Impact of Scottish independence on banks and treasurers

With six months to go until the referendum on Scottish independence, treasurers throughout the UK are evaluating the impact of a “yes” vote on their authorities’ financial arrangements. Most of the attention so far has been around lending to local authorities on the “other” side of the border – north or south, depending which way you’re looking. This follows a couple of instances where English councils have withdrawn their offers of money after the broker told them that their counterparty was Scottish. But this misses the bigger question of whether banks based on the far side of Hadrian’s Wall will need to be treated any differently.

The first thing to remember is that the earliest date that has been proposed for independence is March 2016. Even with a yes vote and a speedy resolution of all the unknowns, nothing is going to change in the near future.  So when planning short-term transactions, treasurers can be confident that England, Scotland, Wales and Northern Ireland will all be part of the United Kingdom for the duration of the contract.  But when planning long-term transactions, including investment, borrowing, leasing and banking arrangements, it’s only proper that due consideration is given to the possibility that we may have a disunited kingdom before too long.

One key concern is around the future creditworthiness of the two post-independence countries. Depending on the outcome of what will undoubtedly be protracted negotiations, Edinburgh may lose access to the UK’s deep and liquid bond market, while London may lose billions in tax revenue from North Sea oil. Both could end up with lower sovereign ratings than the current AAA/AA+ mixture as a result, with consequential downgrades for all other borrowers.  On the other hand, if Scotland starts its independence as a debt free nation, it could be in a very good position. The treasury in Westminster has already told the gilt market that it will continue to honour 100% of its obligations, leaving the Scottish Finance Ministry off the hook a little.

Other major unknowns are around the currency and bank regulation. The Yes Scotland campaign hopes to keep the pound and remain in (or re-join) the European Union.  This would retain a stable currency and strong bank supervision, alongside EU rules on bail-ins. However, as speakers at the recent CIPFA Scotland Treasury Management Forum pointed out, new members of the EU are obliged to adopt the euro, which could throw a spanner in the works. Transactions initiated in sterling before independence could therefore result in settlements involving a different currency with an unknown value afterwards. And although currency risk can be hedged cheaply and easily, it is rather important to know what the currency will be for the hedge to be effective!

And which banks are based in Scotland anyway?  The answer is not as straightforward as you may think.  Barclays, Close Brothers, Co-operative, HSBC and Standard Chartered are definitely English, as are most building societies, while Clydesdale and Yorkshire banks and the Scottish and Century building societies are definitely Scottish.  Royal Bank of Scotland is unsurprisingly Scottish while its Natwest and Williams & Glyn’s subsidiaries are English.  But it’s particularly complicated for the Lloyds Group – Lloyds Banking Group, Bank of Scotland and TSB Bank are all Scottish, while Lloyds Bank and TSB Banking Group are both English companies.

An added complication arises from a 1995 EU Directive that requires banks to be registered in the country where they carry on the majority of their activities.  That’s going to be England & Wales rather than Scotland for both RBS and Lloyds.  This directive is known as the BCCI rule, after the Bank of Credit & Commerce International which went bust in 1991.  Its deliberately complex group structure, including head offices in London, Luxembourg and Karachi, prevented regulators from discovering its widespread illegal activities.  The losses incurred by numerous UK local authorities were one of the driving forces behind the first edition of the CIPFA Treasury Management Code of Practice.  But it will be rather bizarre if a rule designed to prevent a repeat of BCCI leaves Scotland with no major domestic bank post-independence.

David Green is Client Director at Arlingclose Limited. This is the writer’s personal opinion and does not constitute investment advice.