With Scots facing an upcoming vote on whether to stay in the UK, The Banker has looked at how banking assets might be split if Scotland votes yes to independence in the September 2014 referendum.
Currently, UK banking assets total $9876bn, roughly four times the country’s gross domestic product (GDP). However, if Scotland left and became responsible for Scottish-headquartered banks such as RBS, HBOS and Clydesdale, it would have banking assets of 12 times Scottish GDP (1216%). This would be even larger than the banking assets of 10 times GDP that proved so ruinous for Iceland. The rump of the UK would see its banking assets fall to 3.25 times GDP, so it would benefit from Scotland’s departure. These calculations include all assets held by banks, so for RBS this means considerable assets related to non-Scottish operations.
A similar assets-to-GDP ratio is reached if banking assets are broken down according to where they are generated, irrespective of where the banks are domiciled. Using recently released data from HM Treasury, Nomura has found that bank assets purely generated in Scotland are also more than 12 times the value of Scottish GDP (1254%).
Furthermore, Scottish bank loans represent a much lower proportion of local GDP than in the rump of the UK: 70% against 98%. A lower level of personal indebtedness would indicate a safer banking sector. On the other hand, however, the relative size of loans to small and medium-sized enterprises is also lower in Scotland than in the rest of the UK. This exposes a potential weakness as insufficient finance to smaller businesses can be an economic Achilles’ heel and is something European regulators intend to improve.
If Scotland were to become independent, research by Bank of America Merrill Lynch suggests that RBS and Lloyds Banking Group, owner of HBOS, would be under pressure to re-domicile all operations in the UK because of exposure to currency re-denomination, regulation, tax and legal issues affecting balance sheets that are in large parts generated outside Scotland.
