British savers lose confidence in banks, hoard money under the mattress

With the onset of the global financial crisis led by British banks that had stretched themselves with irrecoverable exposures, a large number of British savers have lost confidence in the banking system and are hoarding cash at home under the mattress for the past two years, according to research by the Bank of England.

The Bank of England said that rising demand for £50 notes might reflect some loss of confidence in banks and very low interest rates, which reduce the opportunity cost of holding bank notes as a non-interest bearing asset.

Andrew Bailey, the executive director for banking services and chief cashier, in a speech at the Banknote Conference 2009 in Washington DC, discussed the recent trends in the demand for banknotes and the implications for the future of cash use, and some of the key challenges the Bank of England faces in managing the circulation of its banknotes.

He describes the apparent 'paradox of bank notes,' the increasing value of notes in circulation alongside their gradually declining use as a means of payment is evidence of a loss of faith in financial institutions and the greater 'comfort' many Britons feel from possessing their money in physical form.

He explains that from a macroeconomic perspective, sustained low inflation has increased confidence in the real value of the currency since the mid-1990s, while more recently demand for bank notes has risen during the recession, particularly for £50 notes.

Demand for £50 notes has been huge during the current recession. Since 2007, the total value of £50 notes in circulation has risen from £7 billion to £9 billion.