Under the cash ratio deposit (CRD) scheme, deposit-taking institutions place non-interest bearing deposits at the Bank of England (BoE). The BoE invests these deposits in gilts, and the income earned is used to fund the costs of its monetary policy and financial stability operations.
The CRD scheme was placed on a statutory footing by the BoE Act 1998, with effect from 1 June 1998. The scheme was reviewed in 2003, 2008 and 2013. As part of the 2013 review, the Government made a commitment to conduct a further formal review in five years’ time at the latest. The Government has now published a consultation document setting out the findings of that review and the amendments the Government is considering to make to the CRD scheme.
The review of the past performance of the CRD scheme found that the BoE’s income has fallen below required levels over the last five years. This has resulted in the BoE being underfunded in recent years. The proposals set out in the consultation document are intended to correct this and put the BoE on a sounder financial footing.
The recommendations of the review are:
- the CRD scheme continues to be a suitable method of funding the BoE’s monetary policy and financial stability costs but the CRD ratio should be increased to address the shortfall in the BoE’s funding and requires refinement to make it responsive to changes in gilt yields. Responsiveness should be achieved by moving from a single fixed ratio to a variable ratio, indexed to gilt yields and calculated every six months;
- the current value bands should be maintained, with the threshold value band remaining at £600 million;
- all other parameters of the scheme should remain unchanged but be kept under review; and
- the Government will continue to monitor the effectiveness of the CRD scheme and will conduct a further formal review within five years and publish a report in respect of that review.
The deadline for comments on the consultation document is 9 March 2018.
View HM Treasury consultation on proposed changes to cash ratio deposit scheme, 8 February 2018