Tag Archives: Bank of England

Bank of England CBDC Academic Advisory Group

The Bank of England and HM Treasury have formed a CBDC Academic Advisory Group (AAG).

The AAG will bring together a diverse, multi-disciplinary group of experts to encourage academic research, debate and promote discussion on a range of topics, to support the Bank and HM Treasury’s work during the design phase of a digital pound.

Members:

Alexander Edmund Voorhoeve Professor of Philosophy London School of Economics
Alistair Milne Professor of Financial Economics Loughborough University
Andrew Theo Levin Professor of Economics Dartmouth College
Anna Omarini Tenured Researcher and an Adjunct Professor in Financial Markets and Institutions Bocconi University
Bill Buchanan Professor of Computing Edinburgh Napier University
Burcu Yüksel Ripley Senior Lecturer of Law University of Aberdeen
Danae Stanton Fraser Professor in Human Computer interaction, CREATE Lab University of Bath
Darren Duxbury Professor of Finance Newcastle University
David Robert Skeie Professor of Finance University of Warwick
Davide Romelli Associate Professor in Economics Trinity College Dublin
Dirk Niepelt Professor of Macroeconomics University of Bern & CEPR
Doh-Shin Jeon Professor of Economics Toulouse School of Economics
Gbenga Ibikunle Professor and Chair of Finance University of Edinburgh
Iwa Salami Reader (Associate Professor) in Law and Director, Centre of Fintech University of East London
Jonathan Michie Pro-Vice-Chancellor and Professor of Innovation & Knowledge Exchange Kellogg College, University of Oxford
Marta F. Arroyabe Reader & Deputy Head of Group University of Essex
Michael Cusumano Deputy Dean and Professor of Management Sloan School of Management, MIT
Pinar Ozcan Professor of Entrepreneurship and innovation Said Business School, University of Oxford
Sheri Marina Markose Professor of Economics University of Essex

The Bank of England’s “Future of Finance Report”

Huw van Steenis’ summarizes his report as follows (my emphasis):

A new economy is emerging driven by changes in technology, demographics and the environment. The UK is also undergoing several major transitions that finance has to respond to.

What this means for finance

Finance is likely to undergo intense change over the coming decade. The shift to digitally-enabled services and firms is already profound and appears to be accelerating. The shift from banks to market-based finance is likely to grow further. Ultra low rates, new regulations and the need to invest in updating their businesses mean many UK and global banks are struggling to make their cost of capital. Brexit and political and policy changes around the world will also impact the shape of financial services. Risks are likely to shift.
Regulators and the private sector have to collaborate in new ways as technology breaks down barriers. Finance is hugely important to the UK and the right infrastructure can support new finance.

What we ask the Bank of England to do

Shape tomorrow’s payment system
Enable innovation through modern financial infrastructure
Support the data economy through standards and protocols
Champion global standards for markets
Promote the smooth transition to a low-carbon economy
Support adaption to the needs of a changing demographic
Safeguard the financial system from evolving risks
Enhance protection against cyber-risks
Embrace digital regulation

Mark Carney’s June 2019 speech. See also the 2018 US Treasury report on financial innovation.

The Bank of England Welcomes Fintech

In the FT, Chris Giles, Caroline Binham, and Delphine Strauss report about plans of the Bank of England to let fintech companies

bank at Threadneedle Street and thereby offer payments systems on a level playing field with commercial banks.

The editorial board of the FT welcomes the plans; it seems to have in mind not only competition but also “synthetic” CBDC:

By offering fintech companies access to the BoE’s vaults, the governor may inject much-needed competition into the sector. What must follow is proactive regulation …

Commercial banks have traditionally had exclusive access to deposits at the UK’s central bank, offering them a competitive advantage through cheap banking services. … Another potential advantage for consumers is they could be paid the central bank’s often favourable interest rate directly — rather than relying on traditional banks to pass on rate rises.

Mark Carney outlined the plans in his Mansion House speech. Here are some excerpts from the section on digital finance:

… the Faster Payment System (FPS) launched a decade ago has made payments quicker (within two hours) and more cost effective by encouraging direct bank-to-bank transfers.

While mobile app PayM uses FPS to facilitate direct bank-to-bank payments between individuals via text, it requires both the sender and recipient to be signed up to the third party service. But few are. And FPS is not yet used for in-store or online purchases as the infrastructure required at the point of sale does not reliably exist in the UK.

In these regards, the UK is still a long way behind countries such as Sweden, the Netherlands and India …

The revolution of payments may not be driven by the old bank-based systems … Major changes are on the horizon … That’s why the Bank fully supports the Payments Strategy Review the Chancellor has launched this evening.

To support private innovation and to empower competition, the Bank is levelling the playing field between old and new. This means allowing competitors access to the same resources as incumbents while holding the same risks to the same standards.

… we are now making it easier for a broad set of firms to plug in and compete with more traditional providers. In July 2017, we became the first G7 central bank to open up access to our payment services to a new generation of non-bank PSPs. …

Responding to demands from innovators, the RTGS rebuild will also now provide API access to users to read and write payments data, as well as implementing a system whereby each payment will be tagged with information in a standardised format across the world. This global messaging standard will speed up settlement both domestically and across borders.

