Home > Free Essays > Economics > Banking Analysis > Bank of England Role Compared to the Federal Reserve System
Rate

Bank of England Role Compared to the Federal Reserve System Evaluation Essay

Exclusively available on IvyPanda Available only on IvyPanda
Updated: Jun 25th, 2019

Discussion

The bank of England acts as UK’s Central Bank (Singleton, 2011, p. 229). The bank plays a number of roles in the UK financial system, and these roles include: one, issuing notes and coins. These notes and coins are then sold to banking systems which in turn distribute them to clients as they make withdrawals in their accounts; two, supervises the financial system.

The Bank of England often works in conjunction with other institutions set up specifically to regulate distinct parts of the financial system; three, manages UK’s gold and currency reserves (Great Britain Committees on Currency and Foreign Exchange, 1978, p. 159). This role enables the Bank of England to influence the level of exchange rate; four, acts as banker to government.

It does this by managing UK’s national debt and arranges for the issue of new loans to cover government’s current borrowing; and last but not least, the bank plays the role of acting as a banker to the banking system.

Normally the Bank of England comes to rescue banks that get into short term problems, unable to raise enough funds to meet customer demands. In this case, the Bank of England will supply cash to the banking system to relieve the liquidity shortage (Gomez, 2008, p. 349).

The roles of the Bank of England compares to the Federal Reserve System in varying aspects.

This paper examines the roles of the Bank of England compared to the roles of the Federal Reserve Bank of the US in terms of; regulation of the financial system, comparison of the roles in terms of facilitation of the financial system, comparison in terms of ensuring financial stability in the market, and lastly comparing their roles in Financial Stability and Depositor Protection.

Comparing Regulative Aspects of the Bank of England and the Federal Reserve System

In the UK, domestic banking regulation has been far less formal compared to the United States of America. This may be so entirely because London city is the preeminent centre of the European market. Differing from the United States regulators, the Bank of England operates on the assumption that bankers are prudent, honest individuals who know as much if not more about banking than regulators do (Singleton, 2011, p. 20).

In other words, the approach of the Bank of England for years was not to impose regulations and ratios on banks; instead it requested for periodic reports from banks.

On this basis, the Bank of England discussed informally with the top management of each bank on the quality of the bank’s loan, its liquidity, any features of the bank’s condition that the Bank of England portrays as unusual or out of line, and any suggestions that the Bank of England might make with respect to the banks’ operations (Great Britain HM Treasury, 2008, p. 87).

The current monetary responsibilities for the Bank of England were established through the Bank of England’s Act of 1998. The banking supervisory functions under this Act had previously been under the mandate of the bank of England was transferred to the Financial Services Authority (FSA).

In essence, overall financial stability issues responsibility was spread among three legal separate entities; the Bank of England, Financial Services Authority, and HM Treasury (Great Britain HM Treasury, 2008, p. 87).

A memorandum of understanding was established among the three as there was no legislation that formally sets out their responsibilities. This kind of arrangement blended smoothly with the Bank of England’s long time tradition by facilitating the maximum amount of flexibility in the banking system and avoiding the red tape and restrictions of various sorts found in other countries (Bernan, 2008, p. 99).

The Bank of England treats foreign financial firms operating in the UK much the same manner as domestic UK banks. The Bank of England allows a bank to establish a branch in London with minimal red tape as long as it recognizes the bank is reputable in its home country.

Foreign investing banks did not have to put in any capital to open an office in the UK. All they had to do was to accept to comply with certain regulations, and it was accorded similar rights to engage in banking that any other bank in Britain had (Great Britain Parliament, 2009, p. 30). The Bank of England rather presents a casual regulation of foreign banks.

It operates and continues to operate on the logical assumption that foreign banking branches are inextricable part of the parent. This portrays that it is not easy if not impossible to regulate these branches as independent entities.

It also implies that the bank’s natural assumption that these branches are being regulated by banking authorities in their parent countries, which regulates the activities of the parent bank as a whole (Bernan, 2008, p. 99).

