We’ve already briefly discussed Bill Jamieson’s article in today’s Scotsman claiming an independent Scotland will be more likely to suffer financial collapse and wouldn’t be able to afford to bail out its banking sector, that its economy will diverge from the rUK due to differing economic policies (making Sterling a millstone round Scotland’s neck), and that Scottish banks would relocate their headquarters to London as a result.
We’ve heard these dire tales of “too wee, too poor” inadequacy a thousand times. “But you couldn’t bail out the banks!” is perhaps the most scratched and worn-out disc in the No campaign’s entire DJ setlist of doom-and-gloom tunes. What we need is some sort of independence Woody Bop Muddy, but while we look for his number let’s yawn our way through this tired old scaremongering cobblers one more time.
Established international procedure is that countries are only liable for the investments within their own borders. Under European law every bank must be registered to operate in a given country in order to be allowed to take local deposits. The authorities in the country the deposits were made are then responsible under EU law for insuring those deposits up to €100,000 (£85,000), even if the bank itself is foreign-owned.
This principle can be seen in action in the Fortis and Dexia banking bailout of the 2008 Belgian financial crisis where the Belgian, French and Netherlands governments worked together to cover the bailout of the banks cross border business.
It can also be seen in the actions of the US Federal Reserve when it bailed out RBS in 2007 and 2008 to the tune of $84.5 billion (the most of any non-US-based bank) in order to provide liquidity to American clients caught up in the global credit crunch.
This fact was highlighted by Professor Andrew Hughes-Hallett (Professor of Economics at the University of St. Andrews) in an interview on BBC Radio Scotland’s “Newsweek” programme in July 2011, when he noted:
“By international convention, when banks which operate in more than one country get into these sorts of conditions, the bailout is shared in proportion to the area of activities of those banks, and therefore it’s shared between several countries.”
And the precedent for this, if you want to go into the details, are the Fortis Bank and the Dexia Bank, which are two banks which were shared between France, Belgium and the Netherlands, at the same time were bailed out in proportion by France, Belgium and the Netherlands.“
Hughes-Hallett’s comments were backed up by George Walker (Professor of Financial Law at Queen Mary University London and Glasgow University) on the same programme, where he stated:
“There are no formal rules for the allocation of market support costs in the event of the failure of a major financial institution on a cross border basis. We have provisions governing the allocation of supervisory responsibility and for cooperation and the exchange of information, but not for the formal allocation of support or recovery at the international level.”
There is a committee which is the Basel Committee on Banking Supervision in Basel Switzerland, although it has no formal authority on matters governing support costs which are reserved to the Central Bank governors directly. There is a European Union memorandum of understanding on cross border financial stability of June 2008 which does set out procedures for managing cross-border crisis within the EU.
In this particular case that we’re discussing, it would presumably then have to be calculated having regard to where the various subsidiaries and business operations of RBS and HBOS were located in England and Wales and Northern Ireland, with Edinburgh only then assuming a proportionate share of around, possibly, only 5% of the total costs concerned.“
Of course, these simple, clear facts probably won’t stop the No camp dragging out the scare story again (and again and again) over the next year, but we might as well keep pointing it out – the reality is that Scotland would never, ever have been expected or forced to shoulder the burden of RBS and HBOS by itself.
(And more to the point, won’t be in future, as HBOS is now wholly owned by Lloyds.)
So what about the threat of diverging economies? Scotland and the rUK have very similar economic cycles at present. Over the longer term however, changes in economic policy could mean that the interest rates applied to Sterling no longer met the economic requirements of Scotland.
What’s not mentioned, however, is that this process would be a long one, taking many years, and which would be visible at an early stage. In the short to medium term (10-20 years), a Sterling zone will remain an optimal arrangement serving the interests of both countries. If in future there was a significant deviation, an independent Scotland would have years of warning in order to prepare for a planned transition in currency.
This is not a threat to independence, but one of the benefits of it. If Scotland is tied into the Union during an economic divergence between Scotland and the rUK, it’ll be powerless to take steps to rectify the situation. With independence the country can either alter economic policies to reduce the divergence, or look at ending the currency union in a sensible and planned manner.
And what of Jamieson’s final point – that “Scottish” banks would move their headquarters to London? Let’s take a quick look at their current head office addresses:
- The Royal Bank of Scotland Plc: 250 Bishopsgate, London*
- Lloyds Banking Group (owners of HBOS): 25 Gresham Street, City of London
We’re bored of this. Someone change the record.
* Interestingly, the London Stock Exchange entry for RBS differs from the Head Office location given on the bank’s website, which names an Edinburgh address that the LSE lists as a “Branch Office”.