Currency in an independent Scotland

Central Banks

Fri, 01 Oct 2021 14:08:03 GMT

Central Banks

Before 1931 the Bank of England was like any other bank. A normal bank keeps its own money (reserves) in the Reserve Account at the BoE (or it could use an account at another bank in which case it is really in the other bank’s Reserve Account). In the case of the BoE its Reserve Account was a pile of gold bars in the vault. Just like a normal bank it was still fractional as there was never 100% coverage in gold of the money in circulation.

The requirement for the BoE to hold any genuine reserves came to a final end in 1971. Today I would say the BoE holds no genuine assets other than temporarily when it grants a loan to a bank. In the case of it owning a gilt then yes that is an ‘asset’ on the balance sheet and it is a ‘debt’ of the Treasury. However, the BoE and the Treasury are subsidiaries of a Group Company – UKGov. In Group accounts intra-company loans cancel out and reduce to zero at the Group level. This is exactly what happens when ONS publish the Full Government Accounts (typically two years late). In those accounts the National Debt is correctly recorded as £1.3 trillion and not the publicly quoted figure of £2.2 trillion.

These ‘assets’ in the BoE accounts are very strange assets. If a bank holds a gilt of say £100m and sells it then it will still have an asset of £100m but it will simply have moved out of the gilt and into the Reserve Account at the BoE. If the BoE sells a £100m gilt then the buyer will pay the BoE £100m. Let us assume the BoE only has 1 gilt. So the Tradeable Assets nominal code on the balance sheet would show a debit of £100m, which represents the gilt. Debits are an asset on the balance sheet. The gilt is sold and the BoE receives the £100m. The relevant commercial bank Reserve Account is debited and the Tradeable Assets nominal is credited with £100m. Tradeable assets are now nil and the liabilities in the form of the Reserve Account have also fallen by £100m. The balance sheet has shrunk by £100m and the money has disappeared. As I said it is a strange ‘asset’ that leaves nothing when it is sold at the full nominal value.

Yes the BoE can expand the monetary base without any limit (it could not in gold standard days) and the ‘assets’ are automatic. Its balance sheet will always balance. Suppose the government decides to pay EDF the £25 billion cost of Hinkley Point and the Treasury makes the payment from the Ways & Means account at the BoE. That is the Treasury overdraft account. So the W&M is debited £25 billion and EDF’s account at Barclays is credited with £25 billion. At the BoE that shows up as a credit of £25 billion to the Barclays Reserve Account. The BoE now has a liability of £25 billion to Barclays and an asset of an Overdraft to HMT of £25 billion. This is the BoE creating ‘bank money’ without any limit because unlike a commercial bank it has no requirement for external reserves and none of this ‘bank money’ ever leaves the BoE.

Let us suppose the BoE was liquidated. How would it ‘pay’ the creditors? With what? All the assets are essentially imaginary and the creditors would get nothing. If the BoE was liquidated then that is also the end of sterling to all intents and purposes as the only thing left would be the coin issue. I suppose if you wanted to carry the scenario further you could say the Treasury would mint some £1 billion pound coins and then RBS could get 27 coins to repay it the deposit in the Reserve Account. What, though, would RBS do with a billion pound coin? You should also note that the UK reserves (gold and foreign currency) do not belong to the BoE – they belong to HMT and are managed by the BoE. It is actually BoE policy (stated in the annual accounts) not to hold any other currency except sterling. It is an interesting point that as there are £3.3 trillion or so pounds and the UK reserves are $88 billion then in theory a liquidation of sterling would result in a pay out of about 2 cents per £1.

The only way you could in practice liquidate the BoE would be to set up another central bank to create the sterling required to do so. The end effect would just be a copy of the BoE under another name.

