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Introduction The EMU
The Bank of England The british retail banks




  1. the history of money
    1. barter
      1. definition
      2. Its a system of exchange of goods and services directly (= without a medium) for other goods and services.

        NB : to barter = to swap.

      3. advantages
Direct contact between the buyer and the seller.
Reliable : you can see what you buy.
      1. disadvantages : R.I.D
Rate of exchange : How much was one thing worth in comparison to another ?
Indivisibility of goods.
Double coincidence of wants : For barter to take place one had to want the surpluses of one another (no flexibility).
    1. from commodity money to the present day
      1. definition of money
Money is an acceptable means of exchange which can be measured in small units, that is durable, portable, difficult to imitate and stable in value.
It should fulfil a certain number of things :

A store of value : a government has to deal with it (inflation).

A unit of account, a measure of value, for all goods and services to be possible to be measured. People can compare between two currencies.

A medium of exchange, something acceptable to everybody, who could keep it and spend it later.

A standard of deferred payment (system of credit enabled to function).

      1. various things have fulfilled the characteristics of money
Commodity money :
Things, objects (valuable for them) used as money.
Ex : salt, tobacco, shells,...
Disadvantages : perishable goods, bulky things (cattle), variable quality...
Hard money :
Money of precious metal (intrinsic value)possibility to give change.
Disadvantages : supply and demand.
Demand outstripped supply.
It limited international trade.
Paper/soft money :
Banknotes started to replace coins and hard money.
Convertible banknote system.
To encourage people : " I promise to pay the bearer on demand the sum of... ".
1931 : Britain went off the gold standard (no longer convertible : no more precious metal coins).
Problem : counterfeiting.
Substitute money :
Cheques, then near money : bills of exchange (= lettres de change)
Plastic money : credit card.
  1. the development of banking
    1. the fiduciary issue
The currency issue :
The BOE creates new money : it prints notes and mints coins.
The fiduciary issue :

In exchange for the gold deposited in their vaults, the goldsmiths gave IOU.
So, they were backed by the gold standard, goldsmiths never gave more IOU than the value of gold they had.

But if there is a problem, the BOE must print more notes, which are not backed anymore by gold : this is the fiduciary issue, when money drops the gold standard and is backed by government securities.

    1. the creation of credit
      1. definition
It is a transaction between 2 parties : the lender and the borrower.
Examples : a bank or a shop and a customer, or the Central bank and the government.
Before money is granted, the lender will make sure the borrower is creditworthy : he will look at his income (or assets and turnover) and his outgoing (bills, debts).
When money is granted, it is subject to repayments including interests (fixed or variable).
A variable interest rate is based on the basic lending rate from the BOE to the government (The Treasury) or the other banks.
      1. the risk factor
        1. for the lender
Bad debts

It is a debt that cant be paid back.

To recover it, the bank go to court ; if the borrower dont have any money, the debt is cancelled, written off.

Shortage of cash

The bank lent too much, it has too many bad debts

Run on the bank, collapse

The people dont trust their bank anymore and want their money back in the same time.

Bankruptcy, overspending
        1. for the borrower
Cant repay his loan, defaults on his loan.
Goes bankrupt.
Is barred from holding a cheque book and a credit card.
      1. the solutions
Check on creditworthiness
Credit risk transfer
The bank asks another bank to be guarantor, to back the borrower if he defaults.
Risk pooling
Several financial institutions pool together if there is a problem, they club together. They agree to compensate the shortfall.

