Monetary policy tools

Monetary base

Monetary policy can be implemented by changing the size of the monetary base. Central banks use open market operations to change the monetary base. The central bank buys or sells reserve assets (usually financial instruments such as bonds) in exchange for money on deposit at the central bank. Those deposits are convertible to currency. Together such currency and deposits constitute the monetary base which is the general liabilities of the central bank in its own monetary unit. Usually other banks can use base money as a fractional reserve and expand the circulating money supply by a larger amount.

Reserve requirements

The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier.

Discount window lending

Discount window lending is where the commercial banks, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates (T-bills). This enables the institutions to vary credit conditions (i.e., the amount of money they have to loan out), thereby affecting the money supply. It is of note that the Discount Window is the only instrument which the Central Banks do not have total control over.

By affecting the money supply, it is theorized, that monetary policy can establish ranges for inflation, unemployment, interest rates ,and economic growth. A stable financial environment is created in which savings and investment can occur, allowing for the growth of the economy as a whole.

Interest rates

The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market. One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool — open market operations; one must choose which one to control.

In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage borrowing. Both of these effects reduce the size of the money supply.

Currency board

A currency board is a monetary arrangement that pegs the monetary base of one country to another, the anchor nation. As such, it essentially operates as a hard fixed exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board. This limits the possibility for the local monetary authority to inflate or pursue other objectives. The principal rationales behind a currency board are threefold:

1. To import monetary credibility of the anchor nation;
2. To maintain a fixed exchange rate with the anchor nation;
3. To establish credibility with the exchange rate (the currency board arrangement is the hardest form of fixed exchange rates outside of dollarization).

In theory, it is possible that a country may peg the local currency to more than one foreign currency; although, in practice this has never happened (and it would be a more complicated to run than a simple single-currency currency board). A gold standard is a special case of a currency board where the value of the national currency is linked to the value of gold instead of a foreign currency.

The currency board in question will no longer issue fiat money but instead will only issue a set number of units of local currency for each unit of foreign currency it has in its vault. The surplus on the balance of payments of that country is reflected by higher deposits local banks hold at the central bank as well as (initially) higher deposits of the (net) exporting firms at their local banks. The growth of the domestic money supply can now be coupled to the additional deposits of the banks at the central bank that equals additional hard foreign exchange reserves in the hands of the central bank. The virtue of this system is that questions of currency stability no longer apply. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations, and that the fixed exchange rate will, to a large extent, also fix a country's terms of trade, irrespective of economic differences between it and its trading partners.

Hong Kong operates a currency board, as does Bulgaria. Estonia established a currency board pegged to the Deutschmark in 1992 after gaining independence, and this policy is seen as a mainstay of that country's subsequent economic success (see Economy of Estonia for a detailed description of the Estonian currency board). Argentina abandoned its currency board in January 2002 after a severe recession. This emphasized the fact that currency boards are not irrevocable, and hence may be abandoned in the face of speculation by foreign exchange traders. Following the signing of the Dayton Peace Agreement in 1995, Bosnia and Herzegovina established a currency board pegged to the Deutschmark (since 2002 replaced by the Euro).

Currency boards have advantages for small, open economies that would find independent monetary policy difficult to sustain. They can also form a credible commitment to low inflation.

Unconventional monetary policy at the zero bound

Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy. These include credit easing, quantitative easing, and signaling. In credit easing, a central bank purchases private sector assets, in order to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for future interest rates. For example, during the credit crisis of 2008, the US Federal Reserve indicated rates would be low for an “extended period”, and the Bank of Canada made a “conditional commitment” to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010
.

Lender of last resort

A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to fail'.

Purpose
In the United States the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications for the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private, the availability of liquidity was intended to prevent bank runs.

A lender of last resort serves as a stopgap to protect depositors, prevent widespread panic withdrawal, and otherwise avoid disruption in productive credit to the entire economy caused by the collapse of one or a handful of institutions. Borrowing from the lender of last resort by commercial banks is usually not done except in times of crisis. This is because borrowing from the lender of last resort indicates that the institution in question has taken on too much risk, or that the institution is experiencing financial difficulties (since it is often only possible when the borrower is near collapse).

Within other major world economies this role is undertaken by the Bank of England in the United Kingdom (the central bank of the UK), in the Eurozone by the European Central Bank, in Switzerland by the Swiss National Bank, in Japan by the Bank of Japan and in Russia by the Central Bank of Russia.

