Country Travel Economy.
Special deposits. Cash deposited at the bank of England by the clearing banks in response to a special directive. The scheme, which was introduced in 1958 although it did not become effective until.
1960, was designed to provide a mechanism for reducing bank lending by reducing their liquidity ratio.
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The banks were instructed to increase their gross deposits at the Bank of England (part of their liquidity base) by a certain percentage. The banks receive interest on the special deposits at approximately the current treasury bill rate. Besides the clearing banks, the scheme also applies, on somewhat different terms, to the Scottish banks. Theoretically, the requirement for special deposits appears to be a powerful method for reducing bank lending, since it operates directly on the cash ratio of the banks and quite small percentage increases in deposits should have a significant effect on bank advances. However, the banks could offset the increase in deposits by reducing their holdings of government bonds and, in practice, the importance of an announcement of a requirement for special deposits is that it is a signal of the intention of the monetary authorities to squeeze credit. Until 1971 these authorities continued to rely on a direct limitation on bank advances, as they did in 1957 before special deposits were introduced, and on other means of controlling credit. From 1971 a new system of credit control was introduced. Special deposits continue in force, but did not form part of the reserve assets of the new system. Under the new scheme the Bank of England was able to call for special deposits in proportion to the sterling and overseas eligible liabilities (that is deposits) of the commercial banks (O credit control). In December 1973 a further supplementary deposit scheme was introduced. These supplementary deposits (S.S.D. ) are not interest-bearing and are called for in proportion to the excess of growth of the banks' liabilities over a target set by the Bank of England. S.S. D. Were called for in 1973, 1976 and again in 1978. The effectiveness of the corset as the S.S. D. Was called was seriously affected by what is known as disintermediation, i.e. lending through new credit instruments in parallel markets. For example, banks would meet a corporate borrower's requirements not by an advance but by guaranteeing a bank bill bill of exchange) instead. This bank would in this way be incurring a contingent liability.
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