The Chancellor means to get tough on the big banks, but how would this work in an independent Scotland, asks Peter Jones
George Osborne has decided to take the side of the people and not the bankers. Separation of everyday retail banking, on which we rely for our daily economic life, from risky investment banking, which produces lottery-size incomes and bonuses for the people who work in it, is to be rigidly enforced with the threat of break-up of big retail/investment banks which do not comply. But will Scottish independence enforce a further separation of banking activities?
Chancellor Osborne aims to make sure that we, the taxpayers, do not have to bail out investment banks which go bust. This latest move goes some way to ensuring that. Bankers, when they protest about heavy sticks being applied to their backs, seem to forget that taxpayers had to stump up £65 billion to bail out Lloyds and RBS. That’s the least of it. I haven’t seen a calculation of how much extra in taxes has had to be paid, or how much has had to be foregone in welfare spending and public service cuts since the banks blew up the economy, but it must be hundreds of billions.
So I have absolutely no sympathy at all for bank complaints. Neither do I pay much heed to their moans that it will make them uncompetitive and hamper the growth of the financial services industry. The British economy, five years after the start of the recession caused by the banks, is still 3 per cent smaller than it was pre-crisis, another huge cost in lost jobs and depressed incomes.
Also good news for taxpayers is that Mr Osborne is going to make it a whole lot easier to move accounts from bank to bank, and he is going to open up the payments systems to make it easier for new banks to get up and running so there is greater choice for you and I about where to put our meagre savings.
But be under no illusion that this solves the problem once and for all. The Dutch government has just had to spend £3.2bn to nationalise SNS Reaal, a retail bank with no risky investment arm whose over-exposure in a sinking property market brought it down.
This unfortunate event brings into focus the fact that Alex Salmond is going to have to set out proposals for banking regulation under independence. How much Scottish Government backing would there have to be for the banking system? And could Scottish taxpayers afford it?
Discussion of these matters so far has been puerile. The suggestion by Blair Jenkins, chairman of the Yes campaign, that Scotland, if it had been independent, might have avoided the financial crisis is fatuous. It is equally absurd to contend that Scotland would have been another Ireland or Iceland.
If Scotland had been independent, the regulatory regime and the banking landscape would have been completely different. We have no means of knowing whether it would have got into trouble or not, whether regulation would have worked or not, and whether bail-outs from the Scottish taxpayer would have been needed or could have been afforded.
It is, however, legitimate to point out that at the heart of regulatory failure has been political capture by the banks. Bankers and their apparent money-making magic so impressed politicians that they let go the regulatory reins and allowed them to gallop away. This problem affected countries small and large, from tiny Iceland to the mighty USA, with Britain somewhere in between.
The countries which escaped political capture and the worst of the financial crisis – Canada and the Scandinavians – did so because they had already been through a banking crisis in the 1990s and learned how to avoid them. This condition did not apply in Scotland.
There is no reason to assume that Mr Salmond, or any other Scottish politician for that matter, would not have been captured by bankers. At the very least, he, like me and most other people, certainly assumed that Messrs Goodwin, Hornby and Co knew what they were doing.
So what would an independent Scotland’s banking regulations look like? This question is hard to answer because the central issue is what the currency would be, and that in turn depends on the outcome of negotiations over EU membership.
I rather think it is most unlikely that Scotland would be compelled to join the euro, if only because euro membership requires a country to demonstrate competent management of currency stability for a period of years, and Scotland does not have its own currency.
I also reckon that the economic interests of both the rest of the UK and Scotland would lead to acceptance that Scotland would continue to use the pound sterling. If so, that implies that the Bank of England would remain as monetary authority and banking regulator, provided that the EU, which says that countries must have a financial services regulator, accepts that position.
That’s an awful lot of “ifs” already. But there’s more. In the event of a crisis afflicting a retail bank operating north and south of the Border, there would have to be an agreed rescue regime already in place to protect depositors, which would provide for everything all the way up to nationalisation as in the recent Dutch case.
The SNP say, of course, that this would be the case as it was with Fortis, a bank straddling the Netherlands, Belgium and Luxemburg and which was part-nationalised in 2008 by those governments acting jointly. They could do that relatively easily because Fortis’ operations in each country were in a clearly defined subsidiary in which each government could take a 49 per cent shareholding. But that is not the case with RBS, Lloyds, or the newer retail banks run by Tesco and Virgin.
Thus, for a bail-out plan to work smoothly, or for there to be a clear perception that all the necessary conditions for a rescue to work are firmly in place, all these banks would have to ring-fence their Scottish operations in a Scottish subsidiary.
That has further implications because, obviously, the Scottish Government would want to have some sort of say in the Bank of England’s supervision of banks, to be satisfied that it is making sure the banks are not going to fall over.
Complex stuff isn’t it? Maybe there is a simpler solution. If so, I’d like to hear it. We should all hear it, because this is the kind of debate Scotland needs to have if there is going to be a realistic prospectus for independence that we can vote on with some confidence.