What is the Cash Ratio Deposit Scheme?

As part of my ongoing research into money I’ve been trying to understand the Bank of England’s balance sheet, and while looking through it I noticed an account called Cash ratio deposits.

At first I thought this was something to do with Reserve Requirements (sometimes known as the cash asset ratio or liquidity ratio), where banks need to keep a certain amount of their assets as cash reserves in their vaults or with the central bank in order to be able to service withdrawal demands. However, although the name sounds similar, it is actually something entirely different.

The Cash Ratio Deposit (CRD) Scheme was set up in 1998 as part of the Bank of England Act that passed into law during that year. The purpose of the CRD scheme is described by the Treasury as follows:

Under the cash ratio deposit (CRD) scheme, institutions place non-interest
bearing deposits at the Bank of England. The Bank of England invests these deposits
and the income earned is used to fund the costs of its monetary policy and financial
stability operations, which benefit sterling deposit takers.

It only applies to Banks who’s elligible liabilities exceed £500 million. They must place assets equivalent to 0.11% of these liabilities as non-interest bearing deposits with the Bank of England. As of the end of 2008, the total CRDs listed on the BoE’s balance sheet (the Bank Return) were worth about about £2.5 billion. They aim to make about £100 million a year from investing these funds in order to pay for their financial stability operations.

So why do we have this somewhat complicted scheme instead of a simple fee or using seigniorage income? The Treasury attempt to answer this in a review document from 2003.

Almost universally, central banks fund their activities from general income including that arising from seigniorage (no interest is paid to holders of banknotes) and foreign exchange reserves. In the United Kingdom the income from both these sources passes to the Government: theprofits of note issue are paid in full from the Bank of England to the Treasury, and the Exchange Equalisation Account belongs to the Government, not the Bank of England.

Interesting, the government takes all the profits from printing money in the UK. It would prefer the private banks to pay for these financial stability operations.

A change from cash ratio deposits to a fee-based scheme would require primary legislation.

Is it really that hard?

The BoE looks to make about 6% a year (good luck in 2009!) from investing their CRDs. Why not simply charge institutions with more than £500 million in eligible liabilities – 0.11% * 0.06% of that amount as a fee?

I’m sure it would be a lot less effort than than trying to invest these funds successfully.

3 thoughts on “What is the Cash Ratio Deposit Scheme?”

  1. I just made a concise and reasoned reply to this post but I didn’t fill in an email address and lost the lot 🙁

    “Error: please fill the required fields (name, email).”

    Basically from an institution’s point of view I think the current system might be an advantage. Here is my quick response:

    – There is no annual fee that is wasted every year
    – The banks are owed back their original money
    – This money is ringfenced though
    – So it becomes a question of over how many years would the impact of having capital tied up match wasting the money paid on a fee each and every year
    – As banking is (was?) the main economic industry in the UK perhaps the current system is a small benefit for the banks
    – But I do agree that what you suggest is a simpler system for the B of E to operate
    – And I may have just rambled off on a tangent 🙂

  2. I guess the issue is whether they could generate a better return than the BoE on that money (e.g. > 6%). If they can they would probably be better off with a fee.

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