Could RBS stay in an independent Scotland?

HBOS headquarters in Edinburgh If Scotland became independent, would and could Royal Bank of Scotland and Bank of Scotland, owned by Lloyds, keep their homes there?

Scotland, and Edinburgh in particular, has a world class financial services industry, in banking, insurance and fund management.

The question posed by today's Scotland Analysis Paper from the Treasury is whether a Scotland that separated from the rest of the UK would be able to retain the bigger banks that are part of that industry.

This is something of concern to the two largest Scottish banks, Royal Bank of Scotland (RBS) and Bank of Scotland, and to Bank of Scotland's owner, Lloyds Banking Group. Its registered office is in Edinburgh, and can therefore be seen as Scottish in its entirety, although its top management is based in a London head office.

Directors of these banks are loathe to talk in public about their fears, because they don't want to be seen as influencing the highly charged debate on Scotland's future.

The nub of the problem was described to me by a senior Scottish banker: any big bank with a domicile or home in an independent Scotland might be seen as a much riskier borrower than an equivalent bank based in the UK, and it would therefore become much more expensive for that bank to borrow or raise vital finance.

"In my view," said the banker, "The moment that it looked as though Scotland were to win independence, funding costs would rise significantly, so RBS and Lloyds would have to move their homes to the City of London".

Banks too big?

So is this banker right? I should say his views are held by all the bankers I have spoken to about this over many months. But it doesn't mean they are correct, which is why it is worth unpicking their arguments.

There are basically two reasons why RBS and Lloyds might be viewed by those who lend to them as an altogether riskier proposition if Scotland separated from the rest of the UK.

First, they are very big relative to the size of the British economy, and they are enormous in proportion to the Scottish economy.

For example, the assets or loans and investments of British banks relative to the size of British GDP is around 500%.

Now many would say that shows that Britain's banking industry is way too big for the health and stability of the British economy.

It means, arguably, that if there was another systemic crisis for banks any time soon, the costs of saving those banks for a second time would be unaffordable for taxpayers - bankrupt banks would bankrupt the state.

Which is why officials such as Andy Haldane at the Bank of England are beginning to ask whether the big missing part of banking reform in recent years has been the absence of any attempt to curtail the size of banks.

If Haldane is right that size matters, in a bad way, then the implications for an independent Scotland would be troubling indeed - because in a nominal sense, Scottish banking assets are equivalent to 1,250% of Scottish GDP.

Just RBS on its own, according to its latest published balance sheet, has loans and investments of £1.3tn, equivalent to more than eight times Scottish GDP.

An unaffordable bailout

The Treasury's paper says that the bailout provided by the UK authorities to RBS in the crisis of 2008 would have been equivalent to 211% of Scotland's GDP - which suggests that an independent Scotland, all other things being equal, would not have been able to afford to bail out RBS.

Alex Salmond Alex Salmond backed RBS's 2007 takeover of ABN Amro

It is probably worth pointing out at this juncture that Alex Salmond, Scotland's first minister and proponent of Scottish independence, supported RBS's ill-judged takeover in 2007 of the bulk of ABN Amro, the deal which massively increased both RBS's size and precariousness.

So, some would say, it is quite tricky for Mr Salmond to argue that all things would not have been equal in an autonomous Scotland.

Anyway, the point is that when investors and companies lend to a bank and when they invest in them, they look at what would happen to that bank if all went pear-shaped and said bank got into a serious financial mess.

They look at whether the government of the country which is home to that bank would bail the bank out in a crisis - thus reducing losses for the bank's creditors - and whether the relevant government could in practice afford to bail out the bank.

The point is that those who lend to RBS would note that the UK government was, in practice, only just able to afford to bail it out.

And they would have considerable doubts about whether the government of an independent Scotland would have deep enough pockets to do the same.

So if Scotland were to become independent, all other things being equal (the ghastly weasel words again), they might either refuse to lend to RBS or charge prohibitively expensive interest rates for doing so.

