ENGLISH BANKING SYSTEM

 

—The Bank of England

—Origin and Growth

• —27 July 1694 Bank of England founded
• —The Bank of England began as a private bank that would act as a banker to the Government.
• —It was primarily founded to fund the war effort against France.
• —The King and Queen of the time, William and Mary, were two of the original stockholders.
• —The original Royal Charter of 1694, granted by King William and Queen Mary, explained that the Bank was founded to ‘promote the public Good and Benefit of our People’.

—1720

• —South Sea Bubble: the first financial crisis in the Bank of England’s history
• —the South Sea Company set its sights on servicing the national debt, which was largely the Bank of England’s job at the time. 
• —In 1720, the South Sea Company was granted part of the national debt and its stock price rose dramatically.
• —This caused a frenzy of investment in its stock, but prices eventually crashed and thousands of people were ruined.

—1725

• —First denominated banknotes issued
• —Before 1725, banknotes were hand written, often for the specific amount deposited by the customer.
• —In 1725, it began to issue partially printed notes for amounts of £20 and upwards, in increments of £10. The highest denomination was £90.

—1797

• —The Restriction Period
• —In 1797 France declared war on Britain. When a small French force landed on mainland Britain, fears of invasion quickly spread.
• —During this time, the public rushed to the Bank of England to convert their banknotes into gold, which was possible at the time.
• —The amount of gold held by the Bank dropped from £16 million to just £2 million.

—1797-1821

• —Forgeries in the Restriction Period
• —The Restriction Period (1797 to 1821) temporarily removed the Bank of England’s obligation to exchange banknotes for an equivalent value of gold.
• —It was brought in due to a shortage of gold caused by overprinting of banknotes.
• —This period provided the conditions in which forgery could thrive,
• —because the Bank of England issued low-denomination notes (£1 and £2) for the first time to compensate for the shortage of gold coin.
• —These notes were handled by people who were not used to paper currency and who were often illiterate. They quickly became the natural dupes of the forgers. 

—1826

• —First Bank of England branch opens
• —Bank of England branches were first established in 1826 as a response to the financial crisis of 1825 to 1826, which saw many country and provincial banks fail.
• —One of the main reasons for establishing branch banks was to enable us to take further control of the banknote circulation, in order to prevent another crisis.

—1844

—Bank Charter Act

• —The Bank Charter Act of 1844 Opens in a new window gave the Bank of England a range of new powers and formalised the issuance of banknotes in the UK.
• —This Act of Parliament placed restrictions on any banks, companies or persons in England

—9-10 May 1866

—The Overend Gurney financial crisis

• —There have been many financial crises over the course of the Bank of England’s history.
• —One of the most well-known in the UK is the Overend Gurney crisis of 1866.
• —Overend Gurney was the largest discount house of the time.
• —Despite being a profitable business, over time it built up large piles of bad loans.
• —When it tried to extend the credit lines on these loans, Overend Gurney suffered significant losses.  
• —On 9 May 1866, the Bank of England had been approached for assistance by Overend Gurney.
• —The Bank refused on the basis of the broker’s insolvency.

—1914-1918

—World War One

• —On 10 August 1914, the Court of Directors minutes announced that the Governor ‘had granted leave with full pay to as many clerks as could possibly be spared to serve in the Defensive Forces of the Country.’
• —The Bank of England played an important role in helping the Government finance the war, for example by issuing War Stocks in 1914.
• —Although it was reported that these war stocks were oversubscribed, the public did not actually buy enough to help fund the effort.
• —The Bank therefore bought much of the stock out of its own reserves, and hid this fact to maintain public confidence.
• —1931
• —Gold standard suspended
• —The gold standard linked the value of the UK currency directly to gold, and effectively enabled people to exchange Bank of England banknotes for the equivalent value of gold.
• —In September 1931, the UK suspended the gold standard.
• —Confidence in sterling had collapsed, and the ensuing run on sterling meant that the Bank of England lost much of its reserves.
• —

—1946

• —The Bank of England is nationalised
• —Throughout our history, we have always seen ourselves as a public institution, acting in the national interest.
• —Although the Bank was privately owned for a long time, our activities were determined by the Government and legislation

—October 1996

• —Launch of the Financial Stability Review (FSR)
• —In the autumn of 1996, the Bank of England launched a new publication, the biannual Financial Stability Review (FSR).
• —Since then, the FSR has highlighted developments affecting the stability of the financial system,
• —and promoted our latest thinking on risk, regulation and market institutions.

