The promise to pay: what backs banknotes?

Key considerations for a banknote-backing framework

The assets that financial institutions choose to hold to back their liabilities must reflect the characteristics of those liabilities, including how demand for them changes over time. Similar principles apply when determining how banknotes should be backed on the Bank’s balance sheet, while also considering the policy functions that banknotes serve:

• Maintaining confidence in sterling banknotes. The public must be confident that every banknote will retain its value and continue to be accepted as money. Maintaining this trust is essential to meeting the Bank’s statutory objectives for monetary and financial stability. This requires a backing asset framework that is transparent, credible and robust over the long-term. 
• Understanding long-term trends in banknote demand. A suitable backing asset framework for banknotes should reflect the stability and predictability of the banknote liability, including the gradual and persistent growth in the value of banknotes in circulation over time (Chart 1). 
• Managing changes in demand. Demand for banknotes can change over time. The banknote-backing framework must be flexible enough to accommodate short-term fluctuations in the value of banknotes in circulation, as well as unpredictable changes in demand.
• Subject to meeting core policy objectives, supporting wider considerations. Banknote-backing arrangements must be consistent with the Bank’s core monetary and financial stability objectives. Subject to these being met, the framework should also consider operational efficiency and public sector value for money.^{footnote [10]}

Understanding demand for banknotes

Demand for banknotes is influenced by a range of factors, including economic conditions, access to cash and changes in public behaviour. While the relative importance of these factors changes over time, together they have contributed to a sustained increase in the value of banknotes in circulation over recent decades. The total value of banknotes recorded on the Bank’s balance sheet has increased from £50 billion in 2009 to £99 billion in September 2026 (Chart 1),^{footnote [11]} roughly in line with the increase in economic activity over the period.

Chart 1: Total sterling banknotes in circulation

Footnotes

• Source: Bank of England.

While the total value of banknotes in circulation varies by a relatively small amount each day, larger seasonal movements occur around major holidays, when demand for cash typically increases. As shown in Chart 1, the value of banknotes in circulation consistently rises in December before falling in January, as people deposit cash into bank accounts, or spend it in shops, after which businesses return the cash to the banking system.

Although banknotes continue to be widely held for everyday payments, the UK has become increasingly reliant on digital payment methods for everyday spending over the past 15 years. In 2025, cash accounted for 8% of total payments in the UK by volume, compared with 58% in 2009.

Despite this, the total value of banknotes in circulation has continued to steadily increase. Households and businesses continue to hold cash for a variety of reasons, including for convenience or as a store of value.^{footnote [12]} This is not a new phenomenon and has been observed in many countries. In a 2009 speech, Andrew Bailey described this as the ‘paradox of banknotes’. 

Although the future path of banknote demand is uncertain, the long-term trend in the value of banknotes in circulation has historically been relatively predictable and persistent. These characteristics are important to consider when determining the size and composition of the assets held against banknotes.

Where do banknotes sit on our balance sheet?

The Bank operates two balance sheets: the Issue Department and the Banking Department. These separate departments were created following the requirements set out in the Bank Charter Act 1844 (Figure 1), which mandated that banknote issuance be separated from the Bank’s other activities, aiming to strengthen confidence in the currency at that time connected to the operation of the Gold Standard.^{footnote [13]} As a result, banknotes are recorded as a liability on the Issue Department balance sheet and must be matched by corresponding Issue Department assets. This remains a distinctive feature of the Bank’s balance sheet structure compared to other major central banks, which typically record all activities on a single balance sheet (Box D).^{footnote [14]}

Figure 1: Front page of the Bank Charter Act 1844

Alongside the Issue and Banking Departments sits the Asset Purchase Facility (APF), which is managed under a separate entity – the Bank of England Asset Purchase Facility Fund (BEAPFF) – a wholly owned subsidiary of the Bank.^{footnote [15]} Figure 2 summarises the main functions and components of each balance sheet, while Box A provides more detail. 

