The Bank of England

An unofficial guide to the UK’s most powerful financial authority

What is the Bank of England?

It’s the UK’s most powerful financial authority and the actions it takes affect us all, whether we’re taking out a mortgage, investing in the stock market or just saving what we can for a rainy day, but how much do you know about the Bank of England? When was it established, and why? When the Bank’s governor is on the nightly news, is he the one who decides financial policy, or does he just implement it? Why do interest rates rise, and why does the Bank finance failing firms? It’s important for investors to understand the factors that can influence their returns, and the Bank of England has an enormous amount of influence over the UK economy.

A little backstory...

Before centralised banking, the financial industry was entirely based around merchant banks and private lenders; Italian banking families like the Grimaldis and the Pallavicinos, or German ones like the Fuggers came to dominate Europe by financing individuals, businesses and even national governments. However, there were no modern banks as we’d recognise them today until the end of the 17th Century, when the Bank of England was founded – England was waging the War of the Grand Alliance against France, and King William III needed to raise £1,200,000 (over £25 billion in today’s money!) to rebuild the navy. He did so in just 12 days by offering to incorporate the lenders as the Governor and Company of the Bank of England, given sole dispensation to issue bank notes (until this point, any bank had been able to issue its own notes, so this monopoly was a great incentive to lenders).

Though it was founded as a private institution, the Bank’s role over the next century came to include the safeguarding of national financial interests, and its role in handling a series of financial crises came to define it as an organ of the state. This was set in stone in 1946 when the sweeping reforms envisaged by the Beveridge Report caused mass nationalisation of the UK’s infrastructure. The Bank of England is now the cornerstone of the United Kingdom’s financial stability, and works in concert with the Government to provide stability and security.

What is it for?

The Bank of England are responsible for the design and circulation of bank notes, maintaining interest rates at levels mandated by the Government, promoting safety and stability for savers and investors and to maintain public confidence in the banking system. Their brief is wide, but they’re able to apply their skills and expertise across the board to pursue their goals.

The Bank of England’s mission is to “promote the good of the people of the United Kingdom by maintaining monetary and financial stability”.

Let’s look at how the Bank of England fulfil their goals:

Designing and Circulating Bank Notes

When the Bank was first established, no notes with a value of less than £50 were issued. Since the average yearly income was less than £20, very few people came into contact with bank notes, and their usage was restricted to the very wealthy. Notes were hand-written and signed by a cashier: fully printed notes didn’t come in to use until 1853, when the name and signature of the Chief Cashier was replaced with the anonymous:

“I promise to pay the bearer upon demand the sum of . . . “

Which remains present on all bank notes to this day.

With the introduction of the £10 note in 1759 and the £5 note in 1793 circulation of the Bank’s notes became more widespread, and in 1833 bank notes became legal tender for all sums above £5, to avoid “runs” on the bank. Though notes in value from £2 to £1,000 have all been circulated at some point, the only notes that are legal tender now are £5, £10, £20 and £50 (though notes of £1 million and £100 million are used by the bank internally!)

With paper being so readily available and banknotes being so valuable, there has always been a temptation for forgers to produce counterfeit banknotes. William Booth, a Birmingham forger, was an especially prolific counterfeiter in the early 19th Century, who was caught and hung for his crimes in 1812. Even the Nazis tried their hand at counterfeiting Bank of England notes: during World War 2 they produced more than half a million notes each month, with the aim of para-dropping them into England to destabilise the economy. In practise, they found it more useful to pay their agents in occupied countries with the forgeries!

To keep ahead of the forgers, the Bank incorporates many security devices within its notes, including holographic images, micro-text and watermarks. The new polymer £5 note due to be introduced this year features even more security measures to frustrate counterfeiters, and is more durable than the paper notes that have been issued for over 300 years.

The circulation of bank notes is tightly controlled, as over-printing money can lead to devaluation of the currency and hyperinflation (like the Chinese Yuan, which inflated 5,000% between 1947 and 1949: this was eventually halted by introducing a new currency, the Renminbi, one of which was worth 15,000,000,000,000,000,000 pre-1948 Yuan!). A breakdown in a nation’s currency quickly leads to a breakdown in social order, and can result in widespread recession and even revolutions, so the Bank maintains a strict control over the printing of new bank notes.

Promoting Safety and Stability

Though it began life as a group of private individuals lending for profit, within a century the Bank of England had become England’s de facto financial management institution, working to protect the nation’s interests both at home and abroad. By maintaining interest rates they’re able to promote financial stability, but they also provide safety for savers through the subsidiaries: the Prudential Regulation Authority and the Financial Policy Committee. These two institutions oversee standards of practise in financial trading to ensure that the market is run in accordance with their guidance.

The Prudential Regulation Authority is responsible for the supervision and regulation of more than 1,700 banks, credit unions, building societies, pension providers, investment firms and insurers, setting out rules and expectations for businesses’ conduct. They’re also responsible for integrating with foreign investment, and oversee the conduct of overseas institutions in the UK through “supervisory colleges”. As the UK is a major financial centre, the PRA is an active member of several international forums, such as Financial Stability Board, the Basel Committee, the Joint Forum and the International Association of Insurance Supervisors. Co-ordinating their financial policies across borders allows effective oversight to be established without creating a barrier to foreign investment, and the PRA works to create a stable global financial market. The PRA works in conjunction with the Financial Conduct Authority, which oversees 56,000 financial companies to ensure responsible business practices.