The bank of England

  1. history
The BOE was set up in 1694 by king William 3rd by a Royal Charter
Who wanted to raise money for a war.
He established his own bank and gave it the advantage of being a JSB.
After the war it carried on and became increasingly used by the government.
1826 : Right to open branches
Only five are left now : Birmingham, Bristol, Leeds, Manchester and Newcastle.
1844 Bank Charter Act
1st Act of Parliament concerning the BOE.
It gives it the monopoly to print notes.
But, in return, the BOE must print a weekly statement of its investments : " The Bank Return ".
1914 : New notes printed
The national debt had raised.
Apparition of 1 and s10 (shilling) to replace the sovereign.
No more gold in circulation.
WW2 : Co-operation between banks
The BOE co-operated with the US Federal Reserve of NYC.
Creation of a club of bankers to discuss issues and agree on financial dealing :
Gold market
Currencies and their strength
General economic scene
Interest rates
Agreement to finance other countries and economies
1946 BOE Act
Passed by labour government which nationalised the BOE.
The BOE was no longer autonomous, it had to follow Treasury decision : It took up the capital stock (= assets) of the BOE.
It also gave it legal power over the other banks : the BOE " could ,if necessary, issue directions to any banker ".
It worked right until the 60s : A lot of new financial institutions were set up.
They were fringe institutions (= secondary banks) not controlled by the BOE.
The big bankers were frightened that a panic could appear if those institutions went bankrupt.
This happened in 1973, precipitated by the oil crisis.
The BOE had to step in (= intervene) to stop them going bankrupt : It asked the major banks to contribute money to a major fund : the lifeboat fund.
1979 Banking Act
It made the supervision of the other banks a statutory responsibility of the BOE : the BOE must supervise all other banks.
To protect the British banking system, and small depositors, to strengthen the BOE. But not efficient :
1984 : John Matthey Bank scandal
A small bank in financial trouble, on the edge of collapsing rescued by the BOE.
Scandal : the government tried to cover up the whole story, but the press found it.
The JMB had made a number of risky loans and lied to the BOE.
Still it had to rescue it, bought the bank for 1 and paid all the debts.
1987 Banking Act
It's a consolidation of the 1979 Act : it includes the new EC directives and adds that nobody can take a deposit from the public as a business without the authorisation of the BOE.
Tried to tighten up the banking system, to give more power to the BOE over smaller banks.
  1. functions
    1. issuing money
Keep the notes in good condition.
Print notes every day (8 millions are withdrawn from the circulation every day)
Coins are minted at the Royal Mint, not by the BOE.
Distribute the new notes to the traders, commercial banks and cash dispensers through 8 regional branches.

RQ : For England and Wales the BOE also controls the size of the fiduciary issue.

    1. supervising the financial community and industry
      1. the other banks

Make sure they dont make themselves into difficulty.

Informal agreement until the 60s.

1987 Act by Thatcher tried to tighten up the central banks power over the other banks to stop happening scandals :

All deposit taking institutions have to be authorised by the BOE

Licenses granted after a long detailed investigation.

Sound capital base : adequate capital or liquidity.

Honest, able management, responsible people.

Realistic business plan.

Provision for bad debts.

But if there is any doubt, at any time the licence can be taken away.

If there is a problem between 2 banks, the BOE sends a " banking ombudsman " to oversee the conflict.

To look out the question of ownership

Limit private individuals to 15% of the shares of the bank institution.(In 1984 the JMB was owned by 2 or 3 individuals).

Anybody wanting to take over any of these institutions had to tell the BOE, which could take away the licence if the new owner was not suitable.

Question of loans

All banks had to notify the BOE any large loan
If the banks want to lend 10% or more of the capital for individuals, 25% for institutions.
In 1984, the JMB lent vast sums to the government which could not pay back.

It became a criminal offence to give the BOE false information or misleading information designed to give false impression.
The JMB did it for years.

One of the side effects of the 1987 Act was that it deregulated banking.
It opened up banking to competition, it allowed people to start providing banking services as long as they satisfied the BOE licence.

Moreover the 1979 act is still in operation
It enabled the BOE to settle a deposit protection fund in which it forced the other banks to deposit money according to the size of their capital base.
Then the BOE will use this fund for any bank in trouble, or to pay back a certain amount people have deposited (up to 15,000).