Seigneurage is an outdated term, since people seem to think this applies only to bank notes and coins. The State gets the benefit of spending all money created by the central bank and it makes no difference whether it is a bank note or a Reserve Account entry. Owning Hinkley Point is the ‘seigneurage’ accruing to the State from spending its overdraft money. There is no difference between a coin, a note or a digital amount. The seigneurage is simply the benefit the state gets (whether that is buying a physical asset or somebody’s labour) from spending that coin, note or digital amount over and above whatever it cost to make that coin, note or digital amount. The Seigneur (king) has declared that the token has a value of X regardless of the value Y of the metal, paper, etc. So X – Y = Seigneurage.

None of the above is anything to do with MMT as it is all just down to double entry accounting.

Dr Tim Rideout

Director

Pensions in an Indy Scotland

Fri, 25 Jun 2021 07:30:45 GMT

Pensions in an independent Scotland

It is, in my view, almost certain that Scotland would take on the current UK State Pension and turn it into a new Scottish Universal Pension. There is no fund and it is paid out of tax so there is no reason why we would not do so. Typically there is about £15-20 billion in the National Insurance Fund at any one time, so we could claim £2 billion or so of that as transition funding which would cover maybe two months. We will be collecting our own tax and having our own currency after that so paying it isn't going to be a problem (and taxes don't fund spending, but the other way around).

It is also existing SNP policy to raise that pension to about S£300 / week which is the current EU average (£16,000 pa). The current UK state pension is the lowest in Europe.

So in practicalities if you are resident in Scotland at midnight on Independence Day then your state pension / national insurance record will transfer. If you are a current pensioner ScotGov will take on paying your Scottish Universal Pension. If you are still working then your record will go towards a SUP and not a UK pension. If you are Scottish but in Spain for example getting a UK state pension then that will continue to be a rUK responsibility. You would not get the new SUP unless you return to Scotland before Indy Day. Anyone moving from rUK to Scotland after Indy Day will continue to have a rUK state pension entitlement. They will not get any SUP unless they establish an entitlement by working in Scotland. There may be some negotiation between Scotland and rUK that might allow a transfer of pension entitlements, but at estimated payment rates then you would need two rUK years to earn 1 SUP year. International transfers of state pension rights are rare so this may not happen, in which case you might get say 25 years in the rUK scheme and 15 years in the ScotGov scheme.

For company schemes: The ScotGov, Scottish Health Service, Local Government, Police etc schemes are all already Scottish and will be paid in S£ at whatever rates have been agreed with the unions. These cover around 500,000 people. Company schemes will be paid as contracted, but where the scheme is rUK (e.g. British Airways Pension Scheme) then it will be paid in Sterling and you will have an exchange rate risk. If it is a Scottish company scheme such as Scottish Widows, RBS, etc then it will be paid in S£ at the agreed rates.

For private pensions, SIPPS, etc then it depends on whether the provider is rUK or Scottish. So e.g. if you use Aviva then they are an rUK company and will most likely continue the scheme in Sterling and pay in Sterling. If it is e.g. a Standard Life plan then you should have the option of switching it to S£ with payments then in S£.

If you e.g. retire to Spain after Indy Day then ScotGov would pay your SUP and any increases to you in Spain in S£.

If you move to rUK after Indy Day then if you are already a pensioner ScotGov will pay your SUP in S£. If you are still working then your number of years entitlement to the SUP will freeze at the current level (there may be a scheme for voluntary contributions as there is now with the UK state pension) and you would start to accumulate years in the rUK state pension scheme.

The Story of the Economics of Independence – Part 3

Sat, 22 May 2021 14:09:53 GMT

The Story of the Economics of Independence – Part 3

“It’s 9pm and you are watching the Scottish Broadcasting Corporation. Please stay tuned for an important public information announcement from the Governor of the Scottish Reserve Bank”, said the announcer. The screen faded to a picture of the SRB HQ in the old Royal High School on Calton Hill with the Governor seated in from of it.