… Today, the Bank of England is announcing plans to consult on opening access to our balance sheet to new payment providers. Historically, only commercial banks were able to hold interest-bearing deposits, or reserves, at the Bank. …

From the Bank’s perspective, expanding access can improve the transmission of monetary policy and increase competition. It can also support financial stability by allowing settlement in the ultimate risk free asset, and reducing reliance on major banks. Users should benefit from the reduced costs and increased certainty that comes with banking at the central bank. …

This access could empower a host of new innovation. … settlement systems using distributed ledger technology … consortia, such as USC, propose to issue digital tokens that are fully backed by central bank money, allowing instant settlement. This could also plug into ‘tokenised assets’ – conventional securities also represented on blockchain—and smart contracts. This can drive efficiency and resilience in operational processes and reduce counterparty risks in the system, unlocking billions of pounds in capital and liquidity that can be put to more productive uses.

The potential transformation in retail payments is even more fundamental. …

The Bank of England approaches Libra with an open mind but not an open door. Unlike social media for which standards and regulations are being debated well after they have been adopted by billions of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch.

Carney also outlines plans to support initiatives that aim at giving households and firms control over “their” data:

To make real inroads, SMEs must be able to identify the data relevant to their businesses, incorporate it into their individual credit files, and easily share these files with potential providers of finance through a national SME financing platform.

This would put into practice the recommendations from Professor Jason Furman’s Digital Competition Panel report on how to extract value from data and promote competition. One of the most important recommendations in this regard is to give consumers control of their data. This would allow consumers to move their personal information from one platform to another and avoid lock-in effects, opening the door to new services. To some extent, this is what Open Banking hopes to achieve. Although to make this a success means establishing common off the-shelf API standards and operating platforms onto which developers can build. …

It is not for the Bank of England to build this platform but we can help lay some of groundwork. The messaging standards we are adopting in the new RTGS will also include tagging payments with a unique ID called a Legal Entity Identifier (LEI).

Link to earlier post on the SNB’s policy.

Connecting Central Bank Payments Systems

In the FT, Martin Arnold reports about a new cross-border payment method tested by the Bank of England. The “interledger” program transfers money “near-instantaneously and without settlement risk.” The Bank of England

set up two simulated RTGS systems on a cloud computing platform, using the Ripple interledger to simultaneously process “a successful cross-border payment”.

This is not necessarily good news for the blockchain community. The Bank of England’s proof of concept is

“about connectivity between central bank systems rather than replacing the central bank systems with the blockchain,” [according to] Daniel Aranda, head of Europe at Ripple.

 

 

 

The Early Bank of England and its Contemporaries

In the Journal of Economic Literature, William Roberds reviews Christine Desan’s “Making Money: Coin, Currency, and the Coming of Capitalism” and he provides his own perspective on European monetary history.

… the transition of the Bank of England’s notes from the status of experimental debt securities (in 1694) to “as good as gold” (1833) required more than a century of legal accommodation and business comfort with their use.

Desan emphasizes England’s traditions of nominalism (as opposed to metallism) and monetary restraint as well as early experiments in monetary substitution in laying the foundations for the Bank of England’s success. Lobbying played its role, too.

Roberds discusses the experience of note issuing institutions in other countries.

At the time of the Bank’s founding, there were about twenty-five publicly owned or sponsored banks operating in Europe. These institutions are largely forgotten today; most were dissolved by the early nineteenth century and only one continues in existence, Sweden’s Riksbank. …

These banks were run by and for the merchant communities in their respective cities [Amsterdam, Genoa, Hamburg, and Venice] … The existence of the early municipal banks depended on a form of nominalism more extreme than what prevailed in contemporary England. Merchants in these “banking cities” were required by law and by custom to settle all bills of exchange (the dominant form of commercial credit) with transfers of money on the ledgers of the local public bank. The practical advantage of such a restriction was that it reduced or eliminated the possibility of settlement in the debased coins … the municipal banks’ ledger money was often seen as more reliable than the typical coin in circulation …

Most of these banks failed after getting involved in speculative episodes, hyperinflation, or political turmoil. The Bank of England was lucky.

Bank of England Opens Access to Payment System

A progress update by the Bank of England describes the Bank’s intention, over time,

to extend direct access to RTGS to non-bank Payment Service Providers (firms granted the status of E-Money Institutions or Payment Institutions in the UK), collectively known as PSPs. By extending RTGS access, our objective is to increase competition and innovation in the market for payment services.

History of Finance and Financial Regulation

The Economist reviews the history of finance and financial regulation, arguing that

institutions that enhance people’s economic lives, such as central banks, deposit insurance and stock exchanges, are not the products of careful design in calm times, but are cobbled together at the bottom of financial cliffs. Often what starts out as a post-crisis sticking plaster becomes a permanent feature of the system. … The response to a crisis follows a familiar pattern. It starts with blame. New parts of the financial system are vilified: a new type of bank, investor or asset is identified as the culprit and is then banned or regulated out of existence. It ends by entrenching public backing for private markets: other parts of finance deemed essential are given more state support.

The Economist identifies five major events that shaped modern finance:

  • Hamilton’s bank bailout in 1792.
  • The creation of joint-stock banks in England after the “emerging markets” crisis of 1825.
  • The railroad crash of 1857, global panic and the Bank of England’s stricter requirements for discount houses to hold cash.
  • Financial fraud and low cash holdings, the 1907 panic, the National Monetary Commission’s demand for a lender of last resort and the 1913 Federal Reserve Act establishing the (third) central bank in the US.
  • Recession and financial meltdown in 1929, the bank holiday of 1933, publicly funded bank recapitalization, Glass-Steagall and the FDIC.