Financial regulation

Question 1

prior knowledge

Answer 1

There are 4 functions of money:
Medium of Exchange
Store of Value
Measure of Value (also knows as unit of account)
Standard of deferred payment

The Bank of England is the UK’s Central Bank. It’s equivalent in the USA is the Federal Reserve. In the Eurozone the central bank is the European Central Bank (ECB). The Bank of England conducts monetary policy for the government.

Question 2

bank of England and functions of money

Answer 2

1. The Bank of England ensures that different economic agents can use money as a medium of exchange. They produce banknotes and oversee many of the other payment methods (e.g. debit cards/credit cards)
2. The Bank of England ensures that UK money can be used as a store of value. They regulate the banking system and at least partially guarantee the deposits that different economic agents keep in this system.
3. The Bank of England is tasked by the government to ensure that money remains the most effective measure of value in the UK. It achieves this by using monetary to try and maintain stable prices in the economy
4. The Bank of England is responsible for ensuring money can be used as a standard of deferred payment. In common with roles 1 and 2, this involves overseeing and regulating the wider financial sector

Question 3

main role of bank of england

Answer 3

The main role of the Bank of England is to keep the whole UK money and financial system stable. It does this through carrying out monetary policy for the government and regulating the financial sector.

Question 4

PRA regulation

Answer 4

Regulation: The PRA (Prudential Regulation Authority) is a sub-section of the Bank of England.

This supervises over 1,500 institutions including banks, building societies, credit unions, insurers and investment firms. To do so it sets a series of rules that each of these businesses must follow.
As part of the Bank of England the objective of the PRA is to ensure that firms act safely and reduce the chance of getting into financial difficulty.

Prudential regulation primarily relates to the capital solidity and liquidity of financial institutions- it makes sure that the organisations are solvent

Question 5

FCA regulation

Answer 5

A sister organisation is the Financial Conduct Authority (FCA) which oversees about 50,000 financial services companies, mainly involved with providing credit to consumers.

The FCA is responsible for the conduct of all firms that were regulated by the PRA and many more, mainly consumer facing firms. Its main focus is conduct (e.g. fair treatment of customers)

Question 6

monetary policy

Answer 6

The Bank of England is tasked by the government to ensure that the UK inflation rate is within 1% (+ or -) of the government’s stable prices target i.e. 2% inflation. In order to meet this the Bank of England uses 2 main tools: i) interest rates changes (decided by the MPC, Monetary Policy Committee) ii) quantitative easing

Question 7

quantitive easing

Answer 7

Although the inflation target is the Bank’s first and foremost target it also plays a role in helping the government achieve other macro objectives, e.g. increasing the money supply to help growth. QE is designed primarily to tackle deflation risks but it may also boost government plans for growth. However, it’s important to know than the Bank of England is independent- the government cannot dictate to it- the Bank of England is responsible to the UK economy, not a political agenda.