Banknote distribution, circulation & destruction
The wholesale distribution & circulation of Bank of England banknotes is managed under the Note Circulation Scheme (NCS) which promotes the processing and distribution of notes by the commercial sector. To make this arrangement economically viable, the NCS allows its members (commercial banks, cash-in-transit companies and the Post Office) to hold notes in custody for the Bank within their network of cash centres. Members thus avoid much of the funding cost of the notes handled, which would otherwise make it prohibitively expensive to undertake the wholesale processing of notes. In effect, members receive off-balance sheet treatment for a significant quantity of the notes that are in their possession. The rules of the NCS are framed to minimise the risks to the Bank that arise by virtue of allowing the custody of its notes to be held in this way by commercial organisations, and to promote efficiency in the distribution and processing of notes in a way that meets the demands of cash users.
The Bank seeks to limit the volume of notes in the wholesale distribution network to the minimum required to support the demand for notes in the economy and to sustain an acceptable quality of notes in circulation. So the NCS both limits the volume of notes that may receive off-balance sheet treatment, and gives members incentives to reduce the total volume of notes in the wholesale distribution system by improving the efficiency of their operations. The Bank of England’s direct involvement in wholesale processing and distribution is limited to the issue of new notes, withdrawing notes superseded by new designs, and the authentication and destruction of notes that are no longer fit for circulation.
Notes paid into banks from retailers and the public need to be sorted to assess their fitness for re-issue and prepare them for either ATM or counter dispense. The Bank supports the note sorting process by purchasing from the NCS members the notes declared to be within their sorting processes at the end of each business day. Consequently, the notes being sorted by a member are not held overnight on its balance sheet so it does not incur the funding cost of holding those notes. It is a condition of this purchase that the NCS members undertake to re-purchase the same notes at the start of the next business day. The notes, however, always remain in the physical custody of the member.
In order to promote efficiency, one of the conditions of the NCS is that each member meets a standard turn-around target of four business days for the note sorting process.
An industry acceptable standard to determine whether notes are fit enough or not to re-issue is currently under review but in principle the objective is for the NCS members only to return notes of an unacceptable quality standard to the Bank of England for authentication and destruction.
The Bank of England owns a store of notes held throughout the network of cash centres run by the NCS members.
This provides a means of adjusting for seasonal fluctuations in demand for notes by withdrawing surplus notes from the system to be stored in member’s cash centres but off balance sheet. These surplus notes can be acquired by members in periods of high demand. However, members are expected to hold notes for which there is a short-term demand on their balance sheets and frequent transactions into and out of this ‘store’ are contrary to the terms that govern NCS.
The store also acts as a means of re-distribution of note stocks between those members with an excess of notes and those with a shortage. This store is a common pool of notes; any member may withdraw notes from or pay notes in to any NCS cash centre, irrespective of which member owns the cash centre site.
Banknote destruction
The life of a note ranges from around one year for the £5 note to five or more years for the £50 note. High speed note sorting machines separate the returned notes into those which are fit for re-issue, those which are too dirty or damaged for further circulation and any counterfeit notes which may have entered circulation.
Until 1990, unfit banknotes were incinerated at Debden and the heat generated was used to supplement the heating at the site. However, it was decided that it would be more cost effective and environmentally friendly if notes were shredded on site rather than burnt. The resultant material is then used as landfill or taken to an industrial incinerator for burning. Nevertheless, investigations continue for alternative uses of this waste material.
