The wholesale distribution, processing, and storage of Bank of England banknotes across the UK are undertaken by private sector companies, which are the Members of the Bank’s Note Circulation Scheme (NCS). NCS Members supply banknotes to bank branches, automated teller machines (ATMs) and retailers and ensure that notes which are then deposited back with Members are processed and recirculated to meet public demand.
The NCS governs the distribution, processing and storage of Bank of England issued banknotes in the UK, promoting confidence in the physical currency through maintaining the availability of genuine and high-quality banknotes.
The NCS has four key objectives:
- To facilitate efficient distribution and processing of banknotes, delivering a sustainable Wholesale Cash Distribution (WCD) cycle, while avoiding excess banknote production and delivering value for money.
- To promote public confidence in the physical integrity of the currency, through maintenance of the quality and authenticity of notes in circulation.
- To ensure banknotes are appropriately stored and geographically dispersed across the UK, with sufficient contingency stocks to absorb market shocks.
- To maintain robust management of risks across the WCD cycle and processes.
The NCS has four facilities to achieve these objectives and to ensure that NCS participants meet the required operational and risk management standards (Figure 1).
Figure 1: Facilities used to achieve NCS objectives
The purpose and operation of the NCS facilities is explained in more detail below.
Bond Facility
To ensure there are sufficient banknotes available to meet fluctuations in demand, banknote stocks are stored at NCS Members’ cash centres in secure vaults across the UK. The Bond Facility allows surplus notes to be owned by the Bank while being located in Members’ cash centres. NCS Members receive interest at Bank Rate while storing banknotes on the Bank’s behalf, supporting the upkeep of UK cash distribution infrastructure.
Bond provides a stock of notes which can be used to meet seasonal changes in demand for banknotes and exceptional events. As notes are situated in cash centres across the country, Bond also acts as a contingency, which ensures notes are readily available in response to disruption.
Bond also supports redistribution of note stocks between NCS Members, as the Bank sets minimum and maximum thresholds on the notes that Members can hold in Bond. Stock replenishment or trading with other NCS Members is required if thresholds are breached.
Members can hold new, used, unfit and withdrawn notes in Bond. This means Members can use Bond as a contingency, to allow them to collect or deliver notes to the Bank less frequently, improving risk management, efficiency, and sustainability.
Policy levers: Bond Trading Thresholds ensure NCS Member bond stocks are well-distributed between Members, by obliging Members to offer up excess notes to other Members. Minimum Bond Limits ensure that Members maintain a minimum stock of notes of each denomination, ensuring contingency stocks are available if necessary.
New Note Quota
To promote confidence in the physical currency, the Bank ensures sufficient stocks of banknotes are available to NCS Members to meet demand and replace old and damaged banknotes. To ensure the Bank only produces and issues new notes when needed, the use of brand-new banknotes is controlled through New Note Quota (NNQ). NNQ gives NCS Members the ability to issue from the stock of new notes held in Bond at their cash centres. This control over the use of new notes delivers value for money by minimising unnecessary banknote printing, is good for the environment and helps balance note stocks across the wholesale cash industry, reducing costs to the UK taxpayer, cash users, and the environment.
NNQ incentivises NCS Members to only draw on new notes when necessary, thereby encouraging the efficient recirculation of high-quality used notes. The amount of NNQ available is specific to each NCS Member and each of the four banknote denominations (£5, £10, £20 and £50) and is determined through regular Bank and industry dialogue and data analysis to understand market and public requirements for banknotes.
Policy levers: NNQ can be acquired by Members in three ways; i) the Bank allocating additional NNQ to balance banknote availability with demand, ii) returning unfit or withdrawn notes and iii) a transfer of NNQ from another NCS Member.
Note Recirculation Facility
Sorting and dispense of banknotes, including authentication and note quality checking, is carried out in NCS cash centres. This is supported by the Note Recirculation Facility (NRF), which the Bank uses to incentivise NCS Members to undertake this important activity and ensure banknotes are recirculated to its authentication and note quality standards. Eligible banknotes that are in the process of being sorted or dispensed and do not have the potential to enter circulation overnight, are purchased by the Bank between 6.30pm and 6am in exchange for reserves, which accrue interest at Bank Rate. This relieves the NCS Member of the funding costs for holding the banknotes that are being processed. NRF is designed to help ensure the funding relief provided to Members is limited by a formula to promote efficiency in the sorting and dispense processes.
Policy levers: To ensure efficient note recirculation, the Bank limits the value of notes the Bank is prepared to buy from each Member under NRF using a cap. This NRF cap is determined by the volume of banknotes sorted and dispensed by the Member and a multiplier, which is calculated based on an estimate of i) the maximum number of days it should take to sort and dispense a note, and ii) which of the four banknote denominations (£5, £10, £20 and £50) should be prioritised for sorting and dispense.
Pay-in Standards
Public confidence in the physical currency is underpinned by the availability of genuine and high-quality banknotes. To achieve this, NCS cash centres use banknote sorting equipment to perform authentication and quality checks, which helps authentication and accessibility. If banknotes do not meet the Bank’s authentication and note quality standards due to being damaged, counterfeit, or an old banknote series then these notes are returned to the Bank by NCS Members for analysis and destruction.
The Pay-In Standards (PIS) framework is responsible for verifying the notes returned to the Bank and whether they have been correctly identified as being too worn to re-enter circulation. PIS recovers the costs incurred by the UK taxpayer from replacing any good-quality notes that are returned incorrectly, before the end of their useful life. The Bank does this by selecting and processing a random sample of notes returned by each NCS Member. If sorting discrepancies exceed the Bank’s tolerance level, the Member incurs a financial penalty. PIS incentivises NCS Members to accurately authenticate, check note quality and package notes in line with the standards set by the Bank.
Policy levers: The Bank can vary the authentication and note quality standards to ensure availability of genuine and high-quality banknotes. To account for small variations between Member and Bank sorting equipment, the Bank can adjust its tolerance level to sorting discrepancies before charges apply to NCS Members. The Bank can also alter the charges incurred by NCS Members for each incorrect sorting decision.
Summary
Through the above NCS facilities the Bank governs the distribution, processing and storage of Bank of England banknotes. The Bank reviews the NCS facilities periodically to ensure they remain appropriate.
The links between the NCS facilities and the objectives are summarised in Table A.
Table A: Link between NCS facilities and objectives
NCS objectives | NCS facility – Bond | NCS facility – New Note Quota (NNQ) | NCS facility – Note Recirculation Facility (NRF) | NCS facility – Pay-in Standards (PIS) |
|---|---|---|---|---|
1. Promote efficient WCD | Yes | Yes | Yes | Yes |
2. Ensure public confidence in the currency | Yes | Yes | Yes | Yes |
3. Effective storage/geographic dispersion | Yes | Not applicable | Yes | Not applicable |
4. Robust risk management | Yes | Yes | Yes | Yes |