An Independent Scotland’s banks will “continue to rely on a London-launched bail-out”

Currency would not be a problem for an independent Scotland if, one, the Eurozone had settled its difference over what a fiscal union might look like; or two, the financial sector did not account for such a large proportion of Scottish GDP.

Liam Halligan outlines the problem with some precision…

The combined balance sheets of the UK’s banks amounts to a massive five times annual GDP. We have the most bloated banking sector of any major economy, making our public finances extremely vulnerable in the event of another ruinously expensive bail-out.

An independent Scotland, though, would be even more financially top-heavy – with bank balance sheets totalling an astonishing 12 times national income. When Iceland’s banks crippled the entire country in the aftermath of the 2008 collapse, the equivalent figure was seven times.

That’s why, under independence, the UK’s financial authorities may require large Scots-based banks using sterling to relocate to the rest of the UK, according to NIESR. This loss of large chunks of its vital financial services sector – which drums up £11bn of business outside Scotland, accounting for 15pc of all exports – would then hit an independent Scotland’s balance of payments, prosperity and jobs.

Now, it should be pointed out that none of this should or would affect depositors. As John Kay pointed out on Friday in the FT…

There are two relevant risks for bank customers – credit risk and currency risk. The credit risk associated with a retail bank deposit is negligible. EU rules require a protection scheme, underwritten by other financial institutions, to guarantee deposits up to €100,000. Scotland could be expected to become an EU member or (like Norway) to behave as if it were one. There are strong reasons for deposit protection in any event, and providing a backstop to the guarantee is well within the resources of a Scottish government.

What is not within the resources of a Scottish government is the comprehensive rescue of a major international bank. But that is a matter for the wholesale market creditors of Royal Bank of Scotland, not its retail depositors, and is a reason why RBS would shift the brass plate identifying its head office, though probably not its operations, to London.

Which is possibly the reason Halligan is afraid that in the unstructured mess of a dollarized currency Scotland…

…would still be viewed as UK-backed by global markets in the event of another crash. Could London really stand idly by if Scotland’s large commercial banks – some still with vast liabilities, and still unresolved off-balance-sheet losses – imploded, given the complex web of cultural and financial links between us? Of course not.

The risk to the rest of the UK’s financial markets and credit-rating would be too great.

Scotland’s often rapacious financial services industry knows this only too well, and could become ever more reckless – especially if a newly emboldened independent Scottish government adopts a lax regulatory regime in an attempt to “compete with London”.

An independent Scotland will keep using sterling whatever Westminster says, and its banks will continue to rely on a London-launched bail-out, knowing it will come even if a formal currency union is denied.