      1. the financial community
The BOE is supposed to supervise the stock exchange, any market where securities are exchanged (ex : LIFFE), and all of the commodity market (where raw materials are exchanged).
1975 Basle Concordat : Legislation for foreign EC banks which have branches in England.
      1. the British industry

The BOE must keep an eye on the British industry, guide them, stop them getting in financial difficulty.

    1. as an adviser
Inside the country

Industry, commerce, central government, local government.

Advice based on :

The Financial Statistics Division (gives forecasts and analyses on banks)

The Economics Division

The International Division (evaluates the international money situation)

Outside the country

The commonwealth countries asked the BOE to help them raise a bank.

    1. as a go-between :the IMF
    2. The International Monetary Fund.

      It helps countries in difficulty, in exchange for rigorous policy.

    3. as a banker
    4. The BOE manages :

      The gold reserve (bullion)

      Foreign currencies

      Generally, the BOE doesnt intervene in retail banking, except for shareholders (before its nationalisation) : they had the right to have an account.

      1. to the other banks and discount houses (= banques descompte) through 2 types of accounts
        1. an operational balance (= solde)
Banks deposit big sums of money which they use at the end of every day after the days clearing has taken place, when they have calculated how much the different banks owe the other.
They use this balance to pay each other how much they owe the other banks.
The BOE makes it easier for this account to take place.
        1. non-operational balance

The BOE forces the other banks to deposit within the central bank. It is used to control the money supply (= masse montaire).
The banks dont earn any interests.

      1. to the government
The BOE holds the governments bank accounts and organises the government income and outgoing.
The name of the governments account is : " Exchequers account ".
The BOE receives all the money from tax revenue and has to pay out all of the money necessary for all government spending (ex : unemployment benefit, maternity benefit,...).
As the outgoing are usually very high, the BOE is also uncharged with the public debt.
But the deficit is compensated by the BOE : it raises finance for the government.
      1. to the central banks abroad

Foreign central banks have an account with the BOE where they can keep their gold reserve and a account.

    1. organising the borrowing for the government
    2. The BOE organises government borrowing on behalf of the government.
      These are referred to as The national debt.
      (To service the national debt = to pay its interests as it is due.)

      The BOE borrows from the public and from the other banks.
      (Public Sector Borrowing Requirement : Income - Expenditure.)

      Two ways to do so :


      Treasury Bills

      1. long term : gilts
Gilt-edged stocks are bonds (= obligations) : a loan to the government
Over a long period of time (5 to 40 years)
At a fixed rate of interests (retail price index linked).
Bonds can be exchanged on the stock exchange, so the BOE is the registrar of the stocks.
The BOE :
Pays the interests on the bonds
Repays the loans at the end of the fixed period
Issues more gilts as the government needs to borrow money
      1. short term : 91 day treasury bills and the role of discount houses
        1. mechanism of the TB
TB are financial documents and commercial instruments existing since the 19th century.
They are sold to other banks or discount houses (which regard them as a near cash investment) every Friday.
They dont have a fixed rate of interest : it fluctuates from week to week according to the demand.
        1. role of the discount houses
DH are a financial institution dealing with governments money.
There are 11 DH in England.
They are an intermediary between the BOE and the commercial banks.
DH have a deposit in the BOE (0.35% of their total reserve).
When they have a deficit, the clearing banks withdraw capital from the BOE.
They are responsible for cheque clearance between banks.
DH deal with :
Bills of Exchange
Government bonds near maturity (2 months before they have to be paid)
They guarantee that if nobody else want to buy the TB, they will buy them so that the government is always sure it can borrow the money it need.
In return the government is the lender of last resort : if the discount houses need liquidity quickly, the BOE will always provide them with the money.
DH charge a rate of discount.

This rate is influenced by :

The general BOE rate
How long TB are to be bought back by the BOE

Nevertheless, the discount rate is inferior to the BOE lending rate.
So, when DH borrow from the BOE, they make a loss.
To compensate, BOE and DH negotiate so that there never is a difference between the 2 rates superior to 2%.

The discount houses are unique to England.
They act as a buffer (= tampon) between the BOE and the banking sector in general.
      1. the NLF

The National Loan Fund deals with all governments loans.