Figure 2: The primary activities and components of the three main balance sheets operated by the Bank ^(a)

Footnotes

• (a) For further detail on the APF’s main activities, refer to Memorandum and Articles of Association for the Bank of England's Asset Purchase Facility Fund Limited.

Box A: Demystifying the Bank’s balance sheet

It is useful to begin by looking at the Bank’s balance sheet as a whole, consolidating the three main components shown in Figure 2. Viewed together, the asset side of the balance sheet would consist primarily of the loan to the APF (which is synonymous with gilts held in the APF) and sterling lending facilities, while the liability side would comprise primarily of banknotes and reserves. Chart 2 illustrates this.

Chart 2: Primary Bank of England liabilities and backing assets across all balance sheets ^(a)

Footnotes

• Source: Bank of England.
• (a) Coloured areas summarise the Bank’s main on-balance sheet sterling facilities. ‘Term funding’ includes the Term Funding Scheme and the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises but excludes the Special Liquidity Scheme and the Funding for Lending Scheme (which were held off-balance sheet). ‘Other sterling facilities’ includes most of our regular market-wide operations, including Short- and Long-Term Open Market Operations. ↩ ↩ ↩ ↩ ↩ ↩ ↩

As the Issue Department balance sheet exists solely to support banknote issuance, the Banking Department balance sheet records the Bank’s other core central banking functions. These include supplying reserves to commercial banks for monetary and financial stability purposes via lending operations.^{footnote [16]} This lending may be short- or longer-term and is often referred to as ‘repo’ lending. The Bank has also used term funding schemes to provide longer-term lending.

The third major component of the Bank’s balance sheet, the APF, is a more recent addition. It was established in January 2009 as a special purpose vehicle to hold assets to support central banking functions – primarily for monetary policy purposes. This has included asset purchases during QE, and, more recently, the unwind of those purchases through QT. The APF is closely linked to the Bank's balance sheets via what is referred to as the ‘APF loan’. This is a loan from the Banking Department balance sheet to the BEAPFF, used to finance asset purchases and funded by the creation of new reserves.

How have banknote-backing arrangements evolved over time?

Many people still associate Bank of England banknotes with gold backing. This perception has its roots in the Bank Charter Act 1844, which sought to strengthen confidence in Bank of England banknotes by requiring them to be backed by specified assets. Under the Act, a fixed proportion of banknotes could be backed by government securities, while any additional issuance was required to be backed by gold.

Over time, however, both the Bank’s overall balance sheet and the assets backing banknotes have evolved significantly. In recent decades, banknotes have been backed by varying combinations of government securities, assets generated via repo operations, and other assets held on the Issue Department balance sheet, and before that Bills of Exchange. The composition of these backing assets has changed over time as the Bank’s balance sheet and policy operations have evolved (Chart 3).

Chart 3: Composition of Issue Department assets over time ^(a)

Footnotes

• (a) Bars before the dashed line show average holdings of asset types over each period, based on financial-year end values as reported in the Bank's Annual Accounts. ‘Pre-GFC’ covers the 2005/6 to 2008/9 period. Future arrangements are shown for illustrative purposes only. ↩ ↩ ↩ ↩ ↩ ↩ ↩

Before the Global Financial Crisis (pre-2009)

Before the 2007–2009 Global Financial Crisis, banknotes were backed primarily by assets generated through the Bank’s repo operations, alongside an ‘Issue Deposit’ that acted as a balancing item on the asset side of the Issue Department balance sheet (Box B).^{footnote [17]} As the value of banknotes in circulation increased, more repo assets were allocated to Issue Department.

In 2006, the Bank announced its intention to back part of the total value of banknotes with a portfolio of gilts held on Issue Department. A Quarterly Bulletin article published in 2008 highlighted several advantages of using gilts to back banknotes, including transparency, the suitability of longer-maturity assets for backing a stable liability, and minimal risk exposure. A gilt portfolio was subsequently established, peaking at £5.4 billion before the onset of the financial crisis, backing 12% of banknotes in circulation at the time. Just under £700 million of those gilts remain on the Issue Department balance sheet today as a legacy of that earlier strategy (Chart 3) and are due to mature by end-2028.