JPMorgan Chase and HSBC are examples of non-central banks that have acted as a lender of last resort on several occasions. John Pierpont Morgan is considered to have played the role of a lender of last resort during the Panic of 1907.

Retail lending

Alternatively, a lender of last resort is a bank, cheque cashing store or credit card operation which deals only with the highest risk categories of private client. These retail banks charge very high rates of interest to cover the high credit risk they face since many of the loans are not repaid. They therefore only attract customers unable to secure credit at lower interest rates elsewhere.

This term can be applied to criminal loan sharks who act as lenders of last resort, offering loans at interest rates so high as to be considered usury. This may be illegal in itself, or involve intimidation to ensure repayment.

These moneylenders are not the only lenders of last resort dealing with the public. In some cases, credit is available for the purchase of specific goods which could not be sold for cash. Particularly incar financing, there are large companies specializing in the arrangement of credit for high risk individuals.

Criticisms

Critics of the backing of institutions point to the ability of having a lender of last resort as a temptation for an institution to take on more risk. A lender of last resort provides a safety net to insulate the institution from the full consequences of their risk. The lender does not underwrite the consequences but it could be that business failure can be hidden for longer by the extension of credit.

A more theoretical critique of the institution of a lender of last resort is that its existence is predicated on the possibility of a "market failure": if the credit market accurately assesses risks then institutions not able to receive loans would not be able to misuse the capital and the idea of a panic or ‘contagious’ credit crunch spreading through the banking system would be impossible.

A modern critique of the International Monetary Fund as the international lender of last resort is that it is effectively an inefficient subsidy system, since it is mandated to provide loans to countries unable to raise funds through the bond market, with loans paying below market interest rates. Critics say that this has two deficiencies as a means of charity: one, it confuses the ability to repay with the economic reorganization demanded by the bank and other ethical considerations; and two, the fact that some countries actually do repay their loans, despite the hardship of paying and the reality that most developing nations are not expected to do so.

Clearing House Interbank Payments System

The Clearing House Interbank Payments System (CHIPS) is the main privately held clearing house for large-value transactions in the United States, settling well over US$1 trillion a day in around 250,000 interbank payments. Together with the Fedwire Funds Service (which is operated by the Federal Reserve Banks), CHIPS forms the primary U.S. network for large-value domestic and international USD payments (where it has a market share of around 96%). CHIPS transfers are governed by Article 4A of Uniform Commercial Code.

CHIPS is owned by financial institutions. According to the Federal Financial Institutions Examination Council (FFIEC), an interagency office of the United States government, "any banking organization with a regulated U.S. presence may become an owner and participate in the network. CHIPS participants may be commercial banks, Edge Act corporations or investment companies. Until 1998, to be a CHIPS participant, a financial institution was required to maintain a branch or an agency in New York City. A non-participant wishing to make international payments using CHIPS was required to employ one of the CHIPS participants to act as its correspondent or agent.

Banks typically prefer to make payments of higher value and of a less time-sensitive nature by CHIPS instead of Fedwire, as CHIPS is less expensive (both by charges and by funds required).

CHIPS differs from the Fedwire payment system in three key ways. First, it is privately owned, whereas the Fed is part of a regulatory body. Second, it has 47 member participants (with some merged banks constituting separate participants), compared with 9,289 banking institutions (as of March 19, 2009)^[2] eligible to make and receive funds via Fedwire. Third, it is a netting engine (and hence, not real-time).

A netting engine consolidates all of the pending payments into fewer single transactions. For example, if Bank of America is to pay American Express US$1.2 million, and American Express is to pay Bank of America $800,000, the CHIPS system aggregates this to a single payment of $400,000 from Bank of America to American Express — only 20% of the $2 million to be transferred actually changes hands. The Fedwire system would require two separate payments for the full amounts ($1.2 million to American Express and $800,000 to Bank of America).

Only the largest banks dealing in U.S. dollars participate in CHIPS; about 70% of these are non-U.S. banks. Smaller banks have not found it cost effective to participate in CHIPS, but many have accounts at CHIPS-participating banks to send and receive payments.

Clearing houses are institutions devoted to the exchange of information and the fulfillment of payment processing. A financial clearing house assures that two parties to a transaction do not default. Financial clearing houses include institutions devoted to the clearing of transactions involving the trading of financial securities and the conduct of specific forms of electronic payments.

