What Are the Main Functions of a Central Bank - Assignment Example

London is a one of the largest international financial centres of the world. Its positions constantly strengthen owing to the growth of scales of operations in the markets of euro-currencies and Euro-bonds, which basic centre it is. On the sum of turnover on the international monetary markets and the markets of capitals London strongly keeps leading positions in the world. London City is considered as an example of innovation and dynamism in the international bank business. Banking system of the Great Britain is one of the most developed in the world. It has a high level of "division of labour" between various financial institutions, wide branching and the great variety of various types of financial institutions. Although the “current day-to-day operations of Central Banks are subject to continuous comment and frequent criticism, their structural role within the economic system as a whole is generally accepted without much question; they are part of the existing institutional furniture, the status quo” (Goodhart, 1995: ix). In any modern economy the central bank plays exclusively important role. This statement concerning the Bank of England is especially true. First due to that exclusively important role, which the bank sector plays in the Great Britain, and secondly due to the fact that London City now is one of the leading international financial centres of the modern world. The bank of England formally is not an independent financial establishment; Her Majestys Treasury of the United Kingdom has the right to give orders to the Bank. But usually the Treasury does not use this right, except for critical cases or basic decisions on structure of the Bank. In view of historical tradition the Bank of England does not aspire to a high degree of regulation of bank system. Nevertheless, after each bank crisis the degree of intervention grew. As traditions of state regulation are not so deeply implanted in English economy (even the Bank of England has arisen and long time has been developing as a private bank), and also by virtue of conservative behaviour, the role of the Bank is often underestimated. However the Bank is quite modern institute, it is probably one of the most professional central banks all over world and copes with a dynamical life of London City quite good. The bank of England has been established on July, 27th, 1694. Originally there were 19 employees in the bank. The capital of the Bank was the first public debt of the Great Britain. In 1734 Bank has moved in the building specially constructed for it on Threadneedle Street in the centre of London City. Later by name of this street it has received the nickname: the Old Lady of Threadneedle Street. From the moment of creation the Bank concentrated on issue of bills for the accepted deposits, i.e. predecessors of todays banknotes. It also was the banker of the Government and the ministries, simultaneously taking care of the GS (government stocks). The development of Bank has led to the increase in the area of its building up to todays 3 acres by 1828. In 1826 it has been issued so-called Country Bankers Act, which has “allowed the establishment of note issuing joint-stock banks with more than six partners, but not within 65 miles of London. The Act also allowed the Bank of England to open branches in major provincial cities, which gave it more outlets for its notes” (Bank of England, n.d.). In connection with the further complication of the Banks activity the Bank Charter Act of 1844 has demanded from the Bank conducting two kinds of accounting: on actually bank activity of the Bank and on its issuing activity. This system continues to function now. However in connection with several financial crises in the nineteenth century the Bank has started to depart from commercial bank activity and to pass to attempts of regulation of the level of the interest rate. Simultaneously it has turned to the lender of last resort for banks in difficult financial position. By the time of crisis of Barings Bank in 1890, when the Bank of England managed to prevent successfully the threat to all bank system of England, regulation technique has reached the high level of development and set the pattern for the central banks of other countries. During the World War II the basic function of the Bank there was financing a public debt, which has grown from 1 up to 7 billion pounds sterling. Simultaneously it has been entered the control of currency exchange operations, which has been kept up to 1979. The bank has been nationalized in 1946. The property of the Bank authorized capital passed to HM Treasury of the Great Britain. As a result of the collapse of several "additional" banks in 1973 and the followed bank crisis, it has been issued the Banking Act of 1979, which has given the Bank of England the right to supervise operations of so-called Recognized Banks and Licensed Deposit Takers. When in 1984 Johnson Matthey Bank, the large bank and the important participant of the London Gold Market, has started to undergo serious hardship, in October 1987 the important additions and changes have been introduced in the Banking Act of 1979. MODERN FUNCTIONS OF THE BANK OF ENGLAND Numerous functions, which are carried out by the Bank of England can be divided on two groups: Direct professional duties following from the bank status; Control functions by means of which the state carries out