If you get a chance, it is worth listening to Radio 4’s Desert Island Discs, as it features this week, Sir Mervyn King, the outgoing Govenor of The Bank of England.

[http://www.bbc.co.uk/programmes/b02116z9]

In the UK, the central bank is the Bank of England. In the US, the central bank is The US Federal Reserve. In the Euro Zone, the central bank is the ECB, The European Central Bank. The distinctive feature of a central bank derives from its role as the monopoly supplier of outside money, comprising notes and coin and commercial banks’ reserve deposits.
These constitute the ultimate settlement asset for an economy and mean that a central bank has a unique ability to create or destroy liquidity through the use of its balance sheet. Setting the interest rate in the country and the primary objective is to ensure that the supply of that liquidity is consistent with the smooth functioning of the real economy. From this follows the two core tasks of a central bank: the maintenance of broad stability in the price level, nowadays often enshrined in a formal numerical target for inflation; and supporting the process of financial intermediation during times of stress, including acting as Lender of Last Resort to solvent, though temporarily illiquid, financial institutions. The best example of this was when in 2007, the lender Northern Rock suffered a run, where savers (depositors) formed queues to get their money out. To plug the gap, when wholesale funding / money markets / credits markets froze for Northern Rock. The Bank of England, lent £30bn to The Northern Rock. Later it was disclosed after the collapse of Lehman Brothers, The Royal Bank of Scotland and Halifax Bank of Scotland got £62bn in secret emergency loans in the October 2008, showing the Bank of England was the lender of last resort (and HM Government = The UK Tax Payer being the investor of last resort in the merged LloydsTSB & HBOS (Lloyds Banking Group) and RBS with the £37bn in equity stakes in RBS and Lloyds Banking Group owned by UK Financial Investments (UKFI) the government institution charged with running and managing the UK Tax Payer stakes in RBS and LBG)

The secret support began for HBOS on October 1st 2008, two weeks after the collapse of America’s Lehman Brothers and when financial markets were at their most panicky, and peaked at £25.4 billion on November 13 2008. The money was eventually repaid on January 16 2009. RBS began tapping the Bank for liquidity on October 7 2008 and at its peak borrowed £36.6 billion. It paid back all the money by December 16 2008. Both banks eventually provided the Bank with collateral with a value in excess of £100 billion. They were also charged fees by the Bank of England. It was clear, the emergency loans from The Bank of England were to ensure smooth functioning of the UK economy as if RBS or Lloyds Banking Group failed, perhaps a depression would have occurred.

Of course, central banks sometimes carry out other tasks too. The Bank of England, for instance, manages the government’s foreign exchange reserves and used to manage our national debt. And in some countries, central banks are responsible for banking supervision, such as the MAS, The Monetary Authority of Singapore, but such tasks do not by their nature have to be carried out by the central bank. In the UK currently banking supervision is undertaken by the FCA, the Financial Conduct Authority.