UK Banking System – Banking and Finance

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Sophisticated commercial, financial and professional services developed in the City of London during the 19th century to support Britain’s position as the world’s largest trading nation. Today Britain has a wide variety of banking and financial institutions.

Many of these offer specialised services to individuals, companies and other bodies, both in Britain and internationally. Bank of EnglandThe Bank of England was established in 1694 by Act of Parliament and Royal Charter as a commercial bank with private shareholders. It was brought into public ownership when its entire capital stock was acquired by the Government in 1946, although by then it had for many years behaved as a public institution carrying out public functions. As Britain’s central bank, it has important roles in maintaining a stable and efficient monetary and financial framework and in government finance. It has statutory responsibility for supervising the banking system and issues banknotes in England and Wales.

BanksThe direct ancestors of the modern retail banks were the London goldsmiths of the mid-17th century. The goldsmiths gave promises to repay deposits of coin on demand in the form of bearer documents. These passed from hand to hand and thus became the first English banknotes. Outside London, many provincial banks were formed in the second half of the 18th century, with over 700 by the early19th century. Following a series of financial crises and as a result of mergers, the number contracted considerably. By the 1920s and 1930s there were five large clearing banks, with a network of branches across the country.

In February 1996 there were 539 institutions authorised under the Banking Act 1987 or as European authorised institutions. A distinction can be drawn between “retail” and “wholesale” banking •Retail banking is primarily for personal customers and small businesses. •Wholesale business involves taking large deposits at higher rates of interest, deploying funds in money market instruments, and making large loans and investments. Most banks engage in some wholesale business and some, such as the merchant banks and international banks, base their business in this area. Retail Banks- primarily serve personal customers and small to medium-sized businesses.

The major retail banks operate through more than 11,350 branches offering cash deposit and withdrawal facilities and systems for transferring funds. They provide current account facilities (including interest-bearing accounts), deposit accounts, various types of loan arrangement, and a growing range of financial services.International Banks The number of banks in Britain which are incorporated outside the country continues to grow and in February 1996 totalled 319, Banks from over 60 countries are represented, with the largest numbers coming from Japan and the United States.Merchant Banks are so called because they originated from large merchants engaged in banking activity. Traditionally, they accepted bills of exchange to provide funds for trade and raised capital for governments and British companies through is suing bond and other securities.

More recently, they have services, such as corporate finance and investment management.Building SocietiesBuilding societies originated in the late 18th century. The first known society was Richard Ketley’s in Birmingham, which started business in 1775. Members traditionally deposited a proportion of their wages and were able to borrow money for the purchase of their home, repaying the principal over a number of y ears in addition to a specified amount of interest.

By 1910 there were over 1,700 societies with 626,000 members and assets of over £76 million. Their main activity is still in the housing market. They make long-term mortgage loans, mainly for people buying their homes. Since the Building societies Act 1986 the societies have been able to provide a wider range of services. Merge rs and restructuring have reduced their number to just under 80. The industry is undergoing a radical shake-up as four of the largest societies are planning to convert to banks.

National SavingsNational Savings is a source of finance for government borrowing and aims to encourage saving by offering personal savers a range of investments. Some of these offer tax-free returns. Products include fixed-interest and index-linked Savings Certificates; Income and Capital Bonds; Pensioners Bonds; Premium Bonds; and Ordinary and investment Accounts, where deposits and withdrawals can be made at nearly 20,000 post offices throughout Britain. Over £61,600 million was invested in National Savings in September 1996. The services are run by National Savings, a government executive agency.

Friendly SocietiesFriendly societies have traditionally been unincorporated societies of individuals, offering their members a limited range of financial services, particularly provision for retirement and against loss of income through sickness or unemployment. The Friendly Societies Act 1992 enabled them to offer a broader range of financial services through subsidiaries. Over 120 friendly societies are authorised to accept new business.Investing InstitutionsThe investing institutions attract savings from the personal sector and invest them in securities and other assets.

The main investment institutions are insurance companies, together with insurance broking firms, pension funds, unit tru sts and investment trusts. Some of these are long-established. The origin of the Lloyd’s insurance market go back to the 17th century when informal trading in marine insurance was carried out by merchants in Edward Lloyd’s coffee house. The first investment trusts were developed by Dundee-based Robert Fleming in the 19th century, although unit trusts are a more recent development, the first being launched in 1931.Special Financing InstitutionsSpecial financial institutions offer various types of finance of finance, such as loans. In the private sector they include finance houses, credit unions, factoring companies and venture capital companies.

Financial MarketsThe origin of the London Stock Exchange date back to the coffee houses of the 17th century, where those who wished to invest or raise money bought and sold shares in joint-stock companies. Brokers later opened their own subscription room and in 1773 this was named the Stock Exchange. During the 19th century the Stock Exchange developed as the demand for capital grew with Britain’s Industrial Revolution. The Exchange also financed the construction of railways, bridges and dams across the world. Today it is one of a number of highly organised financial markets in the City.

Others include the sterling money and bond markets, and markets in foreign exchange, financial futures and options, bullion, commodities, shipping and freight.

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