The QE era (2009–2022)

Between 2009 and 2022, the Monetary Policy Committee (MPC) used quantitative easing (QE) to support spending in the economy and meet the inflation target when interest rates were very low. During QE, the APF purchased £895 billion of gilts and eligible corporate bonds from investors in secondary markets.^{footnote [18]}

The introduction of QE changed how banknotes were backed. As the APF had begun purchasing gilts on a large scale, the Bank decided not to run a separate gilt purchase programme for banknote-backing purposes. Existing plans to expand the Issue Department gilt portfolio were therefore paused.

Wider changes to the Bank’s balance sheet have also altered the composition of the portfolio of banknote-backing assets. Following the introduction of QE in 2009, the Bank shifted to a framework in which reserves were supplied primarily through asset purchases. As repo assets held on Issue Department matured and were not replaced, an increasing share of banknotes became backed by the Issue Deposit, which ultimately became the primary backing asset. The Issue Deposit was itself backed by the loan from Banking Department to the APF, meaning that banknotes were indirectly backed by the gilts held in the APF (Figure 2).^{footnote [19]}

As the APF balance sheet expanded, and demand for banknotes continued to grow, APF gilts became an increasingly important part of the broader balance sheet structure supporting banknote-backing.

Current arrangements

Today, banknotes continue to be backed primarily by the Issue Deposit, together with the remaining gilts held in the legacy pre-2009 portfolio (Chart 3). As the Issue Deposit is backed by the APF loan on the Banking Department balance sheet, banknotes are backed by the gilts held in the APF indirectly. Repo assets no longer serve as a direct banknote-backing asset booked to Issue Department. Under the Bank’s capital framework introduced in 2018, they are now held entirely on the Banking Department balance sheet.

Box B: What is the Issue Deposit?

One of the longstanding assets held by Issue Department is its deposit with the Banking Department, referred to as the ‘Issue Deposit’. Having significantly increased in size over the past two decades (Chart 3), it is now the primary banknote-backing asset on Issue Department (‘How have banknote-backing arrangements evolved over time’). 

The Issue Deposit is recorded as an asset on Issue Department and an equal liability on Banking Department, thus acting as an internal balancing item between the two departments for accounting purposes.

The Issue Deposit exists due to the Bank Charter Act 1844, which established the separation of the Bank’s balance sheet for accounting purposes. Many of the balance sheet arrangements described in this article, including the Issue Deposit, arise from this unique institutional structure. If the Bank’s accounts were presented on a consolidated basis, the asset and liability would simply cancel each other out.^{footnote [20]} Importantly, this demonstrates that the existence of an Issue Deposit does not affect the Bank’s ability to meet its banknote liabilities. What matters is that the Bank holds assets of sufficient value and quality to back banknotes in circulation. 

The Issue Deposit automatically adjusts to daily changes in the value of banknotes in circulation, ensuring that the assets and liabilities across the Bank’s balance sheets are always balanced (as illustrated in Figure 3). 

In simple terms, when demand for banknotes rises, commercial banks obtain additional banknotes from the Bank of England in exchange for an equivalent reduction in their reserves holdings with us.^{footnote [21]} As reserves are a Banking Department liability, an increase in banknote demand reduces Banking Department liabilities while equivalently increasing Issue Department liabilities (all else equal). The Issue Deposit automatically increases to offset these changes, due to its role as an internal balancing item. In effect, some Banking Department assets that previously backed reserves now back the additional banknotes in circulation. The reverse occurs when demand for banknotes falls. 

As the Issue Deposit automatically adjusts to changes in banknote demand, it acts as a buffer, absorbing fluctuations in the value of banknotes in circulation – an important requirement of a suitable banknote-backing asset portfolio.