    1. as an instrument of the government in controlling the economy
    2. The BOE is the executor of the governments monetary policy.

      1. four main economic policy objectives
Full employment
Price stability
Balance of payment stability (means not importing too much)
Economic growth
      1. to put into practice those objectives, the government has 2 methods
Fiscal policy (= taxation)
Monetary policy through the BOE

It involves controlling the money supply
This is the total amount of liquidity available in the economy paper money, substitute money, deposit in banks, bank credit.

Economic theory
There is a connection between the money supply, the level of peoples wages and the price of goods.
Therefore, its necessary to control the money supply.

Money Supply

Interest Rates


Price of Goods











(but danger of inflation)

When the MS is tight (= limited), interest rates are high; so its not easy for consumer or business to get credit, to borrow, to buy goods, to create jobs, to invest.

When the MS is loose, interest rates lower, its easy to spend, create jobs, it stimulates the demand in goods and services...But danger of inflation in the long term.

      1. various ways to influence the money supply
        1. special deposits
Involves the BOE telling the banks to deposit a certain amount of money at the BOE; which would limit their ability to create credit.
No interests given (today there are non-operational balances : banks have to deposit 0,5% of their capital at the BOE).
        1. interest rates
Until 1981, the government fixed and published interest rates in the banking sector.
In 1981, Thatcher decided there was too much intervention of the government, so the BOE stopped fixing interest rates.
But in practice, when the BOEs rates increase or decrease, the other banks rate do the same.
Reason : If a bank which rate is very low come into difficulty and borrows money from the BOE, the bank will lose money.
        1. managing the money market (= open market operations)
The money market means all different financial institution providing people with capital or borrowing capital.
It is used by the BOE to control the money supply by buying or selling government securities : treasury bills and gilts.

If the government wants to stimulate spending, because the money supply is too tight :

It tells the BOE to buy back treasury bills and gilts
Then people sell, get money to spend or deposit in a bank
Gives more liquidity to the bank, which can create more credit (Knock on effect).

If the government thinks there is a dangerous boom in the economy, too much credit available :

The government will tell the BOE to sell
Reduces the banks liquidity, and meanwhile the credit.

    1. managing the Pound : operating the Exchange Equalisation Account
1932 : Setting up after Britain left the gold standard.
Intention to use the reserves in gold or currencies in the BOE to protect the .
1979 : Exchange controls regulated by the BOE, which facilitates the control of the value of the .
By 1979 onwards, Thatcher abolished exchange controls.
People could buy or sell as much as they wanted.
Led to various sharp changes in the value of the .
Role of the BOE : preserve the stability, as far as possible.

Not good for business if there are changes in the value of a currency.
(Disruptive = drangeant).

So, the BOE buys and sells or foreign currencies.
(Cable rate = value of the against the $.)

If the BOE buys and sells $ : increases and $ decreases.

But if the is too strong, difficulty to export.

In recent times it became difficult to resist the market, there is so much hot money (= money for speculation) that a central bank cant support a currency for a long period of time.


  1. why did gb hesitated to join eec ?
1957 : GB didnt sign EEC agreement but recognised the importance of Europe.
1960 : GB try to enter EEC. De Gaulle refuses. Why ?
Historical reason :
Britain had a very large empire (1/4 of the globe) which was then transformed into the Commonwealth, except for Pakistan and South Africa.
So, there was no need for Europe.
Close relationship with USA.
Frightened to lose their independence, sovereignty and own policy.
1960 : The EFTA was set up.
It enabled Britain to get the advantages of trade with other countries in Europe without losing political power by being part of an international organisation.
1973 : GB joined the EEC.
  1. what is emu ?
    1. presentation

EMU includes 3 elements :

A single monetary policy for all members.
A single exchange rate for all currencies.
The adoption of a common currency unit.
    1. purpose
It is simpler for business and travel.
It discourages speculation on different currencies.
It imposes certain constraints on a financial level thus encouraging economic stability.
It encourages solidarity between countries.
It aims to make Europe more competitive economically with countries like Japan or USA (The Euro is a satisfactory competitor to the $).
    1. past attemps to achieve emu
      1. 1944 : Bretton Woods agreement
It gives the guidelines for an international monetary system for conversion rates.
Principle :
All currencies aligned on the $.
$ aligned on the Gold Standard.
BWA created :

The International Monetary Fund.

