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Editor’s blogJuly 3 2014

Scotland's future rests on uncertain ground

The subject of Scottish independence has received global attention, with leaders from the US and Europe weighing in on the discussion. But, with very few clear facts, opinion seems to be the main driver of the debate.
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Scottish independence has become a global concern. US president Barack Obama is against it and European leaders are worried that if Scotland gains independence this September, regions from Catalonia to Flanders could decide to follow suit. If this is the case, however, nationalist groups in the European regions would be well advised to have a firmer strategy on the table for how things will look post-independence than is the case with Scotland.

Scottish voters in September have no more than a hazy idea of what is on offer for them, and they are not being helped in this by a pro-independence campaign that doesn’t really engage with the serious issues, but instead prefers to kick them into touch.

Currently, the Scottish electorate has no idea what share of the UK’s oil and gas resources would be assigned to them (Oxford University’s Paul Collier says they are entitled to 8% based on population size), they have no idea what the currency will be, they have no idea what Scotland’s status in relation to the EU will be and they do not know the shape or structure of their financial industry post independence.   

On this last point, as part of The Banker’s just released Top 1000 World Banks 2014, we performed a simple exercise on Scottish banking assets. On the assumption that Royal Bank of Scotland, the HBOS assets of Lloyds and Clydesdale (which is owned by National Australia Bank) were all headquartered in Edinburgh post independence, this would give Scotland total banking assets 12 times the size of its GDP. This is a very high ratio and would pose huge problems in the case of any of the banks getting into trouble. Ireland and Iceland, for example, were hit extremely hard in the financial crisis with ratios of 9 to 10 times the size of their GDP.

Interestingly, Nomura has come up with a similar ratio, calculated by extracting assets purely generated in Scotland from all the banks. The CIO of UK private bank Kleinwort Benson, Mouhammed Choukeir, also comes up with a 12.5 ratio “making it more risky than Iceland at the peak of the credit crisis in 2007”.

On releasing The Banker’s calculations, we received a very vigorous response from both economic policy think tank Business for Scotland and the Scottish government. The former said: “Banks don’t get government support according to where they are headquartered, the support is given where the bank’s operations are.”

Unfortunately, one of the big lessons of the crisis is that national governments ended up bailing out their banks even though the troublesome assets were often far beyond their shores, exposure to US subprime mortgages being the classic example. Former Bank of England governor Mervyn King, who was in office during the crisis, famously said that "banks were international in life but national in death".

A Scottish government spokesman said: “In [government whitepaper] Scotland’s Future, we have been clear that Scotland will play a full part in protecting the financial system on these isles. Policies for financial stability will be conducted on a consistent basis across the Sterling area, with the Bank of England continuing to set macroprudential policy and identifying systemic risks.”

The problem is the government in London has cast doubt on whether Scotland can continue to use sterling and is certainly not going to be the backstop for Scottish banks. In fact, if Scotland has to rejoin the EU it will almost certainly insist that a new member adopts the euro as its currency.

On the banking question it’s true that the banks could relocate to London but then Scotland would lose financial sector jobs and taxes.

With such poor information on Scotland’s future it is unreasonable to expect voters to come to an intelligent conclusion based on the facts. Instead they will be voting on a set of assertions which is not really how anyone wants to decide their future.

Brian Caplen is the editor of The Banker.

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