Would You Leave Your Money In A Scottish Bank Account Post Independence?

Blocking an independent Scotland's ability to share the pound could damage business, said First Minister Alex Salmond on 17 February.  It may also force Scottish savers to think about where they keep their money. Picture: courtesy BBC.

Blocking an independent Scotland’s ability to share the pound could damage business, said First Minister Alex Salmond on 17 February. It may also force Scottish savers to think about where they keep their money. Picture: courtesy BBC.

Remember Iceland. The Icelandic banking system was far bigger than the Icelandic economy and when the financial crisis broke and the banks went pop, the Icelandic government was unable to bail out its banks. People lost money.

If Scotland’s First Minister Alex Salmond fails in his quest to keep an independent Scotland within a monetary union with the continuing UK and an independent Scotland is unable to join the Euro then the Scottish government and a Scottish central bank will have to stand behind the Scottish banking system without the back-stop protection of the Bank of England or the German-backed European Central Bank (ECB).

This raises the question of whether the Scottish economy is big enough to bail out the very large and hugely successful Scottish financial services industry based in Edinburgh in the event of future economic turbulence? I doubt it. And so does Salmond – that is why he is so keen on a currency union.

Where will savers feel safest keeping their cash?

Of course, the Bank of England, the Treasury, Chancellor George Osborne, his Lib Dem deputy Danny Alexander and Labour shadow chancellor Ed Balls have all made it clear that they do not support continued monetary union post independence. This is because, as the Euro Zone has shown, monetary union without fiscal union is inherently unstable and in the wake of the crash we can not ignore the possibility of future banking crises in which Scottish banks would need bailing out. The continuing UK would not want the Bank of England to play the role of the ECB in bailing out a Scottish version of bankrupt Cyprus should the worst happen.

There is a real possibility that an independent Scotland will need its own currency – a Tartan pound – which may or may not be pegged to the value of Sterling. And this, in turn, raises the question of where savers will feel safest keeping their cash?

At the moment, Scottish savers, like savers elsewhere in the UK, benefit from the protection of the the UK Financial Services Compensation Scheme (FSCS). This is the compensation fund of last resort for customers of authorised financial services firms – that is, authorised within the UK. The fund guarantees £85,000 per depositor per authorised bank. And these savers also know that the UK Treasury and the Bank of England ultimately stand behind the whole edifice and are ready to oversee the rescue of any UK bank if the worst happens.

This set up saw us through the banking crisis – just – and UK savers have a warm comfortable fuzzy feeling that their money is safe in British banks as a result. But, post independence, savers in financial institutions registered in Scotland will not benefit from that same level of protection. There would be no guarantee if the worst happens that their money would be as safe even if some Scottish version of the FSCS could be cobbled together – what would stand behind the system as a whole?

Where you bank may matter

Where you bank may matter if Scotland votes for independence. Which parts of which banks will be registered in Scotland and which in the continuing UK on independence day? Will a bank account associated with a bank branch in Scotland be deemed to be part of the Scottish banking system? Will Sterling in such Scottish bank accounts be converted into a new Scottish currency overnight? Would such a Scottish account be eligible for protection under the existing UK FSCS post independence? I doubt it.

Smart people should already be thinking about where they deposit their cash and asking whether or not they would want to keep their savings in a Scottish account, whether or not they would want their Sterling exchanged for Tartan Pounds at independence and whether or not they are comfortable with the ability of the Scottish government to guarantee their deposits in the event of another crash – however, unlikely.

This then raises an awkward question. What happens if, between now and independence, large numbers of people move lots of cash from Scottish accounts to accounts that are associated with the continuing UK? Might this constitute a run on the Scottish banking system? Would the Bank of England be forced to intervene and, if so, what would it do? Would the banks prevent their customers from moving their own cash? Would the government stop people taking their own money out of Scottish bank accounts ahead of independence?

It is conceivable that capital controls could be imposed on bank accounts in Scotland prior to independence to prevent savers from moving their Sterling cash out into accounts that would be associated with the continuing UK post independence. Fanciful? Sure. Unlikely? Absolutely. But impossible? No.

Are capital controls a possibility ahead of independence?

Remember what happened in Cyprus last year. Cyprus was and remains a member of the European Union (EU) and a part of the single currency Euro Zone. And yet when the EU stepped in to rescue Cypriot banks, customers of those Cypriot banks suddenly found that they could not get at their own cash after capital controls were imposed preventing money transfers and withdrawals of Euros.

Now ,wealthy savers in Cyprus were facing the loss of 60 per cent on their savings over 100,000 Euros so they had an incentive to get out. No one is suggesting that any such scenario would happen in Scotland. But capital controls are designed to prevent the movement of capital – no matter what the reason. And if enough people felt more comfortable keeping their cash in Sterling pounds rather than converting it into the new Scottish currency then that could be reason enough. There would be a bank holiday and the necessary rules and legislation would be put in place and then the banks would reopen and capital controls would be in force within the Sterling area ahead of independence.

Of course, the governments north and south of the border will dismiss any suggestion that such measures might be needed – right up until the very moment they are announced. For if capital controls were to be imposed on Scottish bank accounts ahead of independence then there would be no advanced notice. You have been warned.

The people of Scotland may well choose independence. But where they choose to keep their cash will be the real test.

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