The World Bank.

Parity between currencies (until 1970).

      1. 1957 : Rome Treaty
It is the starting point for economic and financial co-operation between countries.
It was signed by 6 countries : Belgium, France, Italy, Luxembourg, Germany and The Netherlands.
      1. 1960 : Organisation for Economic Co-operation and Development (OECD)
      2. 1969 : Barre Plan
For economic and monetary union.
All currencies are aligned on the $.
      1. 1970 : Werner Plan
He was Luxembourgs prime minister.
2 key ideas :
Fixed parities for European currencies.
Free circulation of capitals.
      1. 1972 : monetary snake
Currencies mustnt fluctuate more or less than 2.5% of the $.
1973 : Many countries couldnt follow.
      1. 1979 : European Monetary System (EMS) and Exchange Rate Mechanism (ERM)
        1. EMS ideas
EMS replaces the monetary snake.
It aims at :
Economic and financial solidarity between countries.
Fixed parities.
A common credit system.
A common currency unit : ECU, which would be the backing currency for EMS.
It is based on the ERM : An ERM member is also an EMS member.
        1. ERM principle
The ERM limits fluctuation rates between currencies.
There are 7 currencies involved, but 8 countries : Germany, France, Italy, Britain, Holland, Denmark, Ireland and Belgium.
6 currencies have a 2.25% margin.
1 currency (Italy) have a 6% margin.
If a country wants to devaluate its currency, it had to ask the EC agreement.
        1. ERM failure
The margin was based on the German economy and many countries had problems to follow it.
After the German reunification, interest rates boomed.
It became even harder for countries to compete !
There was a weak economic activity in UK.
Little inflation and low interest rates.
So, GB felt it would be good to leave the ERM.
1992 : GB and Italy left the ERM.
Margin was enlarged up to 15%.
There was no harmony anymore.
      1. 1981 : Delors Plan
      2. He is the president of the European Commission.

      3. 1991 : Maastricht Summit
It is a continuation of the Rome Treaty in moving further towards the integration of Europe on a political, social and economic point of view.
Idea of an economic and monetary union whose founding father is Jacques Delors.
  1. 1981 : the Delors Plan for EMU
    1. first stage
      1. first part : the Single Market 1993
Means the free circulation of people, goods and capitals.
Nevertheless, there are still some glitches :
There are still passport controls because GB didnt sign the Shengen Agreement that allows control only at the limits of EEC.
There are still documents to give and problems of VAT even if it is less complicated.
Thatcher got rid of capital control in 1979.
      1. second part : the Exchange Rate Mechanism
1944 : The Bretton Woods Agreement creates the American Monetary System.
It fixes the exchange rates of the major world currencies.
Nevertheless, they were allowed to vary within a certain limit : 2.25%.
Now, the limit is 15%, except for the German mark and the Guilder.
Aims of the monetary system :
Create an European area of exchange rate stability.
Stability would foster European trade.
To help the government to get rid of inflation.
1979 : The European Monetary System is set up.
It stabilises the exchange rates in Europe.
Principle : It discourage trade if there are big changes in value.
Britains reaction :

1979 : Thatcher comes to power.
She wanted to keep her independence.
She used the as a political tool before the votes.

1990 : The conservatory government gets rid of Thatcher and joins the ERM.
Tory voters were part of the financial community and much in favour of joining ERM.
The was overvalued but couldnt resist speculators.

1992 : GB is forced to leave the ERM.
Then , the was allowed to float.

