Bank of England to hand back pounds 700m

THE BANK of England has decided to cut the size of deposits it requires from banks. As a result, the Bank is to repay more than pounds 700m to the banking system.

The recent wave of building society demutualisations was the key reason why the Bank of England decided to reduce the so-called "cash ratio". The last time the ratio was changed was in January 1992.

The move was favourably received by the banking community. "The reduction is obviously welcome - it is a reduction in the costs of our members", said Peter Vipond, a director at the British Banking Association (BBA), the principal trade association for the banking industry.

Until yesterday, banks were required to deposit 0.35 per cent of "eligible sterling liabilities" with the Bank of England. These deposits are non- interest bearing and help fund the Bank of England. From today, the ratio will be 0.25 per cent.

The recent spate of building society conversions - over the last year, Halifax, Alliance & Leicester, Woolwich and Northern Rock have all become banks - has led to a significant rise in the amount of money deposited at the Bank of England. As a result, the Bank has found itself able to cut cash ratios, a spokesperson said.

The big UK banks - such as Barclays, NatWest and Halifax - will be the main beneficiaries of yesterday's move.

Mr Vipond said the BBA hoped for a further cut in cash ratios when the Treasury assumes responsibility for setting cash rations early this summer.