The UK Banking System - Assignment Example

The UK Banking System By Student’s Name Course + Course Name Professor’s Name University Name City, State Date Introduction It can be ascertained that the Banking System in the United Kingdom has got the capability of endogenously supplying money through reliance on the liabilities so as to satisfy either an increase or even a decrease in the loan demand, which could also accommodate a growth, or a decline in the economic activity (Arnon, 2010; Bordo, et al, 2009). Despite of that, numerous banking firms are actually limited towards this response by the willingness of the investors to not only acquire but also hold their own liabilities (Grossman, 2010; Rogers et al., 2009). For Instance, the Bank of England, which is the United Kingdom’s Central Bank is one of the 8 banks which are authorised in issuing of the UK Bank notes has actually initiated responsibility for the management of its monetary policy (Great Britain, 2005). How the Bank of England could assist in such a type of response through changing the elasticity of money supply over the course of a business cycle In order to increase the amount of money that is in circulation, the bank of England must use utilize an “expansionary open market operation” through which it buys the short term Treasury Bills (Mellyn, 2009; Bordo, et al, 2009). For instance, if the Bank of England will wish to ensure that the monetary policies are tightened, then it is quite definite that it will have to use a “Contradictionary Open Market Operation” (Cooper, 2008; Singleton, 2010). The Bank will therefore have to sell Treasury Bills, which have been newly issued on the behalf of the “Treasury” through the debt management agency. Due to the use of open market operations, the public will hold less money while the Treasury holds more bills (Philippovich, 2009; Poor, 2009). Quantitative Easing (QE) Quantitative easing refers to injecting money into the economy. For instance, if the interest rates of the Bank of England are very low while the Monetary Policy Committee of the bank expects the inflation to fall below the government’s target of 2%, it can directly inject the money into the economy in order to boost spending. The Bank of England therefore creates new money electronically in order in order to buy financial assets like for instance government bonds. This cash injection does not only lower the cost of borrowing but also boosts the asset prices in order to both support spending and also get inflation back to the targets. When inflation seems to be too high, the Bank of England can then eventually sell the assets in order to reduce or minimize the amount of money and spending in the country’s economy. The Monetary Policy Committee thus continues to set the rates of interest monthly and the monetary policy objective remains unchanged so as to meet the government’s inflation target of 2%. It should be known by all and sundry that Quantitative Easing was first put to use in the United Kingdom in March 2009. The Bank of England could also come up with a monetary policy through which its monetary policy will control the supply of the money through targeting a rate of interest that is aimed at promoting the country economic growth and stability. The monetary policy that can be adopted by the Bank of England could be either contractionary or expansionary (Turner, 2011; Bordo, et al, 2009). While an expansionary policy is aimed at increasing the total money supply in the nation’s economy “more rapidly than usual”, contractionary policy on the other hand is known to expand the supply of money more “slowly than usual” and it can even shrink it (Bagehot, 2009; Rogers et al., 2009). The Bank of England can therefore use expansionary policy since it is used in conventionally trying to curb unemployment during recession periods through lowering interest rates with a hope that the easy credit will attract business expansion (Moore, 2010; Bordo, et al, 2009). On the other hand, the aim of contractionary policy is to slow inflation with an aim of slowing inflation so as to avoid the deterioration and distortions of the asset values that result (Grossman, 2010; Rogers et al., 2009). To a greater extent, monetary policy is actually the management of different expectations. In essence, the Bank of England can therefore use various tools in order to control the rates of interest in the country’s economy and the overall supply of money (Bloom, 2009; Bordo, et al, 2009). To control both of these outcomes, Monetary policy will have to be used by the Bank of England in order to influence outcomes like for example inflation, economic growth, unemployment and even exchange rates with various currencies (Rogers, et al, 2009). In circumstances where a given currency is ascertained to be under a “monopoly of issuance”, then the Bank of England has the powers to actually alter or change the supply of money and therefore influence the rates of interest in order to attain the policy goals (Mwenda, 2006; Rogers et al., 2009). The Bank of England is capable of assisting various responses through altering the money supply elasticity in the course of the business cycle (Bagehot, 2009). This can be achieved through using different monetary policies. For instance, the Bank of England can use contradictory policies with an aim of reducing the country’s size of money supply, even slowly increase it, and even raise the rate of interest (Bloom, 2009; Bordo, et al, 2009). If the rate of interest that is set by the Bank of England is aimed at spurring economic growth, then this will be referred to as an accommodative monetary policy. On the other hand, the Bank of England can use a neutral Monetary Policy if it intends to either combat inflation or create growth and use tight monetary policy if the Bank aims at reducing inflation (Andreades, 2013; Philippovich, 2009). In order to achieve the above aims, there are various monetary tools that the Bank of England can use in order to achieve such ends (Arnon, 2010; Rogers et al., 2009). For instance, the bank can increase the rates of interest through fiat, increase the