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.