In the United States, evolution of banking took a different route compared to UK banking system. Financial institutions were chartered either nationally or at state level in the US. A restriction on branch banking at branch and federal level implied that thousands of banks at state level continued to be established.

In addition to the monetary responsibility, the board had regulatory authority over Federal Reserve Banks and banks which, by owning stock in Federal Reserve Banks, became members of Federal Reserve System (Bernan, 2008, p. 100).

Banking in the US is in a form of dual regulatory structure in which federal and state agencies carry out a mixture of unique and joint functions. The US Federal Reserve differs with the system presided over by the Bank of England (Hufner, 2004, p. 95).

As a regulator, the Bank of England consists of a highly concentrated market structure as one powerful regulator. It operates in a close-knit, exclusive community that relies upon understandings, convention, trust and tradition in performing its functions. The US Federal Reserve System on the other hand, consists of a highly decentralized market structure.

Regulation was more dependent on formal and bureaucratic rules in the Federal Reserve System compared to UK banking system. The two systems are however similar in terms of their commitment to relative independence of central banks from government (Hafer, 2005, p. 53).

Comparisons of The Roles of the Bank of England and Federal Reserve in terms of Facilitation

Facilitative or catalytic roles are very necessary for central banks to operate effectively. The Bank of England has established close relationship with private sector participants for the purpose of maintaining active communication over payment system development and to promote specific initiatives. In the United Kingdom, these relationships are formal as it is represented on the board of the country’s banking association.

In the US, the relationships may be less formal but no less influential, for instance, the Feds role in promoting check 21, the law that facilitates check truncation (Hafer, 2005, p. 53). Both the Bank of England and the Federal Reserve System promote and initiate important changes in retail payment systems and also serve as catalysts as they undertake important research programmes (Hufner, 2004, p. 96).

Comparisons of the Roles in terms of Ensuring Financial Stability

The Bank of England cooperates with the Financial Services Authority and the Treasury assist in the filed of financial stability. The cooperation pact between thee three agencies sets out the role of each authority and details how they work together towards the common objective of UK’s financial stability.

The divisions of responsibilities between the three agencies depend on accountability, transparency, a voidance of duplication, and exchanging information on regular basis (Great Britain HM Treasury, 2008, p. 88).

The bank of England contributes to the maintenance of UK’s stability of financial system. This responsilities involves: acting in markets to solve liquidity challenges in order to ensure stability of monetary system as part of its monetary policy functions; supervising infrastructure in financial system systematically important to Britain. This particularly involves payment systems based either in the UK or overseas.

The Bank of England remains at the heart of the payment system as bankers’ bank. It advises the Chancellor, and responds for its advice on any critical challenges that emerge in these systems (Great Britain HM Treasury, 2008, p. 89).

The Bank of England is also closely involved in infrastructural development and improvement, and strengthening of the financial system to assist reduce systemic risks; maintaining a broad supervision of the whole financial system. The Bank of England is strategically placed to perform this.

This is because the bank is responsible for the financial system stability and has high profile representation on the Financial Services Authority Board. Normally the bank is represented in the FSA by the Deputy Governor (Singleton, 2011, p. 229). It is because of this involvements’ in markets and payment systems that the bank is able to identify potential pitfalls first.

As a consequence, it is able to advice on the implications for the Britain’s financial stability of developments in domestic and foreign markets and payment systems.

It also provides assessments of the impact on monetary conditions of events in the financial industry; and last but not least, the Bank of England undertakes official financial operations in exceptional circumstances in their established memorandum with the FSA and the Treasury.

This is for purpose of limiting the risk of problems facing particular organizations spreading to other parts of the UK financial system (Great Britain HM Treasury, 2008, 89).

Similarly, the Federal Reserve System plays a critical role in overseeing the retail payment systems in the US. Both the Bank of England and the Federal Reserve do not have their oversight responsibilities explicitly set out. The payment oversight responsibilities of the Bank of England for instance, is non statutory. In the US, the Federal Reserve’s authority depends on assortment of statutes and agreements (Hafer, 2005, 52).

The Federal Reserve just like the Bank of England and other central banks plays a key role in retail payment system. The Federal Reserve’s legal foundation of involvement in retail payments is entrenched in a number of statutes.

