A Stable Financial System

Ensuring a sound and stable banking system is another important central banking function - important in its own right and vital to the efficient conduct of monetary policy. The Bank of England has long recognized this and for many years sought informally to ensure that banks and other City institutions were financially sound and well-run. But it had no legal basis for doing so until the Banking Act of 1979 gave it power to authorize and supervise all deposit-taking institutions. (Building societies, however, are supervised by The Building Societies Commission.) The Banking Act, which was updated and strengthened in 1987, provides that any UK bank wishing to take deposits from the public (that is, to conduct a banking business) in the UK must gain prior authorization from the Bank, and must submit to the continued supervision of its activities by the Bank. Under European legislation this does not apply to the UK branches of banks incorporated in other countries of the European Economic Area. These are supervised by their home state authority,

To become authorized, and to remain authorized, a bank must have adequate capital, and must make appropriate provisions against possible bad debts. The aim is to ensure that there are sufficient resources available to the bank to absorb losses without putting depositors' money at risk. The bank must also have enough ready cash or liquidity, to meet likely withdrawals. The quality of management is very important: directors and senior managers must be honest and competent - fit and proper, in the language of the Act. So must those who control banks - major shareholders, for example. There must be adequate internal systems and controls to enable management to assess their risks properly and to ensure that prudent banking procedures are observed.

The purpose of all this is to protect depositors with banks against the risk of losing their money. But it does not provide a guarantee against loss: to make banking so completely safe would involve preventing bankers from taking any risks at all. Supervision reduces the risk of failure, but does not eliminate it. If an authorized bank does fail, depositors are entitled to limited compensation from a Deposit Protection Fund set up under the Banking Act and administered by the Bank, but financed by contributions levied on the banking system as a whole.

There are about 480 authorized banks in the UK. More than half of these are branches or subsidiaries of foreign banks. The Bank liaises closely with overseas supervisors in monitoring the position of these banks. In recent years the Bank has also played a prominent part in negotiations aimed at establishing common international standards of capital adequacy designed to increase the stability of the financial system of the world as a whole.

The Bank is also involved in the supervision of certain other institutions - primarily those operating as brokers and marketmakers in the professional (or wholesale) financial markets where the Bank itself is active such as gilts, bullion and foreign exchange.

These specialized firms apart, the Bank is not involved in the direct supervision of investment business, which falls under the Securities and Investments Board (SIB) and the self-regulatory bodies which report to the SIB. However, many institutions and groups undertake business which spans both banking and investment activities. In these cases, the Bank co-operates with the SIB and the self-regulatory bodies to ensure a consistent regulatory treatment and a common response in cases of difficulty.

XIII. The teacher asks the students to prepare a role play. One of the students is asked to play the role of chief of Issue Department of the Bank of England and is ready to speak out at one of the staff meetings, on the performance of Issue Department.

Дата добавления: 2014-12-29