    1. second stage 1994
      1. first part : the setting up of the European Monetary Institution (EMI)
The EMI is an intermediary institution based in Frankfurt.
It has no authority over interest rates or currencies.
Its task is to set up the operation background for the move to stage 3.
      1. second part : period of convergence
The EMI tries to bring about convergence and checks when economies are cheating or manipulating statistics, which is the main fear of the Germans.
5 convergence criteria :

Inflation rate
Mustnt be above 1.5% of the 3-best performing countries average rate.

Public debt
Mustnt exceed 60% of Gross Domestic Product.

Budgetary deficit
Mustnt exceed 3% of GDP.

Rates of exchange
Must respect the EMS margin for 2 years, a least.
There mustnt be any devaluation inside Europe.

Long term interest rate
Mustnt exceed by more than 2% the interest rate of countries with the best economy performance.

    1. third stage 1999
      1. the Single Currency, the European Central Bank (ECB)
The ECB is designed to sit at the hear of an European system of central banks.
It will fix a common interest rate policy for countries in the monetary union once exchange rates are pegged.
When the move to a single currency occurs, the ECB will issue and regulate the new money.
      1. 1999 : Euro introduced in non cash form
The exchange rates between participating currencies is turned into " conversion rates ".
National and European currency became different expressions for the same currency.
Private individuals will use the national currency.
The financial market will use Euro.
This includes monetary policy, foreign exchange operations of the ECB and public debts issues.
      1. 2002 : Euro banknotes and coins introduced
      2. National banknotes and coins are withdrawn.

      3. July 2002 : national currencies lose legal tender status
  1. 1995 : the Madrid Summit
It was a key conference for monetary union.
The economic and finance ministers of the 15 countries decided on how to progress towards a single currency.
The decisions :

January 1995 : Monetary union happens.
It wouldnt be done before because it is necessary for exchange rates to be fixed before, and it takes time.

The ECB.
It will be the single authority in charge of the European monetary union.

The Euro.
It will be the ECU official name.

A 3 year transition period.
During this period, the Euro and the national currency units of each state member will function side by side.

  1. the present state of affairs
Data processing : need to change computer software.
A 2 currencies system (national + Euro).
More decimals (4 instead of 2 in France).
International loans : Which rate of interest (national or Euro) ?
Banks :
Loss of income from international change of currency.
Staff training.
      1. European level
      2. % of population FOR the single currency :









        Todays new surveys show a general decline.

      3. Britains level
A lobby in favour of joining : The financial community.
A larger market.
Simpler financial transactions.
If London (now Europes centre of finance) isnt in the EMU (= rate stability), foreign investors will fly away.
Increasing influence of Euro-sceptics :Conservatory + popular press (tabloids).
Insular attitude, defence of national interest, fear to lose independence.
Solution : the opt-out clause.
GB can leave the EMU if necessary.
So, no need to follow the convergence criteria.
      1. the problems
1998 : Decision on which countries satisfy the 5 convergence criteria ; based on 1997 figures.
1994 : 2 countries satisfy the criteria : Germany and Luxembourg.
1996 : None.
3 controversial members : Portugal, Italy and Spain.
They want to join EMU but they have a huge public debt.
Germany and France fear they will be strict only to enter, not after.
They will join on the 2nd wave (2001).
      1. the solutions
  1. Delay the single currency for 1 or 2 years.
    But, will the situation be better after ?
  2. Enlarge the 1st wave membership to all Mediterranean countries (except Greece).
    But, would this not undermine the Euro (confidence weakened by weaker economies in the EMU) ?

