Bank of England Control and Supervision

In each advanced industrialised country with a well-developed banking system, the central bank regulates both banking institutions and the flow of credit. The extent to which banks are supervised is greater than for any other sub-sector of the economy. It has gradually been recognised that, while competition and the operation of a free market generally may be desirable objectives, banking is somehow or other different. In most industries competition is encouraged because it is thought that, if the less efficient firms are forced out, the more efficient firms will survive and that this will lead in time to lower prices. But the same considerations do not apply to banks. It is believed that the social costs of failure outweigh any advantages that untramelled competition might bring. When a bank fails, it is not only its staff, its shareholders and its suppliers who suffer but also its depositors who risk losing their deposits. Moreover, only the banks can monetise debt and hence increase or decrease the credit base of the economy. This ability can clearly have macroeconomic implications of considerable importance.