intervention in monetary-and-credit system, trying to influence a course of economic processes. Lets consider in detail functions of the Bank of England. There is a set of functions, but all of them are called for achievement of three overall objectives. Among them: Support of cost of national currency, mainly by means of operations in the market, coordinated with the government, in other words, realization of monetary policy; Ensuring stability of the financial system through the direct control over banks and participants of the financial markets of City and ensuring steady and effective system of payments; Ensuring and increase of efficiency and competitiveness of the financial system inside of the country and strengthening of positions of London City as the leading international financial centre. As any other bank, the Bank of England gives a number of services to the clients. However clients of the Bank of England differ from clients of other banks. It is possible to allocate 3 most important groups of clients: Commercial banks. All clearing banks have accounts in the Bank of England. In clearing operations are used accounts of clearing banks in the Bank of England. Banks are obliged to have the certain sum on the account and have no right to exceed it. All the banks, which are carrying out activity in the Great Britain, have a part of funds from the sum of all deposits on the account (the deposit) of the Bank of England. This norm of reserves also provides the main source of the income of the Bank of England. Central banks of other countries have accounts and hold gold in the Bank of England and can conduct business in London through the Bank of England. The government holds accounts in the Bank of England, thus payments and taxes in the budget and payments from the budget on social needs pass through accounts of the Bank of England. According to the aforesaid it is possible to allocate first three functions of the Bank of England: The bank of England serves as bank for commercial banks. The bank of England serves as bank for other central banks. The bank of England serves as bank for the government. Other functions of the Bank of England: Realization of monetary policy. The bank of England advises on methods of policy and is responsible for its performance. Since May, 6th, 1997 the Bank possesses the right to regulate interest rates. The purpose of the given regulation is to ensure price stability and to support the governmental economic policy, including the purposes on ensuring economic growth and employment. The Bank of England is currently “granted instrument independence and practises what is known as inflation targeting. This means that it is the government that decides to target the inflation rate (currently (2005) set at 2 per cent) and the Bank is allowed to independently choose the policies that will help to achieve that goal. Such a situation is only acceptable in a democracy because the Bank is not elected and thus goals should only be set by an elected government” (Casu, Molyneux & Girardone, 2006: 128). The bank publishes the quarterly report on inflation. “In particular the MPC Monetary Policy Committee is responsible for changing interest rates in order to keep inflation within the government’s target of CPI 2% +/-1. To achieve this inflation target the MPC meet every month and examine future inflation trends. If inflation looks to be increasing then they will vote to increase interest rates in order to dampen demand. They dont directly set mortgage rates but indirectly they do influence mortgages through the setting of interest rates” (Pettinger, 2007). Realization of issue of banknotes. Realization of currency operations and control, management of gold and exchange currency reserves of the country on behalf of HM Treasury. Realization supervision of banks and large operators of the currency market, the whole bank system. Cooperation with the European Central bank. The bank of England, as well as the central banks of other countries, now is in the centre of the financial and economic changes demanding from them new efforts on adaptation to varying conditions. It causes necessity of entering of basic changes into their functions, the organization and technology, and also considerably new approach to inter-bank cooperation and the international cooperation. Specificity of mutual relations between the state, its central bank and private banks allows characterizing the Bank of England simultaneously as "the right hand in City and as representative of City in the government". This dual role of the Bank of England enables the government to realize a free monetary and credit policy by more flexible means, and to financial oligarchy of City it give confidence that their interests will be defended at any government and any economic course. Works cited: BANK OF ENGLAND (n.d.) A brief history of banknotes. Retrieved May 11, 2008, from http://www.bankofengland.co.uk/banknotes/about/history.htm CASU, B., MOLYNEUX, P., & GIRARDONE, C. (2006). Introduction to banking. London, Prentice Hall Financial Times. GOODHART, C. A. E. (1995). The Central Bank and the financial system. Cambridge, Mass, MIT Press. HEFFERNAN, S. A. (1996). Modern banking in theory and practice. Chichester, England, Wiley. PETTINGER, R. (2007, January 31). The Function of the Bank of England. EzineArticles. Retrieved May 11, 2008, from http://ezinearticles.com/?The-Function-of-the-Bank-of-England&id=437639 Read More