British banking law refers to banking law in the United Kingdom, to control the activities of banks.
History
The Bank of England was originally established as a corporation with private shareholders under the Bank of England Act 1694,5 & 6 Will & Mar c 20. to raise money for war with Louis XIV, King of France. After the South Sea Company collapsed in a speculative bubble in 1720, the Bank of England became the dominant financial institution, and acted as a banker to the UK government and other private banks.EP Ellinger, E Lomnicka and CVM Hare, Ellinger’s Modern Banking Law (5th edn 2011) ch 2, 30
The Bank of England could, simply by being the biggest financial institution, influence interest rates that other banks charged to businesses and consumers by altering its interest rate for the banks' bank accounts.So, if the Bank of England raised its interest rate for Barings Bank's account with it, Barings would probably try to raise its interest rates for customers with Barings Bank accounts (unless competition was very tight, in which case its profits would have to be reduced). The Bank of England Act 1716 widened its borrowing power. The Bank Restriction Act 1797 removed a requirement to convert notes to gold on demand. The Bank Charter Act 1844 gave the bank sole rights to issue notes and coins. It also acted as a lender through the 19th century in emergencies to finance banks facing collapse.See W Bagehot, Lombard Street: A Description of the Money Market (1873) discussing Overend, Gurney and Co Because of its power, many believed the Bank of England should have more public duties and supervision. The Bank of England Act 1946 nationalised it. Its current constitution, and guarantees of a degree of operational independence from government, is found in the Bank of England Act 1998.
Macmillan Committee (1929)
Central bank UK banking has two main parts.See EP Ellinger, E Lomnicka and CVM Hare, Ellinger's Modern Law of Banking (2011) chs 1-2 and 5 First, the Bank of England administers monetary policy, influencing interest rates, inflation and employment, and it regulates the banking market with HM Treasury, the Prudential Regulation Authority and Financial Conduct Authority. Second, there are private banks, and some non-shareholder banks (co-operatives, mutual or building societies), that provide credit to consumer and business clients. Borrowing money on credit (and repaying the debtDebt capital finance contrasts with equity capital finance, where an investor buys shares, invariably with voting rights, in a company. Debt finance usually keeps the borrower in control of their business, subject to any restrictive covenants and the need to repay the debt. later) is important for people expand a business, invest in a new enterprise, or purchase valuable assets more quickly than by saving. Every day, banks estimate the prospects of a borrower succeeding or failing, and set interest rates for debt repayments according to their predictions of the risk (or average risk of ventures like it). If all banks together lend more money, this means enterprises will do more, potentially employ more people, and if business ventures are productive in the long run, society's prosperity will increase. If banks charge interest that people cannot afford, or if banks lend too much money to ventures that are unproductive, economic growth will slow, stagnate, and sometimes crash. Although UK banks, except the Bank of England, are shareholder or mutually owned, many countries operate public retail banks (for consumers) and public investment banks (for business). The UK used to run Girobank for consumers, and there have been many proposals for a "British Investment Bank" (like the Nordic Investment Bank or KfW in Germany) since the 2008 financial crisis, but these proposals have not yet been accepted.
Central bank governance Under the Bank of England Act 1998 section 1, the bank's executive body, the "Court of Directors" is "appointed by Her Majesty", which in effect is the prime minister.By contrast the US Federal Reserve Act of 1913, 12 USC §241, requires that on advice and consent of the Senate, appointments by the President ‘shall have due regard to a fair representation of the financial, agricultural, industrial and commercial interests, and geographical divisions of the country.’ Under §302, in the Federal Reserve system of constituent banks, three are chosen by and to represent stockholding banks, six others, represent the public and elected to represent stakeholders. In the EU, TFEU art 283(2), states the European Central Bank's Executive Board (a president, vice president and four members) are appointed by the European Council by qualified majority, after consulting the European Parliament and the Governing Council of the ECB. The Governing Council is itself the Executive Board plus governors of the national central banks using the euro. The term is 8 years, non-renewable, and they can only be removed for gross misconduct after review by the CJEU: ECB Statute arts 10-11. This includes the Governor of the Bank of England (currently Andrew Bailey) and up to 14 directors in total (currently there are 12, 9 men and 3 womenSee 'Court of Directors' on bankofengland.co.uk).BEA 1998 s 1A allows the Treasury to add directors, or reduce the number of directors, after consultation, with some limitations. The Governor may serve for a maximum of 8 years, deputy governors for a maximum of 10 years,BEA 1998 Sch 1, paras 1-2 but they may be removed only if they acquire a political position, work for the bank, are absent for over 3 months, become bankrupt, or "is unable or unfit to discharge his functions as a member".BEA 1998 Sch 1, paras 7-8 This makes removal hard, and potentially a court review. A sub-committee of directors sets pay for all directors,BEA 1998 Sch 1, paras 14 rather than a non-conflicted body like Parliament.