reserve requirements and reduce monetary base (Great Britain, 2005; Bordo, et al, 2009). Apart from that, the Bank of England, being the county’s Central Bank also has the task of supervising to ensure that there is smooth running of the financial system (Cooper, 2008; Rogers et al., 2009). The Bank of England should use the open market operations as its main tool of monetary policy to ensure that the quantity of money that is in circulation is well managed through both the buying and selling of numerous financial instruments like for instance company bonds, treasury bills and even foreign currencies (Goodchild, 2009; Bordo, et al, 2009). At most times, all the sales and purchases lead to either less or more base either leaving or entering the market circulation (Eichengreen, 2008). Apart from that, the Bank of England can also conduct monetary policy through discount window lending, fractional deposit lending, and moral suasion and also through open mouse operations (Moore, 2010; Bordo, et al, 2009). If the policies outline above are consistent with the Bank of England’s Current Practices According to the revised “Statistical Code of Practice for the Bank of England”, the code sets out numerous standards aimed at the collection, compilation and eventual dissemination of data by the Bank of England for both regulatory and statistical data purposes (Mellyn, 2009; Bordo, et al, 2009). The Code of Practice therefore rests on seven major principles namely: integrity, quality, relevance, confidentiality, cost efficiency, respondent burden and accessibility (Poor, 2009; Rogers et al., 2009). Just like the earlier versions, the Bank of England’s Code of Practice is quite consistent with the International Monetary Fund’s requirements in Special Data Dissemination Standard and it also has a lot of similarity with other “international codes of Practice for Statistics” which also include that one of the United Kingdom’s Statistics Authority (Singleton, 2010; Mwenda, 2006). Until the occurrence of the financial crisis, the banking regulation of the UK Could is termed as being in “light touch”. This is because the regulators do not actually get involved in aggressive regulation but rather, they only prefer to intervene when there is necessity and through limited means (Bordo et al., 2009; Turner, 2011). This is due to the fact that the main problems facing the regulators was that the heavy touch regulation could result in forcing the global banks to look for other nations in which there less restrictions (Soto, 2009; Bordo, et al, 2009). The policies are therefore not all that good since they would eventually lead to massive job losses in the UK (Caernarven-Smith, 2007; Bordo, et al, 2009). On the other hand, there have been claims that the current money system in the UK actually hinders sustainable development. Due to the fact that the Bank of England, which is the monetary authority in the UK, exerts regulatory control over other banks, then monetary policy can easily be implemented through changing the proportion of the total assets, which banks must hold in reserve with the country’s Central Bank (Eichengreen, 2008; Rogers et al., 2009). While the banks are only required to maintain a small part of their assets in terms of cash which is available to be withdrawn immediately, the rest of the cash is invested in other illiquid assets like for example in loans and mortgages. This therefore acts as a change in the supply of money. Since the Central Bank does not change or alter the reserve requirements as often as it can easily establish volatile changes in the supply of money, this can easily lead to disruption in the banking system (Bordo, et al, 2009; Rogers et al., 2009). Conclusion It can be correctly ascertained that the Bank of England plays a great role in stabilizing the country’s economy. It is therefore important that all banking institutions should follow the laid down policies to ensure that they attain the trust of the clients. It is also important that banking institutions observe the banking practices in order to ensure that they provide quality services to their customers. This is because by following to follow the laid down banking practices and policies, banking institutions will lose the trust bestowed on them by their customers. References Andreades, A, 2013, History of the Bank of England, New York, Routledge. Arnon, A, 2010, Monetary Theory and Policy from Hume and Smith to Wicksell...New York, Cambridge University Press. Bagehot, W, 2009, Lombard Street, A Description of the Money Market, New York, NuVision Publications. Bloom, H, 2009, Gulliver’s Travels. New York, Harold Bloom. Bordo, M, et al, 2009, A Retrospective on the Classical Gold Standard...New York, University of Chicago Press. Caernarven-Smith, P, 2007, Gladstone and the Bank of England, New York, University of North Texas. Cooper, G, 2008, The Origin of Financial Crises, New York, Harriman House Limited. Eichengreen, B, 2008, Globalizing Capital, New York, Princeton University Press. Goodchild, P, 2009, Theology of Money, New York, Duke University Press. Great Britain, 2005, The Monetary Policy Committee of the Bank of England, New York, ` The Stationery Office. Grossman, R, 2010, Unsettled Account, New York, Princeton University Press. Mellyn, K, 2009, Financial Market Meltdown, New York, ABC-CLIO. Moore, S, 2010, Swift, the Book, and the Irish Financial Revolution, New York, JHU Press. Mwenda, K, 2006, Legal Aspects of Financial Services Regulation and the Concept of a Unified Regulator, New York, World Bank Publications. Philippovich, E, 2009, History of the Bank of England and Its Financial Services to the State, New York, Light Source Incorporated. Poor, H, 2009, Money and Its Laws, New York, The Law Exchange Ltd,. Rogers, T, et al, 2009, The First Nine Years of the Bank of England, New York, BiblioBazaar. Singleton, J, 2010, Central Banking in the Twentieth Century, New York, Cambridge University Press. Soto, J, 2009, Money, Bank Credit, and Economic Cycles, New York, Ludwig Von Mises Institute. Turner, B, 2011, Chronicles of the Bank of England, New York: BiblioBazaar. Read More