The british retail banks

Retail banks = Clearing banks.
In the UK, there are 2 types of banks :
Retail banks (US = commercial banks) : they operate banking in small accounts.
Merchant banks (US = Investment banks) : they are wholesale banks.
What are the differences between them :
Size :
Retail banks are usually bigger.
Origin and history :
Merchant banks belong to families, private investors.
Retail banks started as joint stock companies, with shares.
Philosophy :
Retail banks are interested in long term customers.
Merchant banks have a succession of contracts with rich customers.
Profit margin :
Retail banks have smaller profit margin, lower rate of interest.
Role of the retail banks :
It is an intermediary between borrowers and lenders.
They invest money from savings/ deposit accounts.
They use some of money for loans to other customers.
How do they make profit :
Comes from the difference in interest rate. It pays to the savers and borrowers.
Uses the financial market : invest in shares portfolios (spreads the risk).
The rules are almost the same as for the bank of England. They must have an account with the bank of England.
The big 4 :
National Westminster
The Midland Bank
Barclays Bank
Lloyds Bank
They have branches in all main towns and some villages in UK.
Advantage of the system : Less risks of bankruptcy. (Large money reserve)
Disadvantage : It takes long time to take decision (ex : for a loan, 7 or 8 days).
      1. deposit taking and money transmission
        1. current-account services

RQ : current account (GB) = checking account (US)

Advantages of a current account :
Money safe.
Money available at any time.
Interests (3% of the capital) earned on the current accounts (since 1989).
RQ : How come they pay interests ?
Deregulation of banking (80s) = competition from building societies (= mutualistes) which decided to pay interests on current accounts.
From 1987 onwards, retail banks started to lose customers = 1989, they decided to do the same.
Disadvantages :
Cheques are not free.
Banks charges.
          1. cheques
            1. introduction : how a cheque works
The drawer (= current account holder) writes out a cheque to the payee.
Overdraft :
If the drawer has not sufficient capital on his account, the cheque will be returned to his bank by the payees one, and then back to his house.
Current account holders receive a monthly statement showing credits, debits and the balance.
In UK, it is possible to post-date a cheque, to put a later date than the day the cheque was written.
Most cheques are crossed, they can only be paid into an account.
A blank cheque has no amount written on it.
            1. cheque clearance
This is done through the BOE.
13 banks are authorised to clear cheques in Britain.
Main system : Clearing House Automated Payment System (CHAPS).
It was introduced in 1984.
Advantage : Faster (all data are introduced when collected).
CHAPS = BACS (System for automated small payments)
+ Cheque and credit clearing company.
          1. credit cards
Advantages :
Easy way to withdraw money.
Sometimes, it can be used as a short term credit.
Unless you pay back what you spent every month, they can be very expensive.
Interest rate is about 25%.
Charge cards : you have to pay back monthly.
          1. standing orders
The holder asks his bank to pay a certain amount, usually the same, each month to a creditor.
It is used for mortgages.
Fixed sum.
Regular intervals.
          1. direct debits

RQ : = prlvement automatique.

The holder asks his bank to pay a creditor.
The amount can vary.
It is used for common bills : electricity, phone...
Fluctuating sum.
Regular interval.
          1. credit transfers (= banking giro)
It is used by the companies to pay their employees their salaries.
Fluctuating sum.
Large number of creditors.
          1. bankers draft facilities

The cheque is written out by the bank itself.

It underwrites the cheque : it is a guarantee that there will be enough capital to pay it.

The bank draws the amount of the cheque from its own fund, and then draws it from its customers account.

Usually required by the solicitors (= notaires).

Advantages :
No transport of a big capital.
No cash required.
Guaranty of the presence of enough capital.

RQ : Same principle as for travellers cheques.

Large amount.

        1. savings-account services (=deposit-account)

People deposit money but they dont have a chequebook, they have no immediate access to their money : they have to warn the bank before.

In return, depositors get a much higher rate of interest.

      1. lending
      2. This is the major aspects of banking : because banks are joint stock companies, their 1st responsibility is towards the shareholders, who expect an annual dividend.

        1. overdrafts
        2. It the fact to spend more money than available on the account, still, it requires the banks permission before, or the bank may not honour the cheque.

          It is automatically paid back out of the income.

          Interest rates vary according to :
          The level of the basic lending rate fixed by the BOE.
          The customers creditworthiness.
          The customers fidelity.

          Advantages :
          Low cost (if authorised).
          Interest rate negotiable.