Interest rates The Bank of England provides finance and support to, and may influence interest rates of the private banks through monetary policy. Possibly the Bank's most important function is administering monetary policy. This affects growth and employment. Under BEA 1998 section 11 its objectives are to (a) "maintain price stability, and (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment."In the US, the Federal Reserve Act of 1913, 12 USC §225 states ‘The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’ Under TFEU art 9, and see also 127 and 119-150 the EU should aim at a "high level of employment". By contrast TEU art 3(3) says it should be ‘aiming at full employment’. See M Roth, ‘Employment as a Goal of Monetary Policy of the European Central Bank’ (2015) ssrn.com. Under section 12, the Treasury issues its interpretation of "price stability" and "economic policy" each year, together with an inflation target. To change inflation, the Bank of England has three main policy options.R Cranston, Principles of Banking Law (2002) 121-122 First, it performs "open market operations", buying and selling banks' bonds at differing rates (i.e. loaning money to banks at higher or lower interest, known "discounting"), buying back government bonds ("repos") or selling them, and giving credit to banks at differing rates.In the EU, TFEU art 123 contains a prohibition on the European Central Bank lending money to governments, but in Gauweiler v Deutscher Bundestag (2015) C-62/14 the CJEU approved the use of outright monetary transactions to buy Greek government debt on secondary markets (to support the euro) was lawful. This will affect the interest rate banks charge by influencing the quantity of money in the economy (more spending by the central bank means more money, and so lower interest) but also may not.Cranston (2002) 121, ‘This will typically, in turn, produce a change in the base rates of the banks.’ Second, the Bank of England may direct banks to keep different higher or lower reserves proportionate to their lending.BEA 1946 s 4(3). No order has been issued, but banks generally comply with the Bank of England's suggested reserve ratios. Cranston (2002) 121, ‘The size of the reserves clearly determines the volume of money in circulation and the extent to which a bank can itself extend credit to its customers.’ Third, the Bank of England could direct private banks adopt specific deposit taking or lending policies, in specified volumes or interest rates.See Monetary Control (1980) Cmnd 7858. The Treasury is, however, only meant to give orders to the Bank of England in "extreme economic circumstances".BEA 1998 s 19 This should ensure that changes to monetary policy are undertaken neutrally, and artificial booms are not manufactured before an election.
Private bank oversight Bank of England Act 1998 Three Rivers DC v Bank of England Bank of Credit and Commerce International
Private bank governance
Outside the central bank, banks are mostly run as profit-making corporations, without meaningful representation for customers. This means, the standard rules in the Companies Act 2006 apply.
Directors and shareholders Directors are usually appointed by existing directors in the nomination committee,Companies (Model Articles) Regulations 2008, Sch 3, para 20 and UK Corporate Governance Code 2016 section B unless the members of a company (invariably shareholders) remove them by majority vote.Companies Act 2006 ss 168-9 Bank directors largely set their own pay, delegating the task to a remuneration committee of the board.Companies (Model Articles) Regulations 2008, Sch 3, para 23 and UK Corporate Governance Code 2016 section D Most shareholders are asset managers, exercising votes with other people's money that comes through pensions, life insurance or mutual funds, who are meant to engage with boards,UK Corporate Governance Code 2016, section E but have few explicit channels to represent the ultimate investors.See E McGaughey, 'Does corporate governance exclude the ultimate investor?' (2016) Journal of Corporate Law Studies Asset managers rarely sue for breach of directors' duties (for negligence or conflicts of interest), through derivative claims.Companies Act 2006 ss 170-77, 260-263
Concerns about "short-termism" have been written about by the Kay Review (2014) on short and long term thinking in equity markets, and the Walker Review (2009) on bank governance. These have not yet examined the responsibility of institutional investors, and asset managers who vote with other people's money.
Employee rights Since the Credit Institutions Directive 2013,2013/36/EU arts 88-96 there are some added governance requirements beyond the general framework: for example, duties of directors must be clearly defined, and there should be a policy on board diversity to ensure gender and ethnic balance. If the UK had employee representation on boards, there would also be a requirement for at least one employee to sit on the remuneration committee, but this step has not yet been taken. The Credit Institutions Directive 2013 (2013/36/EU article 95 states "If employee representation... is provided for by national law, the remuneration committee shall include one or more employee representatives."
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