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Credit control

An arrangement for the control of all bank credit in Britain, announced in September 1971 to replace ‘·credit ceilings’, Prior to the Second World War the Bank of England controlled the volume of bank credit and hence the money supply through the cash base, as well as the ratio of cash to deposits of the commercial banks. After the war it controlled bank credit through the liquidity ratio and special deposits. In 1968 ceilings on bank advances were introduced, hut these also appeared to be ineffective in restraining the growth in the money supply and were, inoreover, undesirable on the grounds that they inhibited competition befween the banks. From 16 September 1971 the new system ofcredit control was introduced, which unlike the previous system of ratio control applied to all banks. Banks were required to work on a day-to-day ratio of ‘reserve assets’ to ‘eligible assets’ of not less than 12½ per cent. Eligible liabilities consisted of sterling deposits and certificates of deposits and overseas net liabilities. Banks were required to maintain 1½ per cent of eligible liabilities in the form, of balances with the head office of the Bank of England, which no longer fixed the bank rate. Eligible liabilities were.defined as all sterling deposits made for a period of less than two years, plus fonds obtained by switching overseas currencies into sterling. The new definition of reserve assets included treasury bills and certain other government securities and money at call on the money market, _but excluded cash and special deposits and was different in other, more technical ways from the ‘liquid assets’ employed in the previous system of ratio control. All deposit-taking finance houses not classed as banks were subjected to sirnilar controls as banks, except that their minimum reserve asset ratio was 10 per cent. Overseas banks were also included in the new system. The discount house were treated differently from the rest of the banking system in that they were not subject to the reserve ratio on their deposits, although they entered into a commitment to keep not less than 50 per cent of their assets in certain kinds of government securities. The reserve asset ratio was abolished in August 1981. Other substantial changes to this new-system have been made since 1971 and are continuing; examples are the introduction of supplementary special deposits in 1973 and the cesation of regular announcements of changes in·bank rate (minimum lending rate). The monetary authorities have retained their powers to impose direct controls on credit by means of instructions to the banks and now have three other methods for controlling the money supply: influence over interest rates, special deposits and public borrowing and debt management.

Reference: The Penguin Dictionary of Economics, 3rd edt.