In those circumstances, RBS would have to pack its bags and move to London pronto.

Also, it is not just the strain on government finances of bailing out a bank that would be a concern to creditors of RBS and Lloyds.

There would be an even more pressing concern for them, which would be the banks' access to emergency liquidity and emergency loans when commercial sources of money dry up.

The big sterling question

The great triggers both of the 2007/8 global banking crisis and the 2012 eurozone banking crisis were that providers of credit to banks went on strike - and central banks had to step in with life-supporting loans.

Any bank with its headquarters in Scotland would need certainty about which central bank it could turn to for money when markets freeze - which central bank would be its lender of last resort.

Here is the thing: the Bank of England would only be prepared to act as the provider of loans to Scottish banks in a crisis if it was in charge of regulating and supervising these banks, as at present.

The Bank of England could not risk its own viability, and British taxpayers money, on supporting banks it could not boss around, in a supervisory sense.

Or to put it another way, the practicalities of whether RBS and Lloyds could continue to be Scottish banks are intricately bound up in a separate, hugely important, debate - which is whether Scotland would be part of a formal sterling zone, with the Bank of England as central bank for a separated Scotland.

And for Scotland to be a formal part of such a sterling zone, the Bank of England and HM Treasury would wish to impose constraints on the financial risks that Scotland's banks could take - to limit liabilities for British taxpayers.

Which could be yet another reason why Scottish banks might wish to move to London, where the Bank of England would judge their sustainability - and therefore the magnitude of risks they could take - on the basis of the British government's resources rather than the Scottish government's.

A couple of things follow, about the necessary conditions for an RBS or a Lloyds to remain headquartered in an independent Scotland (this is all on the assumption that an independent Scotland would view the high-skilled jobs associated with these banks having a Caledonian home as worth the risks of underwriting the banks' liabilities).

First, that investors - the notorious Mr Market - would impose limits on the scope of Scottish independence, if it wishes to remain the domicile of big banks.

This is uncontroversial. It is precisely what Mr Market is saying to the eurozone's governments if they wish their currency union to survive - namely that they have to pool their financial resources, and cede a degree of autonomous control over taxing and spending, to save the euro.

Second, that the more the British government is successful in reducing the innate riskiness of all British banks and their size, the easier it would be for Scotland to secede and keep its big banks.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 717.

    "Alex Salmond... most dangerous man in Britain"?

    Unkind, of a man who has taken the SNP from a party of 'ancient grievance' and 'elite squabbling', to one of proud determination to build a better life for Scots, AGAINST the determined 'social vandalism' not just offered but imposed by one government after another from London

    That said, one more chance for English vision to catch-up?

  • rate this

    Comment number 716.

    Alex Salmond is quite possibly the most dangerous man in Britain currently. Hopefully, the Scotish people will never find out to their cost.

  • rate this

    Comment number 715.

    I am astounded by the anti-English sentiments the BBC allows on here.

  • rate this

    Comment number 714.

    712. I see Greece is indeed where you gleaned you economic knowledge.

    The GERS figures for 2011-2012 show that Scotland runs a smaller deficit than rUK. They are produced by the Scottish Gov, but sanctioned by Westminster. Scotland is in a better financial position than the rest of the UK.

    Before you state something as a fact, make sure it's correct first, otherwise you sound like an idiot.

  • rate this

    Comment number 713.

    I am astounded by the anti Scottish sentiments the BBC allows on here.

  • rate this

    Comment number 712.


    The figures come from scotland gov's budget approved by the OBR.

    But if you have some figures that prove, that just because you have 9% of the population, your tax take would be 9% of the UK's.

    You don't have to be an economist to know that tax take in Glasgow is around 30% of the UK average

  • rate this

    Comment number 711.

    Scottish Independence - full, complete, total, no-strings-attached Independence - Pigs might fly - No sane, adult Scotsperson will give this the go-ahead so the above article is purely academic. Salmond may lead the horse to 'water' but the horse will not drink for the 'water' is poisoned.