—1996

• —Real-time gross settlement begins
• —The Bank of England has provided a way for two or more institutions to settle payments without settlement risk since the mid-19th century.
• —In 1996, our real-time gross settlement (RTGS) system was set up to allow institutions, predominantly banks, to settle payments in a variety of ways.
• —Most payment systems in the UK use the Bank’s RTGS system to settle payments between their member banks and other institutions

—1997

• —Bank of England agencies open
• —The Bank of England used to have branches around the country.
• —But in 1997 they were replaced with 12 regional agencies.
• —The former Leeds branch became a cash centre to help distribute banknotes around the country

—

—2012

• —Prudential Regulation Authority (PRA) formed and Financial Policy Committee (FPC) formed
• —Following the financial crisis of 2007-08, the Government decided to bring in massive regulatory reform.
• —Reforms to the financial system came through the Financial Services Act (2012)Opens in a new window which announced:
• —an independent Financial Policy Committee (FPC) created at the Bank of England
• —a new prudential regulator, the Prudential Regulation Authority, created as a subsidiary of the Bank
• —New Bank of England responsibilities for supervising financial market infrastructure providers.

—13 September 2016

• —First polymer banknote released
• —The first Bank of England banknote printed on polymer – the £5 note featuring Sir Winston Churchill – was issued on this day.
• —Polymer is a thin, flexible plastic material that lasts longer, stays cleaner and is harder to counterfeit than paper banknotes. 

STRUCTURE OF THE BANK OF ENGLAND

• —The hierarchical structure of the Bank of England is comprised of the Governor, the Court of Directors, and a few subcommittees.
• —The Governor of BoE is selected from within the bank, holding the most senior executive position and participating in all committees. 
• —The Court of Directors is the main administrative body and oversees the bank’s operations, strategies, and resource allocations.
• —Among the prominent subcommittees:
• —Monetary Policy Committee (MPC) implements monetary policy and sets the interest rates
• —Financial Policy Committee (FPC) ensures stability in the financial system
• —Prudential Regulation Authority (PRA) regulates the Financials industry
• —The Bank of England has several subordinate units that fulfil essential functions. These departments include:
• —Monetary Analysis and Statistics
• —Markets,  Financial Stability, Banking Services
• —Central Services,  Finance, Internal Audit
• —Communications, Human Resources

FUNCTIONS OF THE BANK OF ENGLAND

• —Deciding interest rates
• —the Bank of England has sole responsibility for deciding the level of base interest rates.
• —Overseeing the money supply
• —The Bank of England oversees the supply of money in the economy to ensure that there is just sufficient liquidity in the economy.
• —Managing foreign reserves
• —The Bank of England also manages the UK foreign exchange reserves to ensure that the country settles its international debts.
• —Providing banking facilities
• —The Bank also provides banking facilities to the high street banks,  and all credit banks in the UK must keep an account with the Bank of England.
• —The Bank also provides facilities to the UK government, which keeps its accounts with the Bank.
• —Regulating the UK banking system
• —An increasingly controversial feature of the Bank of England’s role is the regulation of the UK banking system.
• —The current regulatory structure in the UK involves three separate organisations,
• —Lender of last resort
• —The Bank also acts as lender of last resort, which means that, given a liquidity shortage in the banking system the Bank of England will provide funds ‘as a last resort’.
• —Issuing notes and coins
• —Finally, the Bank is responsible for controlling the issue of new notes and coins.
• —Monetary Stability
• —Monetary stability relates to maintaining stable prices and confidence in the currency
• —Financial Stability
• —Financial stability involves monitoring the financial system so that there is confidence in the financial institutions, markets, and the overall financial system
• —Official Gold Reserves  Custodian
• —The Bank of England acts as the official gold reserves custodian for the UK and other countries.

