The Bank of England has had much success and as a result many nations have followed its lead in creating a central banking systems of their own. The United States is one of these nations. The two nations have many similar banking objective and strategies on how to best achieve the objectives. These nations also differ greatly in some aspects of their banking philosophies. The currencies of both nations are strongly held around the world. Their monetary policies and bank regulations differ in some aspects, but both nations banking systems are held to high esteem worldwide.
The banking systems of the United States and the United Kingdom were born of the same origins but differ in some major aspects of practice. The United States monetary system was greatly influenced by that of the United Kingdom. The United States Federal Reserve Board and the United Kingdoms Monetary Policy Committee are both used to regulate the economy and are similar to one another. The Federal Reserve System is the central bank of the United States and was established by Congress in 1913. The bank of England is the central Bank of the United Kingdom and plays the same role as the Federal Reserve.
The main roles of the Federal Reserve is to influence the money and credit conditions to achieve stable prices, supervise and regulate banking institutions, maintain the stability of the financial system, and provide financial services to the US Government, the public, financial institutions, and foreign official institutions (Federal Reserve Board Homepage). Before the Bank of England Act of 1998, the United Kingdom and the United States were similar in that their central banking institutions were in charge of these same four objectives.
Now the difference is that the Federal Reserve supervises open market operations, where the United Kingdom the Treasury supervises open market operations. The Bank of England and The Federal Reserve’s main objective for monetary policy is price stability, while maintaining economic health. To maintain economic health they focus on maintaining low levels of unemployment and a high GDP. The Federal Reserve and The Bank of England aim to maintain confidence in the domestic financial markets and stability in the foreign exchange markets.
To achieve this price stability, they are focusing on a monetary policy that targets the value, supply and cost of money in the economy. Both The Bank of England and The U. S. Federal Reserve use the interest rate to influence the economy and control price stability. The interest rate policy is formed through evaluation of many factors such as demand, output, employment, money and credit growth, asset prices and the exchange rate. The Central Banks of the United States and United Kingdom take measures to prevent the collapse of their banking system.
The Federal Reserve and The Bank of England protect themselves by functioning as a lender. They step in as a last resort option to prevent a financial institution from failing if the failure is expected to hurt the overall economy. Both systems also have a requirement for all commercial banks to ensure that the commercial banks will be capable of meeting their liabilities. Along with protecting themselves the Central Banks also have interest in protecting, as well as maintaining confidence of their consumers.
To gain confidence and insure their customers the United States and United Kingdom banking Systems are monitored and maintained by the American Federal Deposit Insurance Corporation and the United Kingdom’s Deposit Protection Fund. These organizations provide bank customers with insurance on their deposits in case of a bank failure. In this aspect the two countries differ because of the reserve requirement. In the United States, The Federal Reserve sets the reserve requirement through a legal process. However, in the UK, there is no legal limit to how low the reserve requirement may fall (The Federal Reserve).
The Bank of England and The Federal Reserve currently have similar policies and goals but different levels of independence. The United State’s Federal Reserve is much more independent and has more duties than the United Kingdom’s Bank of England. The Central Bank of England just gained the ability to raise or lower interest rates to maintain consistent price levels in 1997. The Bank of England is also less independent; in extreme circumstances the government of the United Kingdom reserves the right to overrule the actions taken by the bank.
The Federal Reserve and The Bank of England use different methods to achieve their financial goals. The Federal Reserve Bank relies on the monetary aggregates and interest rates to achieve goals. The Bank of England currently uses interest rates to control inflation. The United Kingdom heavily focuses on inflation targeting through interest rates. The interest rates are targeted through short-term treasury bills (because of their high level of liquidity) and the Bank Rate. The United Kingdom is much more quick to adjust interest rates in order to achieve their ideal level of inflation than the Federal Reserve.
