Following some of the comments and responses to yesterday's post on the banks and Scottish independence, I feel I should write some more on the issue.
David Comerford makes the important point that I have ignored the process of 'subsidiarization' of foreign banks. He cites the recent talk in Edinburgh and Research Briefing paper from Angus Armstrong of the National Institute of Social and Economic Research. What Armstrong notes is that the US Federal Reserve and the Bank of England are moving towards ensuring that
Banks operating in the UK market with headquarters outside of the border would be required to be subsidiaries with their own regulatory capital and reserves held at the Bank of England. If this makes resolution easier this may make support for foreign banks (including from an independent Scotland) operating in the UK easier in future.
Subsidiarization will make the provision of liquidity to banks in the rUK from an independent Scotland easier than I allowed in my first post. This is because while liquidity is, in principle, only provided to solvent banks, they may unknowingly be at risk of insolvency. The requirement of subsidiarization with regulatory capital and reserves held at the Bank of England would minimise the risk to the rUK taxpayer and so liquidity support from the Bank is more likely to be forthcoming.
But that says nothing about the provision of both liquidity and bail-out support in the event of insolvency to banks, Scottish and foreign, operating in Scotland.
Armstrong, in the same paper, notes
For a newly independent country with a high debt to GDP ratio the capacity to support the financial system will be limited. ....... To prevent capital flight savers and investors must believe their money will always be safe in an independent Scotland.
To secure this, Armstrong offers three options: a new Central Bank of Scotland; joining the eurozone monetary union; fiscal agreement between the UK and an independent Scotland. But it is clear from his paper that the first two are not politically feasible and bring economic costs. So that leaves us with a fiscal agreement between the UK and an independent Scotland. And that is precisely what I wrote would be required in my first post.
Comerford further suggests in the context of subsidiarization that RBS and Lloyds could capitalise their English operations under English rules. But why would they want to do this if an independent Scotland was as safe to operate as the rest of the UK?
But Comerford is right to suggest in this context that the scale of the activities in the financial services sector need not change with independence. What I and I believe the Treasury paper was concerned about is the loss of some HQ functions and quality jobs rather than wholesale relocations out of Scotland. That would be unlikely.
Finally, Comerford believes that
John Swinney is correct to say that the importance of financial services to the Scottish economy is smaller than its importance to the rUK economy (but specifically the London economy) and to say that the scale of the activities of the financial services sector need not change with independence.
But John Swinney was using the smaller share of financial services in Scottish GVA not to say that the scale of such activities would not change after independence but to imply that the sector is no more at risk than in rUK; that the capacity of an independent Scottish state to support the financial system would be no less than the rUK. The Treasury paper and Armstrong's paper clearly disputes that.
Yes, financial services are much more important to the London economy in GVA terms as well as scale of assets. But no one is suggesting that London is seeking independence. On the other hand with Boris at the helm ....... !