“Fellow Citizens, I last updated you in November shortly before our St. Andrews Night Independence Day. As you know we are now in the penultimate stage of the launch of our new Scottish Pound currency. We are very pleased to report that over 1.5 million of you bought a £90 familiarisation pack of one each of the new notes and coins when those went on sale two weeks ago. Hopefully that means most of you know what to expect when those new notes and coins go into full circulation on Monday next week. We can also tell you that so far 98% of business bank account holders have asked their banks to open S£ business accounts for them. On the personal front take up is lower but still a very pleasing 84% of account holders. As you all know there is no compulsion and anyone who wants to keep a sterling account and retain some or all of their savings in sterling can do so. Those sterling accounts were all successfully transferred to the rUK part of your bank on schedule late last November, so will remain regulated and guaranteed by the Bank of England .

“This coming weekend is the culmination of nearly four years hard work that started back in June 2021. We estimate there is about £194 billion that we own. So far your banks have asked us to issue them with S£48 billion to meet your initial requests for exchanging your sterling. That money will be delivered to them tomorrow morning and over the weekend it will reach your new bank accounts. Don’t forget that you are paying for your new Scottish currency with the matching amount of sterling. Therefore your bank will also be deducting that sterling from your old account. Different banks have different schedules and the timings are phased over the weekend. Please watch out for a text or email from your bank to notify you when your exchange has completed. In most cases you will be able to use your new account and cards right away. If you have not asked to keep some sterling or have asked for your old sterling account to be closed then please remember – you won’t be able to make payments from your old account after the switch. If you are one of the 16% that has opted not to have a S£ account then nothing changes and you can take no notice of what is happening in the next few days. We expect another £27 billion or so to be exchanged over the next eight-week period when we at the SRB are keeping the rate fixed at £1 sterling equals 1 S£. Do take advantage of this period to make any exchanges you want to do (and I realise many of you are waiting to check that everything goes as planned before taking the plunge). Once it ends the S£ will float so the rate against sterling will start to change. Your bank will also start to apply their usual foreign exchange fees, for example if you use your sterling debit card for a purchase.

“We know about half of the 900,000 of you that have a mortgage have already started the re- mortgage process with your provider that is necessary to switch to an S£ mortgage and pay off your current sterling one. The banks have told us they expect everyone that has already started that process will be able to complete the re-mortgage within the eight-week no fees and charges period. If you haven’t started the process do please ask your bank now and refer to their web site for further details. You can also see our advice and detailed guides at www.reservebank.scot. You can naturally keep your mortgage in sterling, but we don’t recommend that unless you understand and are happy with the additional risks that entails.

“Those of you working in the Public Sector will have heard this from your employer directly many times, but do remember that any wages, pensions, expenses or other monies due to you after 1st February will be paid in our new currency. This also applies to recipients of the Scottish Universal State Pension. Government is confident that almost all those people have arranged to have an S£ bank account. If, though, you are one of the few that has not then you need to contact your bank now as a matter of urgency. Payments will be delayed if there isn’t a Scottish account to receive the money. Suppliers to the public sector should also be well prepared by now as a result of the six- month awareness campaign by procurement departments.

“Finally remember that from Monday morning Sterling will cease to be the currency of Scotland and will be replaced by our own Scottish Pound. Sterling will, though, be accepted in shops, restaurants and so forth at least until the end of our eight-week exchange period. After that it is up to the proprietors. There will be charges on sterling card payments once the exchange period ends. Vending machines, though, probably won’t accept sterling notes and coins once they are converted to the S£, so make sure you have whatever S£ you may need for parking meters and the like after Monday.

“In many ways our job in the Scottish Government, for us at the SRB, is just beginning a new chapter. With our currency finally in place we will have the control levers we have been lacking until now to be able to have the spending and taxation, interest rates, etc that work for Scotland. That means being able to increase our prosperity, minimise poverty and unemployment, and ultimately turn our country into a prosperous, sustainable, green Northern European state in which all of us participate.

“Please join all of us in the Scottish Reserve Bank in taking great pride in our national Scottish Pound. I can’t wait to start using the notes on my trips to see other central banks. Finally, nobody will be getting them mixed up with the Bank of England! The designs featuring maps of our islands and our iconic wildlife are stunning, too.

