The key role of Banks in the UK Monetary System

By far the largest element of money supply is bank deposits; therefore banks play a crucial role in the monetary system.

Clearing banks: These are the main UK retail banks, members of the Clearing House Association The Clearing system is a means of settling bank’s debts with each other on a daily basis. It enables cheques to be cleared rapidly.

E.G. If Lloyds customers have paid £1 million to Natwest customers in a day. Then Natwest makes a single payment of £1 millions to Lloyds. The debt is then settled. This has been made easier with the use of debit cards

Banks and the transformation of maturity:

The balance sheet of a bank shows the total liabilities and assets

Sterling Liabilites

  1. Time deposits (42% of total)
  2. Sight deposits (30% of total)
  3. Certificates of Deposits CDs these are large deposits of a fixed term (eg £100,000 for 18 months). They can be sold by one customer to another and are thus relatively liquid to the depositor but illiquid to the bank issuing them. The use of CDs has grown in recent years
  4. REPOS sale and repurchase agreements. If banks are short of money they can sell some of their financial assets to other banks of to the BoE and later repurchase them on an agreed term often a fortnight. They are in affect a loan
  5. Items in suspense and transmission
  6. Capital and other funds

The Bo E must ensure banks have sufficient liquidity


Sterling Assets

– operational balances at the Bo E :  These are the banks own current account and are used for clearing purposes. They do not earn interest.All banks are required to keep 0.35% of cash balances in the BoE

  1. Notes and coins
  2. Market Loans: These are short-term loans made mainly to other banks. The market for such loans is known as the money market. This includes money at call and short notice. Money at call is the main reserve banks call on if they are short of funds.
  3. Certificates of deposit: a bank with surplus liquidity can but CDs issued by another bank
  4. Bills of Exchange: these are certificates promising to repay a stated amount on a certain date, typically 3 months from the issue of the bill. Bills pay no interest but are sold at a discount and redeemed at face value. Thereby earning a rate of discount for the purchaser
  5. Treasury Bills , these are bills of exchange issued by the BoE on behalf of the Gov’t . They are a means whereby the gov;t raises short term finance
  6. Commercial bills issued by firms
  7. Advances and loans: such as mortgage loans and personal loans. These are the most profitable for banks
  • The following are liquid assets
    – Operational balances BoE
    – Money at call
    – bills of exchange
    – gov’t bonds with less than a year