Scottish banks would flee to the rest of the UK is Scotland became independent, according to a report from the National Institute of Social and Economic Research.
The report also warns that the new state’s economy could be thrown into chaos if the question over which currency it uses has not been resolved. Scotland would either have to keep the British Pound – over which it would have no control – in a process called “dollarization”, wait several years to join the Euro, or invent its own currency.
Business Insider says that with Scottish banks cut off from the Bank of England as their “lender of last resort”, regulators in the UK would likely require all banks to register in the UK rather than Scotland.
The report says:
“If Scotland chooses dollarization as its Plan B (because the UK Government refuses to enter into a formal currency union) it would have little scope to offer lender of last resort facilities to its banking sector. While Scottish banks could continue to have access to the Bank of England’s liquidity operations under the Sterling Monetary Framework, it is doubtful that a UK Chancellor would be expected to provide emergency liquidity assistance to a non – UK institution.”
This would therefore lead to a huge financial exodus from Scotland, causing severe economic damage. Around nine percent of Scotland’s GDP comes from the financial sector, and finance accounts for 15 percent its exports.
There would likely still be high street banks in Scotland, but they would be run as mere branches of English banks. All of the big financial jobs will have moved south of the border.
The report says:
“Without a credible solution to the lender of last resort, the Prudential Regulatory Authority is likely to require systemically important banks using sterling to be domiciled in the UK. Shareholders, customers and rating agencies are also all likely to prefer systemically important banks to be located in the UK.”
The only real solution will be for Scotland to create its own currency, something which First Minister Alex Salmond has ruled out. The currency would also not last long, as Salmond also wants an independent Scotland to join the EU, which requires all new members to pledge to adopt the Euro.
Salmond faced humiliation in the first TV debate earlier this week after he could not say what he would do if the UK will not agree to a currency union in the event of independence. Although he maintained that Scotland would keep the pound, the leaders of all three of Britain’s main political parties have said that such a deal is out of the question.
When pressed by Alistair Darling, head of the anti-independence ‘Better Together’ campaign, Salmond refused to countenance such a scenario.
With the independence referendum now only six weeks away, the ‘no’ campaign continues to lead in the polls.