A wire transfer system for large-value wholesale real-time interbank settlements, the Clearing House Interbank Payments System (CHIPS) is the largest private-sector global clearing house for cross-border dollar transactions, accounting for 95 percent of all international payments conducted in dollars. Wholesale payments are large interbank payments for purposes such as commercial transactions, bank loans, and securities transactions.

CHIPS engage predominantly in large trade-related transactions and foreign exchange transactions denominated in dollars. CHIPS also accounts for 5 percent of U.S. domestic large-value business-to-business payments. CHIPS is owned by 46 member banks from 22 countries and is operated by the Clearing House, an association that is owned by 22 major U.S. member banks. CHIPS can be used by any banking organization with a regulated U.S. presence.

CHIPS was created in 1970 by the New York Clearing House, and according to former Federal Reserve chairman Alan Greenspan, it represented “the most significant qualitative change in clearing house arrangements.”

Transfers between banks occur in two parts: clearing and settlement.

Clearing is when payment information is sent and received between participants.

Settlement is when actual payment occurs.

Banks have two main options when processing interbank payments in dollars: Fedwire, operated by the Federal Reserve Bank, and CHIPS. CHIPS has some distinct advantages over Fedwire. One advantage is that CHIPs uses a patented multilateral netting settlements process. CHIPS keeps track of payments coming in and out of a particular bank’s account and releases a single payment whenever the bank is in a positive position so that it will never be in an overdraft position. This is different from Fedwire, which processes transactions individually using a real-time gross settlement process that may leave banks occasionally in overdraft positions that must be settled by the end of the day. The Fed charges fees on those overdraft positions. Thus CHIPS reduces overdraft fees.

CHIPS reduces the number of transactions between international and domestic banks during the day and processes more than $2 trillion per day.

While CHIPS and Fedwire are competitors, CHIPS could not operate without Fedwire. CHIPS uses Fedwire to conduct its transactions. Banks participating in CHIPS use a joint CHIPS account at the Federal Reserve to set aside funds for CHIPS transactions.

They pre-fund the account to meet settlements throughout the day. Late in the day, there is a second chance to fund any settlements that could not be met with the initial balance. Those settlements are not released unless the bank is in a positive position.

If the bank chooses not to be in a positive position, those payments are deleted and the bank can settle them using Fedwire directly. This is one disadvantage to using CHIPS over Fedwire. Payments made via Fedwire are final and irrevocable. Some payments made over CHIPS may not be final until the settlements are made final at the end of the day.

Coins of the pound sterling

The standard circulating coinage of the United Kingdom is denominated in pounds sterling (symbol "£"), and, since the introduction of the two-pound coin in 1998, ranges in value from one penny to two pounds. Since decimalisation, on 15 February 1971, the pound has been divided into 100 (new) pence. From the 16th century until decimalisation, the pound was divided into 20 shillings, each of 12 (old) pence. British coins are minted by the Royal Mint in Llantrisant, Wales. The Royal Mint also commissions the coins' designs.

As of 30 March 2010, there are an estimated 28 billion coins circulating in the United Kingdom.

The first decimal coins were circulated in 1968. These were the five pence (5p) and ten pence (10p), and had values of one shilling (1/-) and two shillings (2/-), respectively, under the pre-decimal £sdsystem. The decimal coins are minted in copper-plated steel (previously bronze), cupro-nickel and nickel-brass. The two-pound coin is bimetallic. The coins are discs, except for the twenty pence and fifty-pence pieces, both of which are heptagons of constant curvature. All the circulating coins have an effigy of Queen Elizabeth II on the obverse, and various national and regional designs, and the denomination, on the reverse. The circulating coins, excepting the two-pound coin, were redesigned in 2008, keeping the sizes and compositions unchanged, but introducing reverse designs that each depict a part of the Royal Shield of Arms and form the whole shield when they are placed together in the appropriate arrangement. The exception, the 2008 one-pound coin, depicts the entire shield of arms on the reverse. All current coins carry a Latin inscription whose full form is ELIZABETH II DEI GRATIA REGINA FIDEI DEFENSOR, meaning "Elizabeth II, by the grace of God, Queen and Defender of the Faith".

