The role of the Bank of England

The United Kingdom’s central bank is the Bank of England. It is also known as the “Old Lady” of Threadneedle Street. The Bank of England was established in 1694 amid a founding contract that stated its principle was to “promote the public good and benefit of our people”. (About the Bank, 2015)

Today, The Bank of England’s purpose is the sign of that vision or agenda first articulated by its founders. Their mission as stated in their official website is “to promote the good of the people of the United Kingdom by maintaining monetary and financial stability.” The bank was originally founded as a privately-owned organization. After the Second World War, the Bank of England was nationalised, but kept hold of its broad though largely informal unrestricted or public service mission. (About the Bank, 2015)

This focus somewhat changed during 1997, when Parliament voted to provide the Bank functioning independence with a comprehensible remit to practise price stability, which was the most important challenge the macroeconomic policy makers were facing for the last two decades. This financial crisis revealed the necessity for a new move towards to financial parameter in the United Kingdom. This change has resulted in a foremost expansion in the Bank’s duties and responsibilities, which came into action since April 2013.

In some way, this represented a come back to the broader task that the Bank practiced in the past. However, though the Bank’s pledge to providing the public good is recognisable by its seventeenth century organizers but its responsibilities are currently defined by the Parliament.

Financial Policy Committee: The Financial Services Act of 2012 founded an autonomous Financial Policy Committee (FPC) as a subsidiary of the Bank which will work as a new prudential regulator. This created new duties for the management of fiscal market infrastructure providers. This particular committee is responsible for taking steps to reduce or remove general risks with an analysis to protect and enhance the flexibility of the country’s financial system. The FPC also has a secondary purpose to maintain the economic course of action of the Government.

Prudential Regulation Authority: The Prudential Regulation Authority (PRA) has the responsibility to supervise the banks, credit unions and building societies, insurers and key investment firms. This regulation authority controls almost 1,700 financial firms. Its role can be defined in two legal objectives. They are- (1) To promote the safety and security of the firms, (2) to ensure the insurers contribute in securing the proper degree of security to the policyholders. While promoting the safety of the firms, the Prudential Regulation Authority focuses mainly on the problem that the firms can create to the steadiness of the country’s financial system. A steady financial system means it is one in which firms can keep on providing significant monetary services to the economy which is a prerequisite for a strong and successful economy. (About the Bank, 2015)

Monetary Policy Committee: Having monetary stability means constant prices and confidence in the money or currency. Stable prices can be defined by the Government’s inflation objective which is what the Bank aims to meet by the assessments done by the Monetary Policy Committee (MPC). In the United Kingdom the monetary policy generally operates through the interest rate meaning the price at which money is lent. Since March 2009, this committee also started to input money directly into the economy in addition with setting Bank Rate. It injects money by buying financial assets which are often known as “quantitative easing”. Quantitative easing (QE) is an unusual type of monetary policy where a Central Bank makes new money by electronic means to purchase monetary assets, like government bonds. The aim of this process is to directly enhance the spending of the private sector in the economy and return the inflation to the intended target. (Monetary Policy, 2015)

In August 2013, the Monetary Policy Committee gave some clear guidance regarding the future performance of monetary policy. The committee plans to at least maintain highly stimulative monetary policy until economic laggings have been reduced substantially given this will not put any material risks to price constancy or financial stability. (Monetary Policy, 2015)

Foreign Exchange Joint Standing Committee: The London Foreign Exchange Joint Standing Committee (FX JSC) was founded in 1973 under the support of the Bank of England. It was established mainly as a medium for banks and brokers to talk about broad market topics. The aim of the Committee’s regular work is concerned with issues of frequent concern to the diverse members in the foreign exchange market. The Chairman and Secretary of this committee is provided by The Bank of England and its senior staffs are from many of the key banks functioning in the foreign exchange market in London, as well as from voice- and electronic-brokers, corporate users of the foreign exchange market, as well as delegates from the British Bankers’ Association, the Wholesale Market Brokers’ Association, and the Association of Corporate Treasurers.

One of the main duties of the Committee is to keep up the Non-Investment Products Code. This code is a type of voluntary code of good market functionality that covers wholesale deposits as well as the Foreign Exchange market.

Bank’s function in the foreign exchange market: The Bank functions in the foreign exchange market mainly for two reasons:

1. Managing the UK’s foreign currency and gold reserves on behalf of the government’s economic and finance ministry (HM Treasury).
2. Organizing the Monetary Policy Committee’s (MPC) comparatively smaller band of foreign currency reserves.

In addition to these main objectives, the Bank of England also controls general foreign currency transactions for the many departments of the government and also a small quantity of its customers.

In the past year, quite a few members of a subgroup of the London Foreign Exchange Joint Standing Committee which is known as the Chief Dealers’ Subgroup, have either been suspended by their employers or dismissed because of having association with the global inquiry into probable manipulation of the currency market. (Albanese, 2014) The $5 trillion-a-day worldwide foreign exchange market is used by governments and multinational companies to buy and sell notes, as well as hedge against the danger of currency instability. The Bank of England plays an important role as both the participant and regulator of the market as it maintains the UK government’s currency transactions. In the market they use a benchmark which is known as the 4pm “fix”. If this benchmark is by any way manipulated by traders then it can cost UK firms millions of pounds and affect everything operating in the market from business accounts to the worth of investments. (Quinn & John, 2014)

The London 4pm fix which is now a joint venture was initiated in 1994. It notes down the exchange rate among foreign currencies at the 4pm closing value and then these rates are then used for transaction in the foreign exchange deals all over the world. This benchmark aster its initiation was rapidly followed by many clients looking for a universal reference point. However, the currency traders who have the knowledge of currency rates and their client orders can have a major advantage. According to Chris Towner, a foreign exchange dealer, “Currency dealers will start buying before the client and then complete the client’s order at the higher 4pm rate.” (Quinn & John, 2014)

Thus, the central bank plays a vital role in keeping the foreign market in balance. If the price rates of currencies are shared beforehand then market imbalance is certain. Recently the bank is going through speculation on its benchmark policy as one trader who was suspended by his employer has provided the Financial Conduct Authority of the United Kingdom a handwritten note from a private meeting which was help on April, 2012 at the bank. The note proves that the central-bank officers were given the instruction that the practice of sharing and collecting client orders was common. (Albanese, 2014)

The recent allegations over the manipulation of currency markets in UK came into focus after the Libor scandal. The Libor (London Interbank Offered Rate) is an average interest rate which is calculated by submissions of interest rates by key banks in London. Libor scandal pointed out the possible manipulation of other financial markets such as gold and silver because they were mostly loosely monitored before the financial crisis. Mark Carney, the governor of the Bank of England has been facing hearings on the court regarding probably manipulation in the foreign exchange market. The manipulation of foreign exchange markets is estimated to become a criminal offence. (Treanor, 2014)

The central bank plays an important role in terms of maintaining the inflation and exchange rate of a country. Since, they have the responsibility to monitor the entire market and control the private banks; any manipulation by the central bank can cause serious damages in the national financial market as well as the foreign market. The recent financial crisis has put the Central Bank of England come under serious scrutiny.