the Bank's exercise of its functions under Part 5 of the Banking Act 2009 (interbank

payment systems).

Court has delegated to the Committee the following additional functions:

To monitor the Bank's exercise of its functions under Part 6 of the 2009 Banking Act (Scottishand Northern Ireland banknotes).


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To advise the Governor about any loan, commitment or other transaction which it is proposed thatthe Bank should make or enter into for the purpose of pursuing the financial stability objective.

Until the creation of the interim Financial Policy Committee (FPC) in February 2011, Court had alsodelegated to the Committee the final approval of the Bank's Financial Stability Report prior to

publication. The interim FPC has now become the main conduit for the Bank's risk assessment andmarket intelligence, although the FSC remains concerned with the process by which the Bank'sintelligence is gathered and the assessment developed.

Financial Policy Committee

The interim FPC was announced in February 2011 in anticipation of legislation to create a FinancialPolicy Committee (FPC), as outlined in the Government's consultation document 'A new approach tofinancial regulation: building a stronger system' which was published on 17 February 2011. The FPC is acommittee of Court, and will carry out preparatory work and analysis in advance of the creation of the

permanent FPC; monitor developments affecting financial stability in the United Kingdom and

internationally, give advice to the FSA and other bodies it feels appropriate about emerging risks in thefinancial system and recommend possible means of mitigating these risks; consider makingrecommendations to the Treasury about the regulatory perimeter and review and approve the Bank's

Financial Stability Reportwhich will set out its assessment and any recommendations that the Committeemay have made. The Committee will meet at least four times a year and will publish a record of itsdiscussions.

Remuneration Committee

The Remuneration Committee advises NedCo on the remuneration of the Bank's most senior executives,including the Governors, the Executive Directors (who are not members of Court), the Advisers to the

Governors and the members of the Monetary Policy Committee appointed by the Chancellor of theExchequer (the external MPC members).

Audit and Risk Committee

The functions of the Audit and Risk Committee are to assist Court in meeting its responsibilities for aneffective system of financial reporting, internal control and risk management; and to assist NedCo indischarging its responsibilities under the Bank of England Act 1998 for 'keeping under review the internalfinancial controls of the Bank with a view to securing the proper conduct of its financial affairs'. TheCommittee is responsible for providing independent assurance to Court that the Bank's risk and control

procedures are adequate. The Committee, which meets regularly, has detailed terms of reference that

include: receiving reports from, and reviewing the work of, the internal and external auditors; reviewingthe annual financial statements prior to their submission to Court; considering the appropriateness of theaccounting policies and procedures adopted; making recommendations on the appointment of the externalauditors, their independence and their fees; and reviewing the Bank's risk matrix and specific businesscontrols.

Nominations Committee

In 2010 a Nominations Committee was formed, inter alia, to make recommendations to Court on theappointment of Executive Directors, the Secretary, and the Internal Auditor of the Bank, appointments tosub-Committees (other than the interim FPC), as to whether likely conflicts of interest are sufficiently


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severe to prevent a Member of Court continuing to serve as such and to review succession plans withparticular regard to those appointments for which Court's approval is required

PART - 6


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6.1 Structure

In working towards its core purposes, the Bank is organized into four main operational areas - MonetaryAnalysis and Statistics, Markets, Financial Stability and Banking Services, supported by a CentralServices area. This structure was introduced in June 1998 to reflect the Bank's new responsibilities in thelight of the 1998 Bank of England Act. The Centre for Central Banking Studies offers teaching and

technical assistance to other Central Banks.

6.2 Department wise Functions of Bank of England:

Monetary Analysis and Statistics

The Monetary Analysis (MA) divisions are responsible for providing the Bank with the economicanalysis it needs to discharge its monetary policy responsibilities. Its economists conduct research andanalysis of current and prospective developments in the UK and international economies. The MAdivisions produce the Quarterly Bulletin and the Inflation Report, which sets out the Monetary PolicyCommittee's assessment of the current monetary and economic situation in the United Kingdom and ofthe outlook for inflation and growth.

The work of the MA divisions, including reports from the twelve Agencies, provides analyticalinformation for the interest rate decisions taken each month by the Monetary Policy Committee toachieve the Government's inflation target. The Monetary and Financial Statistics Division compiles,

publishes and briefs on financial statistics and the intelligence gathered through its close contacts withbanks. Special studies directed at international harmonization and improvements to the statistics are also afeature of the work.

