A 10  https://www.bankofengland.co.uk/-/media/boe/files/sterling-monetary-framework/annual-report-2018-19.pdf 5  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  5  key merit of this so-called ‘floor’ system is that it can keep overnight interest rates close to Bank Rate despite large changes in the supply of, or demand for, reserves (Chart 5). And rates have indeed been closer to Bank Rate on average than at any point in the past twenty years (Chart 6).11 The regime in place prior to QE, known as ‘reserves averaging’, was also successful at controlling interest rates when the stock of reserves was relatively stable. But it did not cope as well when demand for reserves spiked and we had to inject large quantities of reserves for liquidity insurance purposes during the crisis. Chart 5: The market for central bank reserves under the current ‘floor’ framework  Chart 6: Gap between Bank Rate and market overnight interest rates  Sources: Bloomberg and Bank calculations  11  Market rates are slightly below Bank rate because most overnight deposits with SMF participants come from businesses without access to reserves: see https://www.bankofengland.co.uk/quarterly-bulletin/2018/2018-q1/sterling-money-markets-beneath-the-surface. 6  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  6  Waiting for the exit: (a) The MPC’s QT strategy How will the balance sheet evolve in the future? That depends heavily on the MPC’s monetary policy decisions. The MPC has been clear that its primary policy instrument is Bank Rate, which can move in either direction from its current level of 0.75%.

The single most influential act for banks was the introduction of the Second Banking Coordination Directive, which provided a passport for banks to offer services across the European Union. Liberalisation in the EU financial services sector is already very extensive. What we see now is an ongoing adjustment of the regulatory environment implemented in the 1980s and early 1990s. In effect, it allows other driving forces to have a more profound effect on the financial system. One of these factors, which has been facilitated by liberalisation, is the trend towards globalisation. This trend is occurring in most private sectors of the economy. As companies and individuals requiring financial services are becoming more globally oriented, they demand appropriate financial services. Globalisation is expected to increase competition in most areas of financial services, and it may also be able to realise economies of scale and scope. At the same time, globalisation has opened up new markets for banks, particularly in trading, asset management and investment banking activities. Finally, the wealth of individuals has increased, and a larger proportion of the population is making portfolio investments. This is partly a result of the ageing of the population, which has, in itself, increased the average wealth of people. At the same time, it is also due to changes in pension systems in a number of countries from a “pay-as-you-go” to a funded basis. The prospects for the future are for more of such change, as reflected by the recent proposals for pension reforms in Germany and France.