SCOTLAND’S major banks would be forced to quit the country after independence if a Panama-style approach to using the pound without the UK’s agreement is adopted, leading economists have warned.
UK regulators and the banks’ shareholders would insist that major institutions seen as “too big to fail”, like RBS and Lloyds, would need to be located in the UK in order to have the Bank of England standing behind them as “lender of last resort”, according to a report by the National Institute of Economic and Social Research (NIESR).
But a new Scottish currency could allow the fledgling state to guarantee the country’s financial giants and provide real economic freedom from London.
Alex Salmond has come under pressure this week to set out his Plan B on currency if a monetary union with the UK is rejected. A so-called “dollarisation” approach, which would see Scotland simply use the pound informally, is widely seen as the preferred alternative.
But today’s research warns the estimated £80 billion of debt which Scotland would inherit from the UK would make it difficult for a fledgling Scottish Government to build up the reserves to bail out the massive financial sector.
Alex Salmond’s threat to walk away from this debt could also see Scotland frozen out of the international markets and struggle to gain EU membership, according to report co-author Dr Angus Armstrong
“Without a credible solution to the lender of last resort, the Prudential Regulatory Authority is likely to require systematically important banks using sterling to be domiciled in the UK,” the report warns
“Shareholders, customers and rating agencies are also likely to prefer systematically important banks to be located in the UK.”
The SNP Government wants a currency union with the rest of the UK which would see Scotland share the Bank of England as lender of last resort. This has been ruled out by the UK Government and main Labour opposition who don’t want to be burdened with bailing out Scotland’s financial system in the event of another banking crash.
But the report today entitled Scotland’s Lender of Last Resort Options sets out three options which all likely to prove unacceptable to any Government of the day.
A Scottish Insurance Fund would take takes years, if not decades to fully fund, while striking a “lender of last resort” deal with the Bank of England is also rejected for a number of reasons, including the fact there is no guarantee it could be impose in practice as cross-border deals are difficult to enforce.
A third option is to join the European Banking Union, but this is unlikely to accept a country which is not part of the eurozone.
Report co-author Dr Angus Armstrong said: “We looked at all these options, looked at how you structure it and came to the conclusion that actually it’s very difficult to see how you can provide reasonable lender of last resort support for the Scottish financial sector.”