“Thank you for your attention, and Good Night.“

The Quick Guide to the new Scottish Currency

Sat, 22 May 2021 13:58:25 GMT

Quick Guide to the new Scottish Currency

When will the Scottish Pound come into use?
As soon as possible after Independence Day, which means as soon as the Scottish Reserve Bank, the central bank of Scotland, is ready and Parliament authorises it to proceed. The aim is that this should be of the order of a few months, but that depends on how long there is between a vote for Independence and Independence Day.
How long does it take to create the Scottish Reserve Bank and be ready to release the new currency?
The Scottish Currency Group plan shows this to be about 4 years, of which 18 months or so of preparations can be done now before IndyRef 2.
Why is it called the Scottish Pound?
This seems to be the most popular choice, but there are other options from Scottish history such as the Merk, Noble and Lyon.
Will I be forced to convert my money?
No, everyone is free to choose how much of their savings they wish to exchange into the S£. If you prefer to keep your savings in Sterling you are free to do so.
Do I need to do anything?
Yes, as the default position is that your bank accounts, cards, etc will all stay exactly as they are. Your bank will contact you some months in advance and ask you if you would like to have an account(s) in the new currency. You will need to instruct them to set up the account(s) if that is what you want.
Will my new S£ account and cards be the same as my existing ones?
No. Your existing Sterling account has a UK sort code, contains Sterling and is ultimately under the control of the Bank of England. That can’t be changed so you will need a completely new account with a new Scottish sort code that can contain the S£ and which is ultimately under the control of the Scottish Reserve Bank.
Can I keep my Sterling account(s) and have new S£ accounts?
Yes of course. If you travel to rUK or place orders with rUK shops often then it would be quite sensible to keep your existing Sterling account and debit card. That will save you foreign exchange fees in the future.
Isn’t this even more complicated than Decimalisation in 1971 or bringing in the Euro?
No, it is actually much easier for us and businesses. That is because £1 will equal S£1, so there is no need for any shop or restaurant to change any prices, get menus reprinted, buy new cash registers, etc. All you will notice are a new design for the bank notes and coins, and a new debit card for making payments.
Can I just carry on using Sterling for all my purchases?

Yes, but after the initial Exchange Period this will start to cost you foreign exchange fees that will be the same as when you use Sterling in Spain or other foreign countries. The Exchange Period is the first month or two when the Scottish Reserve Bank will keep the two currencies fixed at one to one and with no charges for changing between them. After that the S£ will start to float on the currency market and the banks will charge a foreign currency fee on Sterling transactions. Shops may decide to stop accepting Sterling bank notes and coins.

10. Isn’t this all very difficult for businesses that buy or sell in rUK?

Not really. We will do what happens in Canada. Most businesses will probably keep their Sterling accounts, credit card machines and the like and use those when buying or selling in rUK. They will use their new Scottish accounts and credit card machines for their dealings within Scotland.

11. What about my mortgage, credit card and personal loan?

All loans will stay exactly as they are in Sterling until you instruct your bank to change them. There will be no automatic conversion into S£. Your bank will contact you near the time and ask if you would like to re-mortgage into the S£, or take out new S£ credit cards and loans. The banks, Scottish Government and the Scottish Reserve Bank will run an information campaign to explain to you the risks and benefits of changing loans into the S£ compared to leaving them in Sterling. It is likely that the Reserve Bank will assist / require the banks to provide the same interest rates and terms on replacement S£ mortgages and loans as you had on your old Sterling ones.

There are about 900,000 mortgages with a total outstanding debt of £75 billion, making the average mortgage £83,000. That is about 30% of Scottish households meaning that 70% of households do not have a mortgage to worry about.