These statutes include; the Federal Reserve Act of 1913, the 1978 electronic Funds Transfer, and the Check Clearing Act of 2003. The Federal Reserve stresses overriding objectives for payment policies such as; safety, efficiency, and accessibility (Hafer, 2005, p. 54).

The Role of the Bank of England in Financial Stability and Depositor Protection

The UK government gives the Bank of England authority to play an important role in special bank administration procedure for the purpose of facilitating successful resolution of a bridge bank. This is designed to maximize the chances for successful disposal of the bridge bank to private sector within the statutory time period and at the best price possible.

The UK authorities through the Bank of England ensures that appropriate funding mechanisms are introduced to ensure that special bank administrator is able to maintain the residual company functioning to achieve the purposes of the procedure (Bernan, 2008, p. 2008).

Practically, the bridge bank would always be expected to pay for the services provided by the residual company on normal commercial terms, but provisions are made to allow access to additional funding if needed to ensure viability of residual company for the purposes of these procedure. The Bank of England also fulfils the role of a creditors committee in a special bank administration procedure.

The Bank of England ensures the special bank administrator provides information in relation to exercise of his functions and generally help the special bank administrator in discharging in his functions (Great Britain Parliament, 2009, p. 30).

In addition, the UK government considers that the Bank of England has additional functions in special bank administration procedure due its unique nature (Great Britain Parliament, 2009, p. 30).

These additional roles include: considering and approving special bank administrator’s proposals for attaining the objectives of the procedure with or without modification; plays an important role in providing information to the special bank administrator in relation to the financial position of the residual company and the bridge bank; approves those assets, or types of assets that may be realized for the benefit of creditors;

Effecting subsequent transfers of assets and liabilities between the bridge bank and the residual company; establishing with the special bank administrator what essential services, assets and contracts the residual company would be obliged to continue to provide in support of a bridge bank; determining whether to approve to the taking of certain actions in the procedure where those may prejudice the successful resolution of the bridge bank; and accepting that the procedure may be terminated (Great Britain Parliament, 2009, p. 35).

Comparison with the Federal Reserve System

Comparatively, the Bank of England and the Federal Reserve System differ markedly on the nature of deposit protection arrangements and the appropriate role for the central bank in the payment system.

The Federal Bank maintains that it is important for a central bank to have a role in banking supervision, even though its own role has covered only a part of the banking system. The Federal Reserve shares the responsibility for regulating and supervising in the US financial system with a number of federal and state government agencies (Hufner, 2004, p. 95).

All chattered banks in US states are under the Federal Reserve System. Besides overseeing activities of banks in Federal Banks, the Federal Reserve also oversees US operations in oversees banks. The Federal Reserves also have supervisory obligations holding companies, though bank subsidiaries of those holding companies are often supervised by other agencies (Hufner, 2004).

For instance, the banking of commercial activities of holding company subsidiaries with national bank charters is supervised by the Office of Controller of the Currency. The Federal Reserve finds it essential for a monetary authority to have some direct links with the banking system, not only for financial stability but also to help with the conduct of monetary policy (Hafer, 2005, p. 31).

Conclusion

In sum, the banking systems in the UK and US compare in a number of ways, for instance: branch banking is prevalent in the UK where banks have branches which control total deposits of the country. The US embraces unit banking as a system of banking with no branches or with very few branches.

The banking system in the United Kingdom is centralized. All banking institutions in the UK are under control of the Bank of England. The authority to issue notes and control credit solely rests on the Bank of England. The US on the other hand, has a decentralized central banking system.

The banking system is distributed among the US federal states under one Federal Reserve Bank (Hafer, 2005, p. 52). Control by the Bank of England is very effective as the number of banks are minimal compared to control by the Federal Reserve System which is not as effective as it is in England because of the existence of large number of unit banks.

In terms of establishment, the Bank of England was formed as a private joint stock bank and gradually it assumed all the powers of a Central Bank. The Bank was then nationalized in 1946.

