Download Your money - what the Bank does

YOUR MONEY
WHAT THE BANK DOES
YOUR MONEY
WHAT THE BANK DOES
The Bank of England is the central bank of the
United Kingdom. It’s not like a bank in your local
high street that grants personal loans or mortgages.
It has special functions that help keep the economy
and financial system stable.
These postcards pick out ten key topics to explain the work of
the Bank of England.
• History of the Bank of England – The Old Lady
• Banknotes and the promise to pay
• Banknotes and security features
• Inflation and the value of your money
• Interest rates and the Monetary Policy Committee (MPC)
• Quantitative easing (QE) – injecting money into the economy
• Forward guidance
• The financial system
• Financial Policy Committee (FPC)
• Prudential Regulation Authority (PRA)
• What happens when a bank fails?
• Storing gold
Low inflation, trust in banknotes and a stable
financial system are important ingredients for a
healthy and successful economy.
HISTORY OF THE BANK OF ENGLAND – THE OLD LADY
Your money – what the Bank does
History of the
Bank of England –
The Old Lady
The Bank of England was founded
in 1694 to raise funds for the
1694
government during a time of war
with France. Thereafter the Bank
gradually assumed the role of
the nation’s central bank. It was
privately owned until 1946, when it
was nationalised.
1734
The Bank moved to
Threadneedle Street in 1734.
Its famous nickname comes from a
James Gillray cartoon published in
1797. Over two centuries later,
the Bank is still known as The
Old Lady of Threadneedle Street.
1920s-30s
During the 1920s and 1930s the Bank
was rebuilt. Work was completed just
before the outbreak of World War II and
survived bombing during the Blitz.
1997
The Bank was given
operational responsibility for
monetary policy in 1997.
www.bankofengland.co.uk
2013
A Financial Policy Committee
was established in 2013 to
respond to risks across the
financial system. In the
same year, the Prudential
Regulation Authority was
created as a part of the
Bank of England to keep
banks and insurers
safe and sound.
BANKNOTES AND THE PROMISE TO PAY
Your money – what the Bank does
Banknotes
and the promise
to pay
The Bank of England has
been issuing banknotes
for over 300 years.
Banknotes were initially IOUs for gold
deposited at the Bank. People used these
notes to pay for things, knowing they
were backed by ‘The Promise’ to pay
the equivalent value in gold.
That’s no longer possible.
So what gives modern
banknotes their face value,
when they cost only a few
pence to make?
In a word,
TRUST
We trust that banknotes can be exchanged for the
things we want to buy. We trust ‘The Promise’ that
they will be accepted by others for their face value.
This trust gives banknotes their value.
www.bankofengland.co.uk
BANKNOTES AND SECURITY FEATURES
Your money – what the Bank does
Banknotes
and security
features
HM The Queen features on the
front of Bank of England notes.
The reverse side has images of
eminent British people.
Fake notes could undermine
confidence in the real thing, so
it’s the Bank’s job to make life
difficult for counterfeiters.
There are four denominations of Bank
of England note: £5, £10, £20 and £50.
Each has its own design, and larger
value notes are bigger in size.
£5
£10
£20
£50
There are almost three billion
Bank of England notes in
circulation. Counterfeit notes
are very rare. They are also
completely worthless.
Genuine banknotes are very difficult to copy. They have a
range of security features including holograms, watermarks,
metallic threads and raised print. Bank of England notes
are printed on special materials that are hard wearing with
a unique feel.
www.bankofengland.co.uk
INFLATION AND THE VALUE OF YOUR MONEY
Your money – what the Bank does
Inflation
and the value
of your money
Inflation is about rising prices.
It’s the Bank of England’s job
to preserve the value of your
money by keeping inflation low.
The prices of individual products
rise and fall all the time. Inflation
occurs when the prices of goods
and services generally are rising.
If the prices of most goods
and services are rising, the
value of your money falls.
Your money buys less.
The
Th rate
t att which
hi h prices
i are rising reflects
the amount of spending in the economy
compared with what can be produced,
and the pressure this puts on company
costs and prices. If spending increases too
quickly, prices will tend to rise.