The Centre for Central Banking Studies (CCBS) acts as a forum where central banks and academic

experts from all over the world can exchange views on the latest thinking in central bank policies andoperations. CCBS provides an extensive program of seminars, workshops and conferences both inLondon and abroad.

Human Resources

The Human Resources function is responsible for recruitment and development of staff, talentmanagement and succession planning, employee relations and administration of the Bank's payroll and

pensions


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Markets

The main functions of the Markets area include: conducting operations in the sterling money markets toimplement the Monetary Policy Committee's decisions; providing liquidity insurance to the banking

system; managing the Bank of England's balance sheet; managing the United Kingdom's foreignexchange reserves, as the agent of HM Treasury; delivering financial market analysis and intelligence insupport of the Bank's monetary and financial stability missions; and contributing to the management offinancial and business continuity crises.In delivering its functions, the area draws on a wide range of financial markets contacts in the UnitedKingdom and overseas and also contributes to facilitating efficient core wholesale markets, including via

practitioner committees. Market intelligence is co-ordinate by a dedicated team.The Risk Management Division is responsible for identifying, measuring and, with the front-officedivisions, managing risks from financial operations. The Markets Strategy and Risk Operations Division

provide strategic management support and risk reporting across the Markets Directorate.

Financial Stability

The Financial Stability area leads on a number of the Bank's financial stability functions. It works closelywith HM Treasury and the FSA under the terms of the Memorandum of Understanding, and working withother directorates, it provides support to the interim Financial Policy Committee.

Internally, a high-level Financial Stability Executive Board, chaired by the Deputy Governor forFinancial Stability, Paul Tucker, guides the financial stability work of the Bank executive.

In supporting the interim FPC and FSC, working with other directorates, the area seeks to detect risks tothe functioning of the UK financial system and to develop measures to strengthen regulatory systems and

infrastructure at home and abroad to reduce those risks.

The area includes the team delivering the Bank's statutory responsibilities for overseeing UK paymentssystems. It also works with other directorates, HM Treasury and the FSA to improve the arrangements formanaging a financial crisis.

Special Resolution Unit

The Special Resolution Unit was created in February 2009. Reporting to Paul Tucker, it develops and co-ordinates the Bank's response to the resolution of individual institutions, using the powers of the Banking

Act 2009, and undertakes analysis to enhance the resolution regime going forward


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Banking Services

Customer Banking Division provides banking services to the Government and other customers,principally financial institutions and other central banks. This includes the provision of custody services,including for gold.

Notes Division manages the issue of Bank of England notes and the Note Circulation Scheme. SinceNovember 2009 it has also been responsible for the regulation of note issuance by Scottish and NorthernIreland note-issuing banks.

Market Services Division operates the Real Time Gross Settlement (RTGS) system through whichpayments relating to the major UK payments and securities settlement systems are settled and, from thisoperational role, contributes analysis to the Bank's continuing work in developing safe and efficient

payment and settlement systems. It also provides the back-office functions to support the Bank's sterlingand foreign currency transactions including settling the Bank's open market (monetary policy) andliquidity insurance operations.

Central Services

The Central Services Divisions encompass a range of support functions that underpin the Bank's activitiesand help to ensure that the Bank's reputation is maintained. These include IT, business continuity, theGovernors' private offices, and legal services.

Finance

Finance is responsible for budgeting, financial accounting and monitoring the performance of the Bank inits attainment of its strategic priorities. In addition it provides Bank-wide project support and risk

oversight, provides advice and support on procurement and supplier management and manages the Bank'sproperty and facilities.

Internal Audit

Internal Audit assists the Court of Directors and Executive Team in protecting the Bank, and itsreputation, by independently and objectively evaluating the effectiveness of internal controls, riskmanagement and governance processes. As part of this assurance Internal Audit recommends cost-effective improvements which are agreed with management and tracked until implementation

Communications

The Public Communications and Information Division manages the Bank's public and media relationsand its work to build public understanding; it includes the press office, the Bank's website, publicenquiries, education and community programs, and the Bank's museum. It also manages internal Bank-wide staff communications.


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PART - 7


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7.1 Bangladesh Bank,

The central bank of the country, was established as a body corporate vide the Bangladesh Bank Order,1972 (P.O. No. 127 of 1972) with effect from 16th December, 1971. The general superintendence and

direction of affairs and business of the Bank are entrusted to a nine member Board of Directors whichconsists of the Governor as chairman, a Deputy Governor, three senior government officials and four

persons having experience and proven capacity in the fields of banking, trade, commerce, industry oragriculture - all nominated by the government. The board, which is the highest policy making body,meets at least six times a year and at least once every quarter under the chairmanship of the Governor.The Governor, appointed by the government as the chief executive officer, directs and controls all theaffairs of the Bank on behalf of the Board. At present it has nine offices located at Motijheel, Sadarghat,Chittagong, Khulna, Bogra, Rajshahi, Sylhet, Barisal and Rangpur in Bangladesh; total manpower stoodat 5071 (officials 3914, subordinate staff 1157) as of end FY 2010.