This has several practical benefits for managing day-to-day movements across the Bank’s balance sheet. It avoids the need to frequently transfer assets between the two internal departments, supporting operational efficiency. It also means that Issue Department does not need to actively adjust its asset portfolio in response to temporary fluctuations in banknote demand (by buying and selling gilts, for example), reducing transaction costs and limiting unnecessary exposure to market risk.

Figure 3: The role of the Issue Deposit in managing changes in banknote demand ^(a)

Footnotes

• (a) This process happens simultaneously. It is represented in separate stages for illustrative purposes only. ↩ ↩ ↩ ↩ ↩ ↩ ↩

Why are we reviewing banknote-backing arrangements now?

The Bank has been considering its long-term balance sheet strategy for several years. Since 2022, the MPC has been gradually reducing the size of the APF gilt portfolio through a combination of sales and maturities – a process known as quantitative tightening (QT) – and has set the pace of this unwind on an annual basis.

When APF gilts are sold back to the market, the reserves used by commercial banks to purchase them are extinguished by the Bank. Given the critical role of central bank reserves in supporting our core monetary and financial stability objectives, the Bank’s Executive has previously clarified its intentions to gradually move towards a repo-led operating framework for the supply of reserves. Under this approach, we supply reserves by lending them to banks as needed, rather than creating reserves through asset purchases. The transition towards this repo-led framework is already underway.

In parallel, the Bank’s Executive has also given due consideration to future banknote-backing arrangements. However, given that the stock of gilts remaining in the APF has consistently and significantly exceeded the expected value of banknotes in circulation, there has been no immediate need to clarify the intended long-term strategy thus far. Moreover, the MPC has previously only set out its plans for unwinding the portfolio of APF gilts held for monetary policy purposes on an annual basis, meaning the implications of QT for banknote-backing arrangements have remained uncertain beyond a 12-month horizon. 

In September 2026, the MPC set a multi-year path for fully unwinding the APF. The MPC's intention to continue QT until the stock of gilts held in the APF for monetary policy purposes is unwound in full gives the Bank Executive greater certainty when assessing the long-term implications of QT on the banknote-backing framework and requires the Bank Executive to set out future arrangements.

The following sections set out the Executive’s long-term plans for backing banknotes in more detail, as well as how we intend to transition from today’s arrangements to the future framework.

The new banknote-backing strategy

The Bank’s new strategy has been designed to reflect the key considerations for a banknote-backing framework, as set out earlier in this article. In the long-term, banknotes will be backed primarily by a large gilt portfolio held directly on Issue Department, supplemented by a relatively small Issue Deposit for managing short-term fluctuations in banknote demand. ^{footnote [22]}

Together, these arrangements are consistent with the Bank’s pre-QE intentions and provide a transparent, credible and robust approach to backing banknotes, while retaining the flexibility needed to accommodate changes in demand over time. By setting out both the long-term destination and the medium-term transition path, the strategy also provides greater clarity on how banknote-backing arrangements will evolve over time. 

Gilts are high quality, highly liquid sterling assets issued by the UK Government. This makes them a credible, stable and low-risk asset base, supporting the key objective of maintaining public confidence in sterling banknotes. Their regular coupon payments offset the costs of producing and issuing banknotes, providing a reliable source of seigniorage income for Issue Department (Box C). Furthermore, gilts are well suited as a ‘majority’ backing-asset for the banknote liability because their maturity profile can be tailored to broadly align with the Bank's expectations for future banknote demand, including anticipated structural trends in the use of cash over the longer term.

