Bill Jamieson: Beware independence blank cheque

Jet streams cross over the former HBOS headquarters on Edinburgh's Mound. Picture: TSPL
Jet streams cross over the former HBOS headquarters on Edinburgh's Mound. Picture: TSPL
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A new paper raises stark questions over the running of our banks should Scotland go it alone, writes Bill Jamieson

Is there yet such a thing as a credible economic case for independence? What do we know of the implications for Scotland’s banks in the event of a Yes vote? What would be the consequences once the economic policies of an independent Scotland and the rest of the UK began to diverge? Would our banks stay put, or be obliged to consider moving their domicile? And if that happened, what would be the implications for the rest of the financial sector?

There are few better-informed sources on these questions than Professor Brian Quinn. His is a voice not heard in the independence debate until now. But both by virtue of his expertise and by his long experience with issues of banking regulation and supervision at the Bank of England, his assessment is as demanding of attention as it is disturbing. He has just published, through the David Hume Institute, a paper: Scottish Independence: Issues and Questions; Regulation, Supervision, Lender of Last Resort and Crisis Management. It hardly lends itself to soundbite reduction, but it does go to the heart of the practicality of a shared currency and central bank arrangement. It does so in unflinching detail and with unsettling conclusions.

The proposal of the Yes campaign is that an independent Scotland would retain the pound as our currency and share a common monetary and interest rate policy, retaining the Bank of England as lender of last resort.

It sounds reassuringly normal: not a separation but a continuation, not a standalone but a sort of Better Together. And why should a profoundly important vote on our national self-definition come to hinge on such minutiae? Who would phone the BBC Scotland’s Call Kaye to have a go over lender of last resort consequentials? Stick to the bigger picture! But the problem is that the bigger picture is comprised of many smaller ones. And for the whole to work, these constituents must be robust and capable of standing up to scrutiny.

Prof Quinn warns that a shared system of banking supervision would encounter difficulties at the level of both individual financial institutions and the financial system with, in particular, serious weaknesses in governance and accountability. And, once an independent Scottish Government adopted economic policies that differed from those of Westminster – the very point of the SNP’s case for separation – these flaws, he believes, would increase in severity. As a result, it seems “very likely” that the Bank of England would judge Scottish financial institutions – notably its banks – to have become riskier and apply higher regulatory requirements to protect depositors and investors.

This could become particularly acute in the event of a repeat financial crisis. “The cost to the Scottish taxpayer could amount to a significant fraction of a post-independent Scotland’s GDP. Scottish financial institutions might also face a substantial increase in their contributions to a financial compensation fund.”

As for the Fiscal Commission Working Group that advised the Scottish Government on these issues, Prof Quinn says it did not consider the implications in any depth. Its assumption that other UK taxpayers should share the costs of the collapse of Scottish banks does not appear, he believes, to have a legitimate basis. His paper concludes that the concept of a shared system of supervision and crisis management is seriously – perhaps fundamentally – flawed and that its weaknesses would increase during the indeterminate period of transition following independence.

This, together with the uncertainties regarding Scotland’s continued use of sterling arising from its proposed membership of the European Union, are likely to result in higher prudential requirements for Scottish financial institutions. “In these circumstances”, he concludes, “it would not be surprising if they reconsidered their group structures and main domicile.”

“Serious weaknesses”? “Fundamental flaws”? It sounds bad. But isn’t it just one man’s opinion? Brian Quinn is not just another opinion. He is honorary professor of economics and finance at Glasgow University, having been head of banking supervision and executive director of supervision and surveillance at the Bank of England and served as deputy governor. He was for ten years a member of the Basel committee of banking supervisors. After retiring from the Bank, he was appointed adviser to the Monetary Authority of Singapore and to the central banks of Chile, Colombia, Venezuela and Malaysia on banking supervisions and crisis management. He also worked with the International Monetary Fund, the World Bank and McKinsey as a consultant on financial supervision in several countries. He is hardly “just another opinion”.

Prof Quinn touched briefly on these issues as a panellist at a Festival of Politics event at the Scottish Parliament last Saturday. Other experts included Dr Angus Armstrong of the National Institute of Economic and Social Research, David Bell, professor of economics at the University of Stirling, and Jo Armstrong of the Centre for Public Policy for Regions. Each questioned the scope for policy discretion for an independent Scottish Government that continued to share the pound and monetary policy with the rest of the UK. “Not much” was the broad conclusion.

And Prof Quinn’s contribution is critical because it goes to the central engine of Scotland’s economy: the banking system, how it is to operate and how it will be supervised. Until the issues raised by him are countered with the granularity of detail required to provide credible reassurance, there is not, or not yet, a potent economic case for independence that stands up to scrutiny.

The counter factual to this is that Scotland long enjoyed a proud and honourable reputation in banking. Our banks were exemplars up until the acquisition and merger fever in the years preceding the financial crisis. Bank of Scotland, in particular, was lauded for its conservatism. Either there is a programme on independence under which Scottish-based banks would be reacquainted with this wisdom and obliged to focus on core domestic functions, or an altogether more uncertain future awaits. In this, the label “Scottish bank” for institutions that have the bulk of their customers and market presence in one jurisdiction and their head office located in another cannot but raise searching legal and regulatory issues.

Of course, the Scottish Government’s own white paper due this autumn may radically change this. We may then have some detail on how independence would work in the economic and financial realm. But, even then, the vital terms and conditions of an independent Scotland’s membership of currency and monetary union together with arrangements for the regulation and supervision of Scotland’s banks would still need to be negotiated and agreed – and all of this after the referendum vote, leaving the proponents of independence asking Scottish voters to agree a “Trust Us” carte blanche manifesto.

It will be the nearest thing to a blank cheque ever put before Scottish voters and with a capacity to bounce with explosive consequence. A blank cheque of this nature may beguile – but don’t confuse it with a winning proposition in independence economics.