7.2 Objective of Bangladesh Bank

The broad objectives of the Bank are:a) To regulate the issue of the currency and the keeping of reserves;

b) To manage the monetary and credit system of Bangladesh with a view to stabilizing domesticmonetary value;c) To preserve the par value of the Bangladesh Taka;d) To promote and maintain a high level of production, employment and real income in Bangladesh; andto foster growth and development of the country's productive resources for the national interest

Vs


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7.3 Functions of Regulation & Policy Department

This department is basically responsible for issuing prudential guidelines to ensure a sound bankingsystem in the country. The major areas covered are:

Determination of capital adequacy requirements, asset classification and provisioning standards. Review and drafting of banking statutes

Framing policies regarding Reserve Requirements.

Supervision of the internal control system of the banks.

Formulate policies with a view to restraining insider lending.

Determination of accounting and disclosure standard to the banks.

Initiate disciplinary action against any Board or members of the Board of Directors of the banks.

Issuance of directives and compliance thereof under Banking Company Act, 1991.

7.4 Comparison between the Banks:

Topic Bank of England Bangladesh Bank Managing Managing the country's foreign exchange

and gold reserves and the Government'sstock register

Managing a Deposit Insurance Scheme,country's international reserves, regulationand supervision of banks and non-bankfinancial institutions, promotion anddevelopment of domestic financial markets.

Monopoly

over note

issue

Monopoly over the issue of currency andthe banknotes

Exercises monopoly over the issue of

currency and the banknotes. Except for the

1 and 2 taka notes.

Performance Bank of England does not perform these

activities.

It performs for depositors in banks andfinancial institutions, investors in financialassets, business community, including farmand non-farm SMEs

Board of

directors

Members of Court are appointed by theCrown, nine Directors are all non-executive, and one of them is designated

by the Chancellor of the Exchequer to chairCourt known as Governor

Board of directors consist of the Governorof the bank and eight other members

Financial

stability

For financial stability- making Financial

Stability Committee published half yearlyFinancial Stability Report & reforming the

Bangladesh Bank can follow these

activities for strong financial stability.


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UK regulatory framework

Functions Activities are- issuing Banknotes,implementing monetary policies,determining Interest rates, controlling thenation's entire money supply etc

Activities are- issuing Banknotes,

implementing monetary policies, credit

control, Clearing House, control Money

Market, job creation, agricultural

development, Industrial development, andNatural resources development etc.

Foreign

exchange

reserve

Does Not regulate the foreign exchangerate

Regulate the foreign exchange rate.

Involvement Heavily involved in the political andeconomic development of the nation

This bank is more involved economic

development than political development

Bangladesh Bank can take up few function of the Bank of England such as gold reserves, the

Government's stock register, making Financial Stability Committee etc.

7.5 The key findings and recommendations for Bangladesh Bank are as follows:

In most countries, the de facto independence of central banks needs to be strengthened.

A common problem that needs to be resolved is the opaque process of changing the governor.

In most cases, the proper criteria for the selection of the board members need to be strengthened,and board and management roles and responsibilities should be in line with best practices.

A management information system for off-site supervision needs to be developed and automated

in many cases.

The resolution capacities of the central banks and regulators with problem banks must bestrengthened, in close collaboration with the ministries of finance.

Contingency plans for dealing with the likely deterioration of the banks financial positionascredit risks and losses are being recognized as resulting from the global financial crisisneed to

be comprehensively developed. These plans should focus on prompt corrective actions, includingpossible mergers, and how limited government intervention and resources can be used effectively.

The capacities of the staff at the banking supervision departments need to be built, and the numberof staff increased.


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Enforcement of the laws must be strengthened, and this should include strengthening andconsistently imposing penalties and fines on violations of prudential regulations.

PART - 8


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8.1 Limitations:

Contrary to popular perception, central banks are not all-powerful and have limited powers to put theirpolicies into effect. Most importantly, although the perception by the public may be that the "centralbank" controls some or all interest rates and currency rates, economic theory (and substantial empirical

evidence) shows that it is impossible to do both at once in an open economy. Robert Mundell's"impossible trinity" is the most famous formulation of these limited powers, and postulates that it isimpossible to target monetary policy (broadly, interest rates), the exchange rate (through a fixed rate) andmaintain free capital movement. Since most Western economies are now considered "open" with freecapital movement, this essentially means that central banks may target interest rates or exchange rateswith credibility, but not both at once.