We intend to supplement Issue Department’s future gilt portfolio with a relatively small Issue Deposit as a ‘minority’ backing-asset. As set out in Box B, there are several benefits to using the Issue Deposit for managing day-to-day changes across the Bank’s balance sheet, including those driven by short-term fluctuations in banknote demand. Given that the Issue Deposit is recorded as a liability on Banking Department, it will likely be backed by a portion of Banking Department's repo operations in future.^{footnote [23]}

We intend to maintain the Issue Deposit at a baseline size, sufficient to manage short-term fluctuations in banknote demand. This will avoid unnecessary encumbrance of banking sector collateral driven by persistent increases in the size of the Issue Deposit, whilst also maintaining an appropriate backing asset portfolio for the banknote liability. 

The size and flexibility of the Issue Deposit should, as far as reasonably practicable, allow gilts to be held on Issue Department to maturity even if there are small falls in banknote demand from time to time. This minimises operational and market risk, supporting wider considerations of public sector value for money and operational efficiency. However, the Bank may, in consultation with HM Treasury, occasionally need to take alternative actions in response to unforeseen changes in banknote demand, including selling gilts before maturity, to ensure that banknote-backing arrangements remain appropriate over the long-term. 

Overall, these arrangements reflect longstanding principles that have guided the Bank’s approach to backing banknotes over the past two decades – as set out earlier in this article. Under the current framework, gilts indirectly provide the majority of banknote-backing via the Issue Deposit and APF loan arrangement, while the Issue Deposit responds to short-term fluctuations in demand. 

Under the long-term framework, gilts will instead be purchased directly onto Issue Department from the secondary market. This will create a clearer and more transparent relationship between banknotes, their backing assets and the Bank's balance sheet. 

The following section sets out how we intend to transition to the future banknote-backing framework over the medium-term.

Box C: What is seigniorage?

Under arrangements set out in the Currency and Banknotes Act 1928, the Bank of England pays any profits earned by Issue Department to HM Treasury. The profit Issue Department earns by issuing banknotes is known as ‘seigniorage’ – the income generated by the assets that back banknotes, after deducting production costs. 

As the value of banknotes in circulation grows over time, seigniorage income can also increase. This provides an ongoing source of income for the National Loans Fund – the UK Government’s main account for managing domestic borrowing and lending. On the other hand, under the National Loans Act 1968, HM Treasury is required to make up the shortfall if the value of the Issue Department assets falls below the value of banknotes in circulation. This is charged to the National Loans Fund. This commitment from HM Treasury ultimately guarantees the Bank’s ability to keep banknotes fully backed and meet the ‘promise to pay’. 

Profit and loss arrangements vary across our three main balance sheets (Figure 4)

Financial arrangements for the Bank’s day-to-day operations on Banking Department are governed by a capital- and income-sharing framework whereby the Bank must hold sufficient capital to ensure delivery of its statutory objectives.

Profit and losses generated by the APF are recognised and settled separately between the Bank and HM Treasury. Under the ‘APF indemnity’ agreed in 2009, HM Treasury receives any profits and covers any losses arising from the APF’s activities. This ensures the Bank is able to undertake APF operations without bearing the associated financial risk.

Refer to Box D for more information on consolidated cash flows between the Bank and HM Treasury.

Figure 4: Profit and loss arrangements for the three major components of the Bank of England’s balance sheet

Implementing the new banknote-backing strategy

A £120 billion APF gilt portfolio will back banknotes in the medium-term

The Bank judges that it can meet its policy objective of appropriately backing banknotes through the proposed medium-term arrangements, under which banknotes are backed by the Issue Deposit and, indirectly, by gilts held in the APF. In the long term, a gilt portfolio will be held directly on Issue Department. However, following the MPC's decision to unwind the stock of gilts held in the APF for monetary policy purposes in full, the Bank has decided to retain £120 billion of the longest-dated gilts in the APF. This is the most practical and operationally efficient way to back banknotes indirectly during the medium-transition period.