The Federal Reserve System on the other hand, began as a central banking system which came into existence by passing the Federal Act of 1913. The Federal Reserve was empowered by the Act to perform all the central banking functions (Hafer, 2005, p. 55).

The Bank of England is currently nationalized, where as the Federal Reserve banks are owned by member banks of each district as entire share capital is contributed by them. In England, commercial banks seldom approach the Bank of England for rediscounting of their bills, instead they recall funds lent to the Discount Houses who go to the Bank of England for rediscounting of bills.

Thus, commercial banks obtain accommodation from the Bank of England only indirectly. In most cases, they are reluctant to approach the Bank of England for accommodation as it appears as a sign of weakness.

In the US, member banks approach the Federal Reserve banks for getting their bills of exchange and other papers rediscounted. Unlike in England, commercial banks in the US are not reluctant to approach the Federal Bank as they feel they have a stake of ownership of the Federal Reserve Banks (Singleton, 2011, p. 229).

The Bank of England adopts fixed fiduciary systems for regulating issuance of notes. The Federal Reserve System on the other hand, adopts proportional reserve system for regulating note issue. Another good comparison is in terms of commercial banks maintaining reserves with the Bank of England by convention. In the US, member banks maintain reserves with the Federal Reserve Banks by legal compulsion.

The Bank of England and the Federal Reserve System also compare in terms of effectiveness of bank rates. In England, the bank rate is very effective. Bank rates in the US are not as effective as it is in England.

The member banks sometimes do not increase their lending rates in accordance with increase in bank rates. This is due to the fact that some member banks may have surplus reserves and therefore, do not need any accommodation from the Federal Reserve Banks (Hafer, 2005, p. 54).

Reference List

Bernan, L & International Monetary Fund 2008, Global Financial Stability Report, 2008. IMF, Washington.

Hafer, R 2005, The Federal Reserve System, TSO Shop, New York, 2005.

Hufner, F 2004, Foreign Exchange Intervention as A Monetary Policy. Cambridge University Press, Cambridge.

Gomez, A 2008, Financial Markets and Financial services, Learning PVL, New York.

Great Britain Committees on Currency and Foreign exchange 1978, British Parliamentary Report. Ayer Publishing Company, London.

Great Britain HM Treasury 2008, Financial Stability and Deposits Protection. TSO Shop, London.

Great Britain Parliament 2009, Financial Stability and transparency. TSO Shop, London.

Singleton, J 2011, Central banking in the Twentieth Century, Cambridge University Press, Cambridge.

This evaluation essay on Bank of England Role Compared to the Federal Reserve System was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.
Removal Request
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda.
Request the removal

Need a custom Evaluation Essay sample written from scratch by
professional specifically for you?

Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar

certified writers online

Cite This paper
Select a referencing style:

Reference

IvyPanda. (2019, June 25). Bank of England Role Compared to the Federal Reserve System. Retrieved from https://ivypanda.com/essays/bank-of-england-role-compared-to-the-federal-reserve-system/

Work Cited

"Bank of England Role Compared to the Federal Reserve System." IvyPanda, 25 June 2019, ivypanda.com/essays/bank-of-england-role-compared-to-the-federal-reserve-system/.

1. IvyPanda. "Bank of England Role Compared to the Federal Reserve System." June 25, 2019. https://ivypanda.com/essays/bank-of-england-role-compared-to-the-federal-reserve-system/.


Bibliography


IvyPanda. "Bank of England Role Compared to the Federal Reserve System." June 25, 2019. https://ivypanda.com/essays/bank-of-england-role-compared-to-the-federal-reserve-system/.

References

IvyPanda. 2019. "Bank of England Role Compared to the Federal Reserve System." June 25, 2019. https://ivypanda.com/essays/bank-of-england-role-compared-to-the-federal-reserve-system/.

References

IvyPanda. (2019) 'Bank of England Role Compared to the Federal Reserve System'. 25 June.

More related papers
Psst... Stuck with your
assignment? 😱
Hellen
Online
Psst... Stuck with your assignment? 😱
Do you need an essay to be done?
What type of assignment 📝 do you need?
How many pages (words) do you need? Let's see if we can help you!