Even when targeting interest rates, most central banks have limited ability to influence the rates actuallypaid by private individuals and companies. In the most famous case of policy failure, Black Wednesday,George Soros arbitraged the pound sterling's relationship to the ECU and (after making $2 billion himselfand forcing the UK to spend over $8bn defending the pound) forced it to abandon its policy. Since then

he has been a harsh critic of clumsy bank policies and argued that no one should be able to do what hedid.


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The most complex relationships are those between the yuan and the US dollar, and between the euro andits neighbors. The situation in Cuba is so exceptional as to require the Cuban peso to be dealt with simplyas an exception, since the United States forbids direct trade with Cuba. US dollars were ubiquitous inCuba's economy after its legalization in 1991, but were officially removed from circulation in 2004 andreplaced by the convertible peso.

8.2 Conclusion:

The bank of England was established in the year 1694 as a government bank, it acts as the central bankand its roles include maintaining monetary stability, issuing bank notes and other functions related to acentral bank, Previously decisions regarding interest rates were made by the treasury, in 1997 the central

bank was granted the responsibility of making decisions regarding interest rate, the act of 1998 allowedthe bank to make decisions regarding interest rates, this act also gives the power to the government tomake decisions regarding interest rate in times of crisis and emergencies. The Bank of England workswith many other institutions to ensure both monetary and financial stability; the institutes include HMTreasury, the Government department accountable for financial and economic policy, the FinancialServices Authority and body that regulates the financial services industry and other central banks andinternational organizations, with the goal of improving the international financial system.

The Bank of England has been heavily involved in the political and economic development of thenation. The bank has evolved with developments and enhanced its role at the centre of the national

financial situation. Today its role is as important as it has ever been, supporting the government in itsmonetary decisions is a fundamental function that maintains the stability of the economy.


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Bank of England plays a vital role as lender of last resort. If the commercial banks are short of cash,they go to the Bank of England, who is capable and ready to lend them money. This is an importantfeature that is only handled by bank of England. It ensures the banks are never short of cash; so, peoplehave trust on the banking system. The Bank of England controls the banking and financial system of theUK Financial stability.

Central bank is working as the banker of all the banks in the UK, and all the banks in the UnitedKingdom are working under the guidance of bank of England. Its importance has increased with the

passage of time. The Bank of England works for the development of UK. It has major importance ineconomy because it issues notes and coins in the country.

7.5 Bibliography: (Journals):

1. Parikh, A; Starmer, C., The relationship between the money supply andprices in Bangladesh, Bangladesh Development Studies, (September

2000), pp. 60-70.

2. Aminur Rahmans An overview of Monetary policy, Published in the Daily

Star 10 november 2010.

3. Economic trends, November 2010, Bangladesh Bank, Dhaka, Bangladesh.

4. Dr. Zaidi Sattar, Chairman, PRI, Overview of Monetary Policy Statement 2010,

Published in The financial Express 25 august 2010.


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5. Dr. Salehuddin Ahmed, Former Governor, Bangladesh Bank , Opinion About

MPS 2010, Published in The Financial Express, 25 august 2010.

6. Hossain akhter (2010), Exchange Rates, Capital Flows and International

Trade, Dhaka: The University Press Limited, 2010.

7. Bangladesh Economic Outlook, Vol-2, No-3, March 2009.

8. State of the Bangladesh Economy in FY2010, Prepared by Centre for Policy

Dialogue.

9. Subhasish Barua and Md. Habibur Rahman, Monetary policy and Capital

Market Development in Bangladesh Policy Note: PN 0708.

Websites:

1. www.bangladesh-bank.org

2. www.cibafi.org

3. www.unnayan.org

4. www.cpd.org.bd

5. www.global-changes.com/changing-mps-expenses.

6. www.slideshare.net
http://www.bangladesh-bank.org/http://www.cibafi.org/http://www.unnayan.org/http://www.cpd.org.bd/http://www.global-changes.com/changing-mps-expenseshttp://www.slideshare.net/http://www.bangladesh-bank.org/http://www.cibafi.org/http://www.unnayan.org/http://www.cpd.org.bd/http://www.global-changes.com/changing-mps-expenseshttp://www.slideshare.net/


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Bank of England by Imran Hossain

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