Inflation in Britain has averaged about
www.bankofengland.co.uk
2%
since 1997.
MPC
INTEREST RATES AND THE MONETARY POLICY COMMITTEE (MPC)
Your money – what the Bank does
Interest rates
and the Monetary Policy
Committee (MPC)
The Bank of England’s MPC meets
regularly to set interest rates to hit the
Government’s 2% inflation target.
The MPC is made up of nine experts.
Five are senior Bank of England staff and
four are external members appointed by
the Chancellor. Each has a vote to decide
what interest rate to set.
2%
If inflation looks set to go above
target, the MPC will probably
increase interest rates.
It takes about two years for
a change in interest rates
to have its full effect on
inflation. So the MPC sets
interest rates based on its
forecast for inflation two
to three years ahead.
Bank members
MPC
External members
People will tend to spend less
and save a bit more, putting
downward pressure on inflation.
www.bankofengland.co.uk
If inflation looks likely to fall
below target, the MPC will
probably cut interest rates
to stimulate spending and
inflation.
QE
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QUANTITATIVE EASING (QE) – INJECTING MONEY INTO THE ECONOMY
Your money – what the Bank does
Quantitative
Easing (QE) –
injecting money
into the economy
If interest rates are very low
and the Bank’s Monetary Policy
Committee expects inflation to
fall below the Government’s
2% target, it can inject money
directly into the economy to
boost spending. This is
quantitative easing.
If inflation looks like being
too high, the Bank of England
can sell these assets to
reduce the amount of money
and spending in the economy.
www.bankofengland.co.uk
The Bank of England
creates new money
electronically to buy
financial assets like
government bonds. This
cash injection lowers the
cost of borrowing and
boosts asset prices to
support spending and get
inflation back to target.
The Monetary Policy Committee
continues to set interest rates,
and the objective of monetary
policy is unchanged – to meet
the Government’s 2% inflation
target. Quantitative easing was
first used in the UK in March 2009.
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FORWARD GUIDANCE
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Your money – what the Bank does
Forward guidance
Forward guidance is one of the
tools the Bank of England’s
Monetary Policy Committee (MPC)
can use to hit the Government’s
2% inflation target.
It’s designed to help people understand
how the MPC sets interest rates.
This means households and
businesses can plan their spending
and investment with more confidence.
Forward guidance was first
used in August 2013.
The MPC said it would leave
interest rates unchanged at 0.5%
at least until the unemployment
rate had fallen to 7%, provided
there weren’t risks to inflation or
financial stability.
Forward guidance can evolve.
By February 2014, unemployment
had fallen close to 7%. The MPC said
there remained room for growth in the
economy before raising interest rates.
And, when they come, increases
in interest rates are likely to be
gradual and limited.
www.bankofengland.co.uk
INSURERS
PENSION
FUNDS
HIGH STREET
BANKS
PENSION
FUNDS
CREDIT
UNIONS
INVESTMENT
BANKS
BUILDING
SOCIETIES
HEDGE
FUNDS
ASSET
MANAGERS
BUILDING
SOCIETIES
THE FINANCIAL SYSTEM
Your money – what the Bank does
The financial
system
The financial system is central
to the working of the economy
and modern life. It includes
high street banks, building
societies and insurers. There
are many other parts including
pension funds, asset managers,
investment banks, credit unions
and hedge funds.
Each day the financial system handles
millions of transactions allowing us to make
payments in the shops and online, settle bills
and receive our wages and benefits.
The financial system performs two other vital
tasks. It connects those who have money to
save with those who need to borrow
money – be it for a mortgage or a business loan.
And it allows people to insure
against the risks they face in their
businesses or daily lives.
www.bankofengland.co.uk
A healthy and stable financial system
will deliver these key services in good
times and bad.
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FINANCIAL POLICY COMMITTEE (FPC)
Your money – what the Bank does
Financial Policy
Committee
(FPC)
The Bank of England’s FPC looks
out for risks and weaknesses
across the financial system.
A healthy financial system is a
key part of a successful economy.
Bank members
FPC
The FPC consists of thirteen
experts. Six are senior Bank
staff and the others are external
members appointed by the
Chancellor.