The Financial Policy Committee was established in 2010 to identify and remove threats to the UK economy, and a subsidiary responsibility to support the economic policy of the sitting Government. The FPC’s job is to evaluate the economy’s performance as a whole through “macroprudential financial planning” – essentially, it’s their duty to look at the big picture. They can influence the economy by advising financial bodies to take a given course of action, and they can direct the PRA and FCA to take a given set of actions.

Maintaining Public Confidence

Poor financial management can have dire consequences for a nation: reckless over-lending can cause disasters like the 1929 Wall Street Crash and recent economic recession, over-circulating currency results in the hyperinflation that occurred in Germany post-WW I and in modern-day Zimbabwe, and falling public confidence can cause a “run” on the bank, where depositors try to withdraw as much money as they can for fear of losing it altogether. The Bank of England seeks to mitigate these risks by maintaining public confidence in the banking system through a variety of schemes.


Public confidence in a nation’s financial system is crucial: money doesn’t work if it’s hoarded; it must be spent and circulated to keep the economy buoyant. If savers are unwilling to trust banks with their money, and lenders are unwilling to finance borrowers, the economy suffers from slow growth or recession.

The Bank of England guarantees savers’ deposits through the Financial Services Compensation Scheme, which covers deposits of up to £75,000 in the event of a bank being unable to repay its depositors. This means that a run on the bank should never occur: there is no incentive for savers to withdraw their money (if they have £75,000 or less), as the FSCS guarantees that it will be repaid even if the bank is unable to. Even so, in the 2008 subprime lending crisis Northern Rock became the first UK bank in 150 years to suffer a run: the FSCS paid out more than £18 billion that year in guaranteed savings.

By acting as a “lender of last resort”, the Bank of England also seeks to ensure the continued survival of financial institutions whose failure is seen as harmful to the economy as a whole; in 2008, the Bank of England worked in conjunction with the Government to deliver a “rescue package” worth £500 billion to UK banks to restore consumer confidence in the sector, and to avert further damage to the economy.

The policy of “lender of last resort” has been criticised by some, as providing a safety net encourages banks to take more risks when trading. Though it does encourage banks to take on riskier loans, the effect of one of these institutions failing entirely is seen to be a much worse proposition than keeping them running, no matter the cost; some banks are just “too big to fail”. In response, some commentators have noted that firms like this are therefore a liability, with financial analyst Alan Greenspan asserting that “if they’re too big to fail, they’re too big”.

Who is in charge?

As noted previously, the Bank of England has been nationalised since 1946, making it effectively part of government. As it’s such a large institution, however, with such a wide-reaching scope, there are many different departments with their own objectives and degrees of autonomy. Furthermore, as financial policy of takes several years to implement, a new Parliament may well be elected before the previous one’s policies have been enacted, granting the Bank a degree of influence over economic strategy.

At the top of the pyramid sits the elected UK Parliament: they pass laws to support their mandated goals and instruct the civil service to act accordingly (with input from experienced civil servants and advisory bodies). The Chancellor of the Exchequer works closely with the Bank of England to determine and implement economic policy, and the Bank is represented in the House of Commons by the Treasury Committee. The Bank itself is run by the Governor (currently Mark Carney) and the Court of Directors, who determine internal policy and the execution of their objectives.

The Bank’s subsidiaries, the FCA, PRA and FPC all take direction from the Bank’s central committee. They each have their own stated objectives: the Financial Conduct Authority is tasked with regulating financial markets to ensure consumers get a fair deal, the Prudential Regulation Authority oversees financial practises to ensure that firms are trading in an economically responsible way, and the Financial Policy Committee ensures that the UK economy as a whole is healthy, resilient and protected from potential threats. Because each institution has differing goals, each one has its own board of directors to determine how best to execute their objectives.

What does the Bank of England mean to me?

With all this talk of macroeconomic management and financial policy, it’s sometimes hard to see how the Bank of England really relates to us. Their policies are so vast, and so far-reaching, that the impacts they have on our day-to-day lives can be hard to grasp. Let’s look at a few ways in which the Bank affects our daily living:

  • Mortgages: If you have (or are applying for) a variable-rate mortgage, the rate at which the Bank sets their base rate directly impacts your monthly payments.
  • Employment: By encouraging lending by raising the interest rate, the Bank can stimulate the economy. With readily available finance, businesses are more likely to take on employees and invest in larger projects, and with a buoyant economy both wages and employment rise.
  • Travelling: The exchange rate against foreign currencies doesn’t just affect overseas investors; when you travel abroad, the exchange rate you receive directly affects how much spending power you have!
  • Savings: Being able to save with 100% confidence allows you to build up a nest egg for your retirement. With the backing of schemes like the FSCS, you can deposit your money sure in the knowledge that it’ll be returned to you in full.
  • Reliability: With oversight and regulation of financial services in place you’re free to invest in a plethora of different options. Even recent services like peer to peer lending are regulated by the Financial Conduct Authority (though not backed by the FSCS), guaranteeing that the industry is run in accordance with ethical and responsible rules.

Further Reading

Other resources about the Bank of England can be be found here:

Other Unofficial Guides

Covering areas of UK financial regulation and aspects of Bridging Finance.

Photograph by Bank of England Image Archive

Research provided by Falbros