The Bank’s operations, as carried out by the Bank Executive, should maximise value for money by minimising cost and risk over the lifetime of the APF, subject to achieving the MPC’s chosen unwind strategy.^{footnote [24]} Using existing APF gilts to back banknotes avoids the transaction costs associated with purchasing gilts from the market directly onto Issue Department.^{footnote [25]} It also avoids the operational complexity and risks associated with running a separate, large-scale gilt purchase programme alongside ongoing APF unwind via active QT gilt sales.

In effect, this decision formalises existing balance sheet arrangements, ensuring that banknotes continue to be backed by suitable and sufficient assets as the stock of APF gilts held for monetary policy purposes is unwound. It also supports a smooth and predictable transition to the long-term framework for Issue Department.

Why £120 billion?

The value of banknotes on the Bank’s balance sheet has been steadily growing for several decades, currently standing at around £99 billion (Chart 1). Although future demand is uncertain, and there have been periods of modest volatility, we expect demand for banknotes to continue to grow for the foreseeable future.

We have decided to retain a £120 billion^{footnote [26]} portfolio of APF gilts. This has been calibrated to allow for a continuation of previous trends in banknote demand over the period of active QT, with an additional buffer included in case of stronger demand. This reflects the principle that the backing framework should be calibrated to the long-term characteristics of the banknote liability, and reduces the likelihood that additional gilts will need to be purchased for Issue Department during this period. This supports a smooth and predictable transition to the long-term framework for Issue Department over the medium-term.

If structural demand for banknotes exceeds £120 billion before the APF banknote-backing gilt portfolio begins to mature, additional gilts will be purchased directly onto Issue Department as required.

Why long-dated gilts?

A portfolio of long-dated gilts is well suited to backing banknotes as its maturity profile provides a good match for the long-term nature of the banknote liability. This reflects the relatively predictable long-term characteristics of banknote demand, which has increased steadily over recent decades despite changes in how cash is used. 

The retained APF gilts will not begin to mature until 2049 (Chart 4) - well after the intended completion of QT sales. ^{footnote [27]} This allows the portfolio to support banknotes in the medium-term transition period before gradually moving towards the long-term framework as APF gilts mature and are replaced by gilts held directly on Issue Department.

Chart 4: Maturity profile of the medium-term APF banknote-backing gilt portfolio

Eventually, the banknote-backing gilt portfolio will be held on Issue Department

In the long-term framework, banknotes will be backed primarily by gilts held directly on Issue Department. 

When the APF banknote-backing portfolio begins to mature from 2049, proceeds will be reinvested into gilts, purchased in the secondary market and held directly on Issue Department. Over time, this will increase the proportion of banknotes backed by gilts held directly on Issue Department and reduce the role of the Issue Deposit, facilitating a gradual transition to the long-term framework.

If banknote demand remains below £120 billion ahead of 2049, a small proportion of the APF portfolio will continue to back reserves until the gilts begin to mature. At that point, we would purchase and hold the quantity of gilts required to meet banknote demand on Issue Department. A relatively small Issue Deposit will continue to complement the gilt portfolio in the long-term by absorbing short-term fluctuations in demand for banknotes.^{footnote [28]}

Conclusion

Bank of England banknotes remain an important form of money, used and trusted by millions of people in the UK and overseas. Maintaining confidence in sterling banknotes therefore continues to form part of the Bank’s core responsibilities. Backing asset arrangements are an important part of that confidence, alongside public trust in the Bank’s commitment to maintain the value and integrity of sterling banknotes. 

While the assets that back our banknotes have evolved alongside broader changes to the Bank’s balance sheet and policy operations, the underlying objective remains the same: banknotes must continue to be supported by sufficient and appropriate backing assets, ensuring that the public can have confidence in the value of the money they hold.

The long-term banknote-backing framework set out in this article builds upon these longstanding principles, while reflecting the changing structure of the Bank’s balance sheet. It provides a more transparent and robust framework for the future, reinforcing the confidence that underpins the value of sterling banknotes and the 'promise to pay’ they represent.

Bank Insights articles do not necessarily represent the views of the Bank of England’s policy committee members.