The Bank Move: Just what Scotland Ordered
So amidst the rattle of the party heads visit to Scotland there has been the announcement that Lloyds bank and RBS, both predominantly state owned, will move their headquarters to London. These contingency plans have been drawn up due to the confusion over the currency that Scotland will be using. The Yes camp, backed by international economists, are claiming that they would prefer to use the pound in a currency union with the remaining UK. If that is not possible they would use the pound without an official union in what is termed “Sterlingisation”. Despite the international support for the currency union, the Westminster government has said that it won’t back a union based on their own reports. So the banks are taking serious and prudent moves to safeguard themselves in the case of Sterlingisation.
Now the media coverage of these announcements has portrayed this in a mostly negative light and as a portent of doom for an independence Scotland. The fact that the treasury controversially leaked this story to the BBC ahead of the RBS announcement shows the urgency that Westminster wanted this information out there, presumably hoping that this recycled story would create further panic amongst voters and a setback for the Yes campaign..
Quick Guide: Big Banks Move.
- Banks don’t keep in cash all the money customers have deposited. Instead it is given out in loans, mortgages etc.
- If customers suddenly demand their money, in what is known as a “run”, the central bank (Bank of England currently) can print the money.
- If Scotland adopts Sterlingisation there will be no Central Bank to cover the customers’ deposits
- This means the Scottish government will have to cover it, in cash, potentially reaching a staggering 1200% of GDP.
- As such, RBS and Lloyds bank will move their technical headquarters to London, meaning that in the event of a run the cash can be covered by the UK central bank, the BoE.
- This was actually advised by credit ratings agencies
- Only the technical headquarters of the banks will relocate
- Branches, offices and call centres will still be required
- RBS has confirmed no plans to move jobs
- Corporation tax is based on where the economic activity is conducted, so tax revenues from the banks operations won’t be lost.
What isn’t being discussed however, is that this is what should happen in an independent Scotland in the event that Scotland goes down the Sterlingisation route. The reason for this is that should the banks keep their headquarters in Scotland they will have to have in reserve all money deposited in those Scottish based banks, potentially 1200% of GDP, which leaves Scotland with a debt it couldn’t cover without its own central bank. The staggering sum that would need to be covered is a result of banks not keeping enough currency to cover the deposits they retain for their customers. Instead the vast majority it dealt out in loans, mortgages and investments with a view to growing the holdings of the bank. When customers want to withdraw all their money from a bank in what is known as a “run” you get what we saw with Northern Rock, where they just can’t cover it. A central bank is required as it can then print the money required to pay the banks customers. Without the central bank this isn’t possible, hence the Scottish government would be liable and unable to cover the “run” if customers did want their money. The knock on effect is that Scotland would also then find it difficult, if not impossible, to borrow money in the global arena.
So indeed, it’s not feasible or desirable to retain such a banking structure in an independent Scotland using the pound without a currency union. What people seem to have forgotten, or didn’t know in the first place, is that the credit ratings agencies such as Standard and Poors and several global economists have already argued that for Scotland to prosper, and potentially have a AAA credit score, it has been told that it needs to scale down its financial sector. This is, in effect, what is happening. The banks move their technical headquarters to London in order to be based in a country with a central bank for the reasons that have been mentioned. This means that the liabilities no longer lie with Scotland and so we are under no obligation to hold in reserve such a large proportion of our GDP to cover the banks (see this article in Forbes magazine). This frees an independent Scotland to borrow with a decent credit score, though perhaps not the optimistic AAA, as under Sterlingisation Scotland would be exempt from their share of the UK debt and plan not to pay, which the No campaign claim would not be seen as such a favourable lending situation. It’s important to remember here that this is all in the event that a currency union is not accepted by the rest of the UK, as in the event of a union Scotland has offered to accept full responsibility for a fair proportion of the debt.
Another thing that perhaps people are worried about is the loss of jobs. But this won’t change much. It is simply the declared headquarters of the banks that move, not the operations and this has actually been made explicit in its statement to its own staff by RBS. There will still be the branches, offices and call centres. They will still have to serve their customers in Scotland or we may move our business to another bank, so the same operations will still be here. What’s more, as corporation tax is determined based on where the economic activity is conducted, not where the headquarters are, this source of revenue would be mostly unaffected and go directly to the Scottish Government. In fact, many businesses would probably find the lower cooperation tax in Scotland appealing.
So in essence, we’ll still have the same number of jobs but, as the liability will now be based in the remainder of the UK, we won’t have the negative consequences of having to cover the banks. All this is, of course, conditional on the UK government ignoring the advice of many economists and not agreeing to a currency union. Should they have a change of heart in a post-Yes Scotland, the Bank of England would still be the central bank and there would be little need for RBS and Lloyds to move.
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