Scotland's own banknotes saved

Alistair Darling, the Chancellor, revealed he had brokered a deal between the Treasury, the Bank of England and the Scottish banks to keep the financial tradition alive.

After the Northern Rock crisis, the government planned to tighten the rules on banks' collateral, in case one collapsed.

The new plans would have seen Scotland's banks lose the money they use to print and distribute their banknotes.

Under the current system which dates back to 1845, Scots banks – because their notes are not technically legal currency – deposit 4.7 billion in sterling with the central bank over a weekend, in practice Friday, Saturday and Sunday, to cover the cash they have in circulation.

The three-day deposit was seen as a gesture which guaranteed the notes' value. The banks do not earn interest on it, but could invest the money on the other four days and earn interest.

Under the proposed rules they would have been required to lodge the 5 billion in sterling with the Bank of England all week.

As a result, the three Scottish banks involved – the Royal Bank of Scotland, the Clydesdale and the Bank of Scotland – would have lost the four days' interest on the deposits, costing them millions.

The potential loss of that money led to warnings that Scotland, and Northern Ireland, would lose their distinctive notes – which have been printed with the blessing of the Bank of England, for nearly three centuries.

In Northern Ireland, Ulster Bank, which is owned by RBS, the Bank of Ireland, First Trust and the Northern Bank, all issue their own notes.

Under the deal revealed last night, the banks will have to deposit 100 per cent of the value of their notes seven days a week, but they will get interest on 40 per cent of that.

Last night, Mr Darling's intervention was welcomed by Alex Salmond, the First Minister, who hailed the change as a "victory for Scotland's financial sector".

It came after weeks of behind-the-scenes talks involving the Scottish banks which issue notes and the Treasury.

Although all three banks were affected, the Clydesdale led the campaign against the plans, warning that it might not be able to continue to fund the cost of printing and distributing producing notes.

Treasury officials took the lead in the negotiations, but Mr Darling was following the process closely. The Chancellor said last night: "I am determined to ensure that Scottish and Irish banks will continue to issue their own bank notes.

"The agreement we have reached today does that and also provides protection for people holding these notes."

However, his move will also allow Labour – which has been under pressure from the Nationalists north of the Border – to claim that it is responding to the needs of Scotland.

Last night, two of the banks affected welcomed the move. A Clydesdale spokesman said: "We are happy that the Chancellor has listened to the concerns of the industry."

And a spokeswoman for RBS said: "This is a pragmatic and sensible long-term solution which ensures that Scotland's long and proud tradition of producing banknotes, which dates back 280 years, is continued." The Bank of Scotland did not comment.

Mr Salmond, who had described the original plan as a "dagger at the heart" of Scottish banking said: "This is great news. It's a victory for Scotland and its financial sector. I'm delighted the Treasury have dropped their ludicrous proposals that threatened the very existence of Scottish bank notes. Let's hope they've finally learnt their lesson and never jeopardise our bank notes again.

"Although some concessions have been made, this is a substantial victory and, as such, we welcome it. All those who took part in the campaign deserve congratulations – their determination ensured success."

When the plans were first proposed Mr Salmond said the changes could cost the Scottish and Northern Irish banks a total of 100 million a year.

Last night, the banks could not provide up to date details of the breakdown in the proportion of notes each issues.