In addition to the circulating coinage, the UK also mints commemorative decimal coins (crowns) in the denomination of five pounds (previously 25 p). Ceremonial Maundy money and bullion coinage ofgold sovereigns, half sovereigns, and gold and silver Britannia coins are also produced. Some territories outside the United Kingdom, that use the pound sterling, produce their own coinage, with the same denominations and specifications as the UK coinage but local designs.

In the years just prior to decimalisation, the circulating British coins were the half crown (2/6), two shillings or florin, shilling, sixpence (6d), threepence (3d), penny (1d) and halfpenny (½d). The farthing(¼d) had been withdrawn in 1960.

All modern coins feature a profile of the current monarch's head. The direction in which they face changes with each successive monarch, a pattern that began with the Stuarts. For the Tudors and pre-Restoration Stuarts, both left and right-facing portrait images were minted within the reign of a single monarch. Medieval portrait images tended to be full face.

From a very early date, British coins have been inscribed with the name of the ruler of the kingdom in which they were produced, and a longer or shorter title, always in Latin; among the earliest distinctive English coins are the silver pennies of Offa of Mercia, which were inscribed with the legend OFFA REX"King Offa". The English silver penny was derived from another silver coin, the sceat, of 20 troy grainsweight, which was in general circulation in Europe during the Middle Ages. In the 12th century, Henry II established the Sterling Silver standard for English coinage, of 92.5% silver and 7.5% copper, replacing the earlier mediæval use of fine silver. The coinage reform of 1816 set up a weight/value ratio and physical sizes for silver coins. Silver was eliminated in 1947, except for Maundy coinage.

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:

Bank House, the Bank of England offices on King Street in Leeds.

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 inflationtarget. 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 1997 Memorandum of Understanding describes the terms under which the Bank, the Treasury and the FSA work toward the common aim of increased financial stability. In 2010 the incoming Chancellor announced his intention to merge the FSA back into the Bank.

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.

Since 1997 the Monetary Policy Committee (MPC) 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. Computer share took over as the registrar for UK Government bonds (known as gilts) from the Bank at the end of 2004.

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.

In order to help maintain economic stability, the Bank attempts to broaden understanding of its role, both through regular speeches and publications by senior Bank figures, and through a wider education strategy aimed at the general public. It maintains a free museum and runs the Target Two Point Zero competition for A-level students.

Asset Purchase Facility

The Bank has operated, since January 2009, an Asset Purchase Facility (APF) to buy "high-quality assets financed by the issue of Treasury bills and the DMO's cash management operations" and thereby improve liquidity in the credit markets. It has, since March 2009, also provided the mechanism by which the Bank's policy of quantitative easing (QE) is achieved, under the auspices of the MPC. Along with the managing the £200 billion of QE funds, the APF continues to operate its corporate facilities. Both are undertaken by a subsidiary company of the Bank of England, the Bank of England Asset Purchase Facility Fund Limited (BEAPFF).

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 tenshillings 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 the UK 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 Alliedhands 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.

The Vault

The Bank of England is custodian to the official Gold reserve of the United Kingdom and many other countries. The Vault, which is situated beneath the City of London, covers a floor space greater than that of the tallest building in the City, Tower 42 and needs keys that are 3 feet long to open. The Bank of England is the second largest (only just) custodian of Gold Reserves, holding around 4,600 tonnes - second to the Federal Reserve Bank of New York.

History of Bank of England

England's crushing defeat by France, the dominant naval power, in naval engagements culminating in the 1690 Battle of Beachy Head, became the catalyst to England rebuilding itself as a global power. England had no choice but to build a powerful navy if it was to regain global power. As there were no public funds available, in 1694 a private institution, the Bank of England, was set up to supply money to the King. £1.2m was raised in 12 days; half of this was used to rebuild the Navy.

As a side-effect, the huge industrial effort needed started to transform the economy, from iron works making nails to agriculture feeding the quadrupled strength of the Royal Navy. This helped the new United Kingdom – England and Scotland were formally united in 1707 – to become prosperous and powerful. Together with the power of the navy, this made Britain the dominant world power in the late eighteenth and early nineteenth centuries.

The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan which had been proposed by William Paterson three years before, but had not been acted upon. 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. The first governor was Sir John Houblon, who is depicted in the £50 note issued in 1994. The charter was renewed in 1742, 1764, and 1781.