Brief history of international banking

 

Brief history of international banking

—Ancient times

• Utilization of some sort of medium of exchange as a form of conducting trade started with the past civilizations of the east and the west which evolved to become a form of money as a standard measure for transacting goods and services

—The middle ages

• —Ironically, the foundation of IB was set by medieval bankers in the middle ages. 
• —As industrialization and economic transactions expanded, so did the need for various entities to perform exchange and conversion activity. 

—European continent

• — Through this beginning, Italian merchants thrived in trading activities, and the impact of that activity had a ripple effect throughout the northern and southern European continent.

—Development of IB

• —The development of IB was dominated first by Italians, who pioneered something known today as universal banking. 
• —In other words, their banking activity went beyond just deposit taking and lending activity. 

—1700's and 1800's

• —Eventually, Dutch dominance in IB and finance faded and London emerged as the center for international credit and banking. 
• —The Bank of England evolved to become an important financial entity during the 1700's and 1800's. 

—19th and early 20th centuries

• —The evolution of IB in the United States has its roots in the late 19th and early 20th centuries. 
• —Fundamental changes in the U.S. economy were the catalyst for the expansion of the banking system in the U.S. 

—After World War II

• —After World War II, the creation of a new order in international economy, commerce and finance was inevitable. 
• —Consequently, a conference was held in Bretton Woods, New Hampshire, to establish a new, worldwide agreement on the operation of the banking system.  

—World Bank

• —The orientation of the World Bank was to provide technical assistance for economic development matters to developing nations. 
• —Coincidentally, it became so appropriate, since after World War II an enormous amount of redevelopment was needed. 
• —The efforts of the World Bank, coupled with the GATT agreement, were major catalysts for the expansion of trade and economic development. 
• GATT eventually became known as the World Trade Organization (WTO

—The expansion of IB

• —The expansion of IB and its involvement in trade and cross-border lending activity resulted in a transfer of a large sum of U.S. dollars overseas, especially to their subsidiaries, agencies, offices, branches, etc. 
• —The existence of this large sum of deposits, devoid of the reserve ratio required by the Federal Reserve, created an environment of profit taking for international banks. 

—The Eurodollar

• — The Eurodollar became a significant financial instrument, since it was not subject to the regulatory limitations of the Federal Reserve that are imposed on domestic reserves of the U.S. banking system. 

—OPEC

• — The OPEC (Organization of Petroleum Exporting Countries) oil cartel imposed an oil embargo against major industrial societies which caused a shortage of the oil supply, and consequently the price of this commodity increased. 
• —This process increased revenue for the oil producing nations and, in turn, these revenues were deposited in major U.S. and European banks.

—Globalization in financial market

• — In modern times, with globalization impacting every aspect of human life, including economics and finance,
• —major banking systems such as the Bank of Japan and the Bank of China were compelled to join the existing multinationals in shaping the evolutionary processes of IB. 

Drafting of Audit Reports

 

Drafting of Audit Reports

Audit Reports

—The auditor's report is a written letter from the auditor containing the opinion of whether a company's financial statements comply with generally accepted accounting principles (GAAP). The independent and external audit report is typically published with the company's annual report.

—The typical audit report contains three paragraphs, which cover the following topics:

◦The responsibilities of the auditor and the management of the entity.

◦The scope of the audit.

◦The auditor's opinion of the entity's financial statements.

Form or Content of Audit Report
Title of the report

It should disclose the name of the client.

2. Name of the Addressee

          The addressee normally refers to the person who appoints the auditor

3. Introductory Paragraph

             the auditor’s opinion on financial statements audited.

4. Scope

             The audit examination should cover company’s accounts, Profit and Loss Account, Balance Sheet and Cash Flow statements.

5. Opinion

           The auditor’s opinion on the books of account and financial statements examined

6. Signature

             The signature part should include the manual signature of the auditor. 

7. Place of Signature

            This should include the location of the auditor or the auditor firm, which is ordinarily their city.

8. Date of the Report

           The date of completion of the audit work should be mentioned in this section.

Types of Audit Report

—Clean or Unqualified Report

      ◦the auditor is satisfied about true and fair financial report prepared

—Qualified Report

    ◦overall financial statements are not fairly stated due to some errors 

—Adverse or Negative Report

    ◦Non conformity with  GAAP

—Disclaimer Report

     ◦Auditor has not been able to obtain sufficient information