  • rate this

    Comment number 710.

    706 It sounds to me like Greece is where you got your economic education, as what you have posted isn't true.

  • rate this

    Comment number 709.

    ..SNP..blame anything that is bad on past or current UK governments

    & the UK government blames everything bad on the previous UK Government & says anything vaguely successful is down to them
    its a trait of politicians rather than particular to the SNP

  • rate this

    Comment number 708.

    @679.where am I
    a lot can depend on how a question is asked
    If I was asked whether I would give the Northern Isles a seperate referendum on leaving Scotland then I would answer
    "Yes if they want one"
    If I was asked whether I was going to give the Northern Isles their own seperate referendum then I would say
    "No they're part of Scotland they get to vote in the same referendum as everyone else"

  • rate this

    Comment number 707.

    Not without paying back all the UK taxpayers first!!!

  • rate this

    Comment number 706.

    I laughed when i watched his speech.

    It small deficit is based on tax take as proportion of UK tax based on populace. Unfortunately its real tax take from individuals and corporations is only 40% of their estimates. The scots are paid less are taxed less and spend more per member of the populace.

    Greece are willing to offer economic advice, for a small fee obviously

  • rate this

    Comment number 705.

    Salmond says Scotland can afford independence. So the opposite must be true!. ie. If they couldn't afford it and still had to rely on England for their drugs, booze and fried mars bars, they wouldn't be so keen on it. As far as I'm concerned the sooner they go the better, but they should be careful what they wish for. They might get it.

  • rate this

    Comment number 704.

    Scottish Referendum Order 2013:
    No mandate.
    No election.
    No Green Paper.
    No White Paper.
    No Bill.
    No Constitutional Bill.
    No Constitutional Debate on Floor of the House.
    No Vote
    No Act of Parliament.
    Defend the Union
    commonrepresentation campaign

  • rate this

    Comment number 703.

    665. realisticlogic
    If the European union is such a good thing, why do Scotland & Wales need to be controlled by England?"

    They aren't.

    If anything, England is more controlled by Scotland, than Scotland is by England.

    There is a Scottish Parliament, and there is a UK parliament. There is no English Parliament.

  • rate this

    Comment number 702.

    Doug @ 664

    I think you will find that, at present there is such thing as an Internationally recognised Scottish territorial waters, nor an English waters - they are all UK waters. The exact boundaries of which will be be settled by negotiation - Fact

  • rate this

    Comment number 701.

    The Bank of Scotland and the Royal Bank of Scotland have been rescued by the Government of the UK and are in effect owned by the British (predominently English) taxpayer. In the event of Independence Scotland should either transfer full ownership to England (or remaining UK) and redeem its share of the debt or buy both banks, paying its share in full to compensate English/UK tax payers.

  • rate this

    Comment number 700.

    I see from the latest eords of Shrek that he wants to spend his way into oblivion.

    The EU has show that if you do not have a currency/political and bugetary union then it wil lnot work. its either ALL IN or ALL OUT anthing else will be the larger party subsidising the smaller party.

  • rate this

    Comment number 699.

    further to 698: In addition to the "Fishery Protection Squadron", the ships available for rapid deployment to the North Sea are:

    Two frigates or destroyers plus a further destroyer, frigate, landing platform dock, amphibious assault ship, nuclear fleet submarine, the casualty receiving ship, two landing ship docks , two replenishment ships and a fast fleet tanker.

  • rate this

    Comment number 698.

    @692. Prickly Thistle
    "No answer yet from you to 669 re navy protection now"

    So, you are saying that despite the Royal Navy's demonstrable impact on the sovereignty of the UK's bit of the North Sea, this bit of the North Sea is now exclusively Scotland's?

    As for present naval protection, this is at present provided by 4 river class patrol vessles: HMS Mersey · Severn · Tyne · Clyde.


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