The British Money Market
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7/30/2019 The British Money Market
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The British money market
The discount houses
In Great Britain the money market consists of a number of linked markets, all of themconcentrated in London. The 12 specialist banks known as discount houses have the longest
history as money market institutions; they have their origin in the London bill broker who in
the early 19th century made the market in inland commercial bills. By selling bills through
this market, the growing industrial and urban areas were able to draw upon the surplus
savings of the agricultural areas. Quite early many bill brokers began to borrow money from
banks in order to buy and hold these bills, instead of simply acting as brokers, and thus
became the first discount houses. Since then the major assets held by the discount houses
have at different times been commercial bills (first inland bills as described above and later
bills financing international trade), treasury bills, and short-dated government bonds. During
the 1960s there was a resurgence of the commercial bill, which finally became the discount
houses largest single class of asset, only to be overtaken later by the certificate of deposit.
Important changes were introduced into the British monetary system in 1971, but money at
call with the discount houses retained its role as a reserve asset. Such is the safety and
liquidity of call money that, despite the fractionally lower rate on it compared with other
reserve assets, the banks hold about half of their required reserves in this form. This in turn
provides the discount houses with a large pool of funds, which they invest in relatively short-
dated assets, of which the most important is sterling certificates of deposit, followed by
commercial bills, local authority securities, and treasury bills. This pattern of assets is greatly
influenced by the fact that all call loans to the discount houses are secured loans, parcels of
assets being depositedpro rata with the lending banks as security, and the assets held by the
discount houses must therefore be suitable for use as such security.
They also need to hold a substantial proportion of assets that are rediscountable at the Bank
of England in case of need, and the Bank of England limits their holding of assets other than
public sector debt to a maximum of 20 times their capital resources.
On the liabilities side of the discount houses balance sheet, operating in call money is part of
its day-to-day work. A bank that expects to make net payments to other banks during the day
(for example, in settlement of checks paid by its customers to their customers) will probably
call in some of its call loans, and by convention this is done before noon. Since the banks that
have called in money then pay it to other banks, these other banks will have an equal amount
to re-lend to the discount houses in the afternoon. Thus the discount houses can balance their
booksborrow enough money in the afternoon to replace the loans called from them in the
morning.
It is not uncommon for perhaps 100,000,000 to be called from, and re-lent to, the discount
houses on an active day.
There is one main reason why the money position may not balance in this way. The British
government accounts are kept with the Bank of England, which does not lend at call as other
banks do. Thus net payments into or out of these government accounts will cause a net
shortage or surplus of money for the discount houses in the afternoon and will tend to causemoney rates to rise or fall. The Bank of England can allow such shortages or surpluses to
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affect interest rates, or it can offset them by buying or selling bills or by lending overnight to
the discount houses at market rates. Even if the Bank of England does not act in this way to
meet a shortage of funds, the discount houses are always finally able to secure the funds they
need by their right to borrow from the Bank of England (the lender of last resort) against
approved security at the minimum lending rate (the penalty rate).
On the assets side of their balance sheets, the discount houses are active dealers in a number
of the assets they hold. They make the market in sterling certificates of deposit and in
commercial bills, quoting buying and selling rates for different maturities. They also quote
selling rates fortreasury bills that they acquire at the weekly tender in competition with each
other and with any other banks that may tender, including the Bank of England. Most of these
other banks tender for treasury bills in order to hold them to maturity, but the discount houses
sell theirs on the average when only a few weeks of the bills 91-day life has passed. A large
proportion of these bills is sold to the clearing banks, which do not tender on their own
account.
The Bank of England minimum lending rate is normally determined for each week 0.50.75percent above the average treasury bill rate at the previous Fridays tender. The bank,
however, has the power to fix it at a different level if it so wishes, and this has been done.
http://www.britannica.com/EBchecked/topic/603753/treasury-billhttp://www.britannica.com/EBchecked/topic/603753/treasury-bill