The FPC meets at least
quarterly and publishes its
Financial Stability Report
twice a year. The Report sets
out its assessment of risks and
weaknesses in the financial
system and the measures it is
taking to address them.
External members
If risks are increasing, the
FPC might ask banks to
raise more money from
shareholders as a buffer in
case things go wrong.
www.bankofengland.co.uk
The FPC makes decisions
based on consensus. If a
consensus cannot be found,
members of the FPC can vote
to reach a decision.
BANKS • BUILD
LDI
DIING
NG SOC
CIIET
TIES • CR
CREDIT UNIONS
NS • INSUR
INSURERS
ERS
S • IN
INVESTMENT FIRMS
PRUDENTIAL REGULATION AUTHORITY (PRA)
Your money – what the Bank does
Prudential
Regulation
Authority
(PRA)
The PRA focuses on the harm
that financial firms can cause
to the stability of the UK
financial system. A healthy and
stable financial system is one
in which firms continue to
provide key financial services in
good times and bad. Those
institutions and issues posing
the greatest risk to the
financial system are the focus
of the PRA’s work.
BANKS
BUILDING
SOCIETIES
www.bankofengland.co.uk
INSURERS
The PRA is part of the Bank of
England. It regulates around
1,700 banks, building societies,
credit unions, insurers and major
investment firms. The PRA has
two objectives. To promote the
safety and soundness of these
firms and, for insurers, to secure
protection for policyholders. It
also has a secondary objective to
facilitate effective competition.
Bank members
Prudential
Regulation
Committee
External members
The Prudential Regulation
Committee meets regularly
to make important decisions
on the regulation of financial
firms. The Committee
comprises five senior Bank staff
and seven external members.
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WHAT HAPPENS WHEN A BANK FAILS?
Your money – what the Bank does
What happens
when a bank fails?
Each day banks handle
millions of transactions
for their customers.
These include our spending in
shops, paying bills, salary payments
and withdrawing cash.
Our everyday lives would soon
grind to a halt if the failure of one
of our large banks meant these
transactions could not be made.
If a bank gets into serious financial
difficulties, the Bank of England
can step in to ensure vital services
are kept running, customers are
protected and there is no knock-on
disruption to other banks.
This means that customers will be
able to access their money and
make their payments as normal.
www.bankofengland.co.uk
Taxpayers should not pick up the
cost for dealing with a failure and
bosses of the failed bank will be held
accountable and can be replaced.
STORING GOLD
Your money – what the Bank does
Storing gold
The average gold bar weighs
400 fine ounces. That’s around
13 kilos or 28 pounds.
The Bank of England is one of
the largest custodians of gold in
the world, with around 400,000
gold bars stored in its vaults. It
provides safe keeping for the
country’s gold reserves and
overseas central banks. The Bank
has very little gold of its own.
Gold plays no role in the Bank’s
monetary or financial policy.
When gold bars are delivered to the
Bank they are weighed and checked
before being taken for safe keeping in
one of the Bank’s gold vaults. No gold
has ever been stolen from the Bank!
Gold is stacked on pallets four high
in the Bank’s vaults. A fully-loaded
pallet can hold up to 80 bars and
weighs one tonne.
www.bankofengland.co.uk
YOUR MONEY
WHAT THE BANK DOES
The Bank of England has a Museum that tells the
story of the Bank from its foundation in 1694 to
its role today as the nation’s central bank that sets
interest rates and keeps the financial system stable.
Opening hours
Monday – Friday: 10.00am – 5.00pm (last entry 4.30pm)
Closed at weekends and Public Bank Holidays
Admission is Free
Address
Bank of England Museum
Bartholomew Lane
London
EC2R 8AH
Tel: 020 7601 5545
Email: [email protected]
Web: www.bankofengland.co.uk/education/pages/museum/visiting
If you have any questions or enquiries about the
Bank of England, you can email us at:
[email protected]
Or write to:
Public Information & Enquiries Group
Bank of England
Threadneedle Street
London
EC2R 8AH
You can telephone the Bank’s public enquiries team on
020 7601 4878