Satirical cartoon protesting against the introduction of paper money, by James Gillray, 1797. The "Old Lady of Threadneedle St" (the Bank personified) is ravished byWilliam Pitt the Younger.

The Bank's original home was in Walbrook in the City of London, where during the building's reconstruction in 1954 archaeologists found the remains of a Roman temple to Mithras (Mithras was – rather fittingly – worshipped as being the God of Contracts); the Mithraeum ruins are perhaps the most famous of all twentieth-century Roman discoveries in the City of London and can now be viewed by the public.

8th century

In 1734 the Bank of England moved to its current location on Threadneedle Street, and thereafter slowly acquired neighbouring land to create the edifice seen today. Sir Herbert Baker's rebuilding of the Bank of England, demolishing most of Sir John Soane's earlier building was described by architectural historian Nikolaus Pevsner as "the greatest architectural crime, in the City of London, of the twentieth century".

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.

19th century

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.

20th century

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 1997 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 fromcommercial banking and become a central bank. In 1946, shortly after the end of Norman's tenure, the bank was nationalised by the Labour government.

The main Bank of England façade, c. 1980.

After 1945 the Bank pursued the multiple goals of Keynesian economics, especially "easy money" and low interest rates to support aggregate demand. It tried to keep a fixed exchange rate, and attempted to deal with inflation and sterling weakness by credit and exchange controls.

In 1977, the Bank set up a wholly owned subsidiary called Bank Of England Nominees Limited (BOEN), a private limited company, with 2 of its 100 £1 shares issued. According to its Memorandum & Articles of Association, its objectives are:- “To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organisation, sovereign, province, authority, or public body, or any group or association of them....” Bank of England Nominees Limited was granted an exemption by Edmund Dell, Secretary of State for Trade, from the disclosure requirements under Section 27(9) of the Companies Act 1976 , because, “it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders.” The Bank of England is also protected by its Royal Charter status, and the Official Secrets Act. Historically, BOEN was a vehicle for Governments and Heads of State to (subject to approval from the Secretary of State) invest in UK companies, exempt from the usual disclosure requirements, providing they undertook "not to influence the affairs of the company". BOEN is nowadays a dormant company with assets less than £1 million and is "no longer exempt from company law disclosure requirements". BOEN has 2 shareholders: the Bank of England, and the Secretary of the Bank of England.

Tercentenary of the Bank of England, commemorated on a 1994 British two pound coin.

On 6 May 1997, following the 1997 general election which brought a Labour government to power for the first time since 1979, 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 (which came into force on 1 June 1998), the bank'sMonetary 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.

The handing over of monetary policy to the Bank of England had featured as a key plank of theLiberal Democrats' economic policy since the 1992 general election. A Conservative MPNicholas Budgen had also proposed this as a Private Member's Bill in 1996, but the bill failed as it had neither the support of the government nor that of the opposition.

21st century

More recently, in 2007 the Bank of England, in its role as lender of last resort, helped support 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 crisis. The role of supporting Northern Rock, and other UK banks caught up in the late 2000s financial crisis, is now performed by UK Financial Investments Limited, set up by the UK Government. The Bank of England of course still remains lender of last resort in the case of any further unexpected shock to the UK financial system.

Introduction of 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 central banks have been based. Established in 1694, it is the second oldest central bank in the world (the oldest being the Bank of Sweden). It was established to act as the English Government's banker, and to this day it still acts as the banker forHM Government. The Bank was privately owned and operated from its foundation in 1694. It was subordinated to the Treasury after 1931 in making policy and was nationalised in 1946.

In 1997 it became an independent public organisation, wholly owned by the Treasury Solicitor on behalf of the Government, with independence in setting monetary policy.

The Bank has a monopoly on the issue of banknotes in England and Wales, although not in Scotland, Northern Ireland, the Isle of Man, or the Channel Islands. The Bank's Monetary Policy Committee has devolved responsibility for managing the monetary policy of the country. The Treasury has reserve powers to give orders to the committee "if they are required in the public interest and by extreme economic circumstances" but such orders must be endorsed by Parliament within 28 days. The Bank's Financial Policy Committee held its first meeting in June 2011 as a macro prudential regulator to oversee regulation of the UK's financial sector.

The Bank's headquarters has been located in London's main financial district, theCity 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 currentGovernor of the Bank of England is Sir 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.