Under the Regulations the authorised banks are required to hold backing assets for their notes at all times.
To back their note issue, authorised banks may use a combination of Bank of England notes, UK coin and funds in an interest bearing bank account at the Bank of England. Bank of England notes held as backing assets may be held at an authorised location or at the Bank of England. Notes held at the Bank may include £1 million notes (Giants) and £100 million notes (Titans), which in physical terms are permanently held at the Bank.
For the purpose of backing requirements, notes issued by an authorised bank are always considered to be one of three mutually exclusive classes:
- Notes In Circulation (NIC): notes that have been issued by the authorised bank and are now in general circulation, e.g. notes in wallets and purses. At least 60% of the backing assets for NIC must be Bank of England notes or UK coin. The remaining 40% of the backing assets may be Bank of England notes, UK coin or funds in an interest bearing account at the Bank of England.
- Notes With the Potential to Enter Circulation (NWPEC): notes that are held by or on behalf of the authorised banks and which are available to be issued, e.g. notes held in ATMs or in bank branches. These notes may be backed with Bank of England notes, UK coin or funds in an interest bearing account at the Bank of England.
- Excluded Notes: notes which are held by or on behalf of the authorised banks, which fulfill specific requirements and conditions imposed by the Bank, e.g. are securely stored in a banknote cage. This includes notes which have been printed but which have not yet been collected from the printer. These notes are excluded from the requirement to be backed.
In the event of an authorised bank entering an insolvency process as defined in the Regulations, the backing assets will be ring-fenced for one year or any longer period that HM Treasury may decide, for the sole purpose of reimbursing noteholders through a Note Exchange Programme (NEP). More information on how an NEP would operate can be found in our “Frequently Asked Questions” section.
As at 28 February 2013, the three authorised banks in Scotland had a total of around £4,000 million of NIC and the four authorised banks in Northern Ireland had around £2,100 million of NIC.