          But overdrafts are repayable on demand by the bank without notice.

        3. loans

        It is a fixed amount asked for in advance for a particular purpose at a fixed rate of interest.

        It is paid back in instalments.

        If the customer defaults on his loan, the bank can seize the good for which the capital was needed to buy or it can ask a guarantor to pay for him..

      3. other services
Advice and information.
Access to other financial services.
Foreign exchange activities for importers and exporters.
Acting as intermediaries in dealings with stockbrokers.
Executorship and trustee services.
Income tax advice to customers.
Services in the export field.
Credit ratings and credit worthiness.
Economic information on overseas markets etc.
Cash dispensers and cash points.
Bankers credit cards.
Discounting Bills of Exchange.
Investment management services.
  2. Deregulation :
    Removing legal restrictions on the type of business that a bank or firm can do.
    It is a form of liberalisation of financial trade.

    Key effect of deregulation : It raises competitivity between financial institutions.

    In the 80s, deregulation affected many businesses in every fields.

    The " Big Bang " : Deregulation in GB.
    On the 27th October, 1986 :
    the Stock Exchange was computerised
    Introduction of " dual capacity "
    A bank or a Building Society or any financial institution is no longer reduced to one role.
    For example, they could give financial advice, or a current account...

    Consequence for retail bank : more competition, they were no longer in a position of supremacy.


Before deregulation Building Societies had no shareholders.

Now, they do and they are now public companies.

They have merged with insurance companies.

New range of services :
Current account and cheque book
Share dealing services and other types of financial advice

So, now, Building Societies compete successfully with the retail banks.

Evolution in their share of the market :
1960 50% of the overall savings that banks had.
1990 75% of the GB population.

Evolution in the current accounts business :
Differences with a current account in a retail bank :
Higher rate of interest
More notice needed for a withdrawal

The " stepped accounts " :
The more you save money, the higher the rate of interest.

Evolution in the mortgage business :
It was the Building Societies main activity.
In GB, the average home loan (= mortgage) lasts 25 years.

How do the Building Societies protect themselves against a shortage of reserve ?
They invest in short-dated gilts (= gilts nearing maturity).

The difficulties for the Building Societies :
The collapse of housing (80s)
There was too much speculation on housing.
So, money was granted too fast.
Property prices were high.
Example : You could borrow up to 3 times your salary plus the salary of your partner and there was no deposit needed.
Interest rates increased and people with high loans could no longer pay back them.
So, many houses were confiscated and sold by the Building Societies.
Home loans were no longer affordable (fewer buyers, lower demand, low property prices)
There was a big number of houses to sell on the market, so their price collapsed.
Sometimes, the price was less than the initial loan required for it.
Building Societies lost a lot of money.
This was called " negative equity " : when the market value of a property was worth less than the loan on that property.
Reduction of the tax relief on home loan.
The British government felt the economy was too much dependant on property prices, so it introduced measures to discourage property speculation.
It was a drastic reduction : from 40% to 15% of reduction on home loan.
It even worsen the situation for Building Societies.
New national savings.
There was a high budget deficit and the conservative government was against a rise in taxes.
There was a good rate of interest on those savings, so it discouraged people to save with the Building Societies.
1992 : GB leaves the ERM.
So, interest rates fell.
There was a strong criticism with Building Societies investors.
Many of the Building Societies were on the verge of bankruptcy.

Solutions :
To merge with other societies.
After, a few big Building Societies were dominating the market.
To take advantage of the deregulation : to expand the number of services offered :
Home and life insurance (a new mortgage was created : the endowment mortgage, a form of life insurance).
Cash machines.
Home banking.
Involvement in the Euromarket. It was a crucial area for Building Societies. They invested massively in this field by getting together.

Conclusion :
For BS, deregulation meant competition but also a saving grace.
They expanded in a number of sectors and it prevented them from collapsing.
The 1996 BS Act allowed them to diversify. It is a direct consequence of deregulation.