George Kerevan: Separate Scots banking system is not the problem

Published on Wednesday 1 April 2009 22:10

I ONCE had lunch with Will Hutton, former City stockbroker, former editor of the Observer and currently the mouthpiece of a think tank called The Work Foundation. Mr Hutton was visiting Scotland on a "fact-finding" tour, much as one drops into some obscure African country. It was a good lunch, which I had plenty of time to enjoy as Mr Hutton monologued through most of it, hardly bothering to ask any questions about Scotland.

So it came as no surprise when Mr Hutton popped up in the media over the weekend to pontificate on the forced dismemberment of the Dunfermline Building Society and the banking crisis in general. He has a peculiar take on the issue: it is all the fault of Scottish bankers.

Working in a small, provincial country, far from the City of London, means Scottish bankers have chips on their shoulders.

According to Mr Hutton's theory, hubris drives Scottish bankers to take inordinate risks in order to prove they are as good as their metropolitan counterparts in London, Frankfurt or New York. This recklessness is aided and compounded by the fact that, operating in a small country far from the main regulatory bodies, their culpability and stupidity are hidden from view until it is too late. (Mr Hutton extends this analysis to explain the banking failures in other small countries, particularly Ireland and Iceland.)

Luckily for everyone, according to Will Hutton, the English taxpayer is there to rescue us from the wilful incompetence of Edinburgh financiers, by bailing out RBS, HBOS and now the Dunfermline Building Society. He points out that the financial guarantees the Treasury has offered RBS and HBOS sum to many times the annual GDP of Scotland – implying that an independent Scotland would not have been able to save these banks unless helped by the IMF.

But Will Hutton's analysis of 2009 is in stark contrast to what he wrote in the Observer on 12 February, 2006:

"Some 20 years ago, the Royal Bank of Scotland fought off a foreign takeover and argued that it would be good for Scotland and Edinburgh to be the home of an independent bank, complete with a Scottish headquarters, rather than become part of another company's and country's dream. It was right; it has grown into one of the world's great banks … more importantly, it keeps alive an idea of Scotland and Edinburgh as one of the world's financial playmakers rather than a sub-contractor."

The Will Hutton of 2006 is a better guide than the Will Hutton of 2009 when it comes to understanding the vital importance of maintaining regional banking centres of excellence. Far from the current global financial disaster being caused by small countries and their bankers, it is the direct responsibility of the giant, all-purpose banking conglomerates that emerged in the City of London and Wall Street after the deregulation of the 1980s. If Barclays had won the fight for ABN AMRO, instead of RBS, it would have gone bust. HSBC had as much exposure to US subprime toxic debt as HBOS and was saved only by the fact that it had lots of Asian depositors who save rather than borrow.

Look around the world and it is the small, efficient banking systems that have kept their head and stayed profitable during the crisis. This is true of Canada's leading banks – Royal Bank of Canada, Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce. Largely founded by Scots, Canada's banks are the soundest in main industrial countries, according to a recent report by the World Economic Forum.

The Nordic banking systems, Iceland aside, have also come through the crisis relatively unscathed. In fact, the Norwegian krone has appreciated in value substantially, as the currency is seen as a safe haven for investors, while the shaky pound has fallen through the floor.

Why are small, regional banking centres likely to be more effective, economically and socially? In a word: trust. In smaller systems bankers know one another and peer-group pressure acts as a brake on imprudence or outright malfeasance. This week I attended a voluble meeting of retired Scots bankers of the old school – they all knew each other and each other's foibles. They had a lot to say (most of it critical) about their successors.

Contrary to Mr Hutton, smaller banking systems are usually much more conservatively regulated, as they are in Canada and Scandinavia. This is because the practice of banking in smaller systems is very much more transparent to the public and the politicians, who then insist on proper rules. The imprudent HBOS and DBS lending would not have occurred in the first place if an independent Scotland had been in a position to enforce proper banking rules.

However, banks in Canada and Scandinavia do have an advantage over their Scottish counterparts in one crucial respect. All banks, small and large, have to make substantial profits to satisfy shareholders. Protected by distance, language and local business laws, Canadian and Scandinavian banks have access to niche markets, which allow them to make sufficient profits on their traditional loan-and-deposit business to satisfy (mainly local) shareholders.

But Scottish banks, faced with competition from a deregulated City, were forced to embark on evermore risky ventures to manufacture unsustainable profits for international shareholders. To accomplish this, old-style banking professionals, trained by the Chartered Institute of Bankers in Scotland, were summarily replaced by non-bankers. Scotland's traditional banking culture was destroyed and our banks with it.

Rather than preserve and revive what is best in Scottish banking, Gordon Brown and Alistair Darling are following the false analysis of Will Hutton. At every stage – RBS, HBOS, DBS – they are intent on enforcing a "UK solution", rather than a local one, even when it is available.

They see a separate Scottish banking system as the problem, when it is in fact the solution.