Have you ever wondered how banks exchange money among themselves? Do you envision one bank borrowing, say, £1,000,000 from another, and exchanging suitcases full of banknotes?
Well, it’s not exactly like that.
Notes issued by banks in England, Wales, Scotland, and Northern Ireland have to be backed by Bank of England (BoE) notes that are held by the issuing bank. To avoid the problem of suitcases full of UK banknotes, the BoE issues special internal notes called Giants, with a denomination of £1,000,000. They now also make the Titan banknote, which is worth £100,000,000, but there are only around 40 of these in existence.
But if you work the till at your local Sainsbury’s, you needn’t worry about having to make change for a customer bearing a Titan banknote, because they are not used in general circulation. Banknotes like Giants and Titans are held by banks and “ringfenced” by the Bank of England for the benefit of noteholders from banks. That means that if an issuing bank fails, the noteholders can get the full value for the banknotes they hold, regardless of whether they are Scottish banknotes, Northern Ireland banknotes, or other banknotes backed by BoE notes.
When you compare bank accounts, you don’t have to worry about whether you are issued Bank of England notes, because Scottish and Northern Ireland banknotes are backed by BoE notes and are fully protected and insured. In fact, in the UK, seven retail banks are allowed to print their own banknotes in addition to the Bank of England. While this is an unusual situation, it is not unique. Hong Kong, for instance, has a similar arrangement, with three banks, in addition to the Hong Kong government, being allowed to issue their own banknotes.