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Your money and the financial system Page 20
What happens if commercial
banks run short of money
The Bank of England is able to lend money to keep
the banking system operating smoothly.
It’s difficult for a bank to hold
enough cash to guard against
every possible withdrawal.
Holding too large a pool of spare
cash would limit a bank’s ability to
lend and could hurt the economy.
Even well-managed and wellregulated
banks can run short of
money temporarily.
An operational hitch could make
it difficult for a bank to meet
withdrawals of money as they arise.
Or a general loss of confidence
among depositors and investors –
similar to what happened during
the financial crisis in 2007 – might
spark a surge in withdrawals that
a bank is unable to fulfil.
It’s in the public interest that
the Bank of England is able to
lend money to keep the banking
system operating smoothly.
These loans provide ‘liquidity
insurance’ for commercial banks.
In the balance sheet picture, a
bank has run short of cash and
liquid assets, but a temporary loan
from the Bank of England allows it
to pay all of the withdrawals by its
depositors and investors.
Otherwise temporary cash
shortages could lead to serious
disruption of the payment
systems.
Liquidity
insurance
The Bank of England can lend
money in normal times and
at times of stress, either to
individual banks or to the
banking system as a whole.
If it makes a loan to a troubled
bank, it is sometimes referred to as
the ‘lender of last resort’.