12. If I re-mortgage how does this work?

You are best to ask your bank to do this during the Exchange Period, the first two months or so. That will avoid you having any currency fees to pay or any risk from exchange rate changes. After you instruct your bank to arrange an S£ mortgage you will complete the standard process of selecting a mortgage (fixed term, tracker, etc), an updated valuation if required and the legal paperwork. On the date agreed with your bank they will release the S£ funds, exchange those into Sterling and use that Sterling to repay your Sterling mortgage. Your Sterling mortgage account will be closed and you will be left with just your new S£ mortgage account. You can do this at any time, but the longer you delay the more likely that the S£ and Sterling values will diverge, in which case it might cost you either more or less in S£ to repay the Sterling loan.

13. What is the big picture on our debts?

By far the biggest component of personal debt is mortgages. Exact data for Scotland is hard to find, but personal loans, credit cards, and overdrafts probably total less than £20 billion. As there is no change to Sterling debts until such time as people and business ask for their banks to exchange them into the S£, then it is expected that the exchange of debts into S£ will lag significantly behind the exchange of deposits and cash. As we have seen with mortgages then exchanging a debt into the new currency involves paying off the old Sterling loan. This means that settling these debts requires an outflow from the S£ and into Sterling. For example, I take out a new S£500 overdraft and ask my bank to pay off my old £500

Sterling overdraft. That means my bank will sell S£500 and buy £500. That is most likely to be via the Foreign Exchange market, but may be assisted by the SRB. This will depend on whether the transaction is before or after the initial Exchange Period ends, and what the conditions are in the FX market. If there is a large or sudden outflow of S£ to redeem Sterling debts then the SRB can intervene in the market to buy up (and thus cancel) an surplus S£. It can do that using part of the Sterling reserve it acquired selling us the new S£. It should be kept in mind that there is also a long tail of people who held on to Sterling who will exchange it gradually over many months. That inflow will to a large extent mop up the outflow that is clearing old Sterling debts.

14. What about my ISA?

If you have a cash ISA then it is up to you to decide whether to keep the money in Sterling or to exchange it into the S£. There is no guarantee that the Scottish Government will continue the ISA scheme after Independence so there might be tax changes. If you keep your cash ISA in Sterling then it may become a foreign investment rather than a domestic Scottish one but it would still fall under the jurisdiction of Scottish tax law. If you want to avoid exchange rate risks you will be safer to exchange your Sterling cash ISA into S£. Until such time as there is a Stock Exchange in Scotland then a stocks and shares ISA would remain in Sterling as the shares would be held in the London market.

15. What about my wages?

This depends on your employer. If you work for the Scottish Government, Scottish Health Service, a Council or any other public sector body then from the first month your wages will be paid in S£. You will not have a choice about that. The amount you get paid will be exactly the same as before. If you work for somebody else then it is up to you and your employer to agree whether they continue to pay you in Sterling or switch to S£. Most employers are likely to switch to the S£ within a month or two, simply because using Sterling will become inconvenient.

16. What about my pension?

It is likely that as part of the Independence Negotiations the Scottish Government will agree to take over the UK State Pension for anyone resident in Scotland on Independence Day. If that happens then the new Scottish State Pension will be paid in S£ only. Any Scottish public sector pension (Council, SHS, Fire, etc) will be paid in S£ only. For the declining number of people lucky enough to have a private sector company pension then it is up to the pension scheme to decide. Where it is a Scottish company scheme then they are likely to change to pay in the S£ within a short period. Where it is an rUK scheme (e.g. British Airways), then it will continue to be paid in Sterling. Annuities, personal pensions and similar from rUK providers (e.g. Aviva) will be paid in Sterling. Scottish providers (e.g. Scottish Widows) will probably offer the option to convert to receiving S£ if you wish to do so. Some large pension schemes (e.g. the Universities USS) may choose to allow Scottish pensioners to be paid in S£ rather than Sterling. If you use an rUK pension provider you may wish to move your pension fund to a Scottish provider if you want to avoid any exchange rate risk.

17. Don’t we need to save up Foreign Exchange reserves before we can introduce the S£?

No – this is a much repeated and common fallacy. The new S£ is not given out free of charge. Every new S£ is sold to us in exchange for us paying £1 Sterling. So if the Scottish

Reserve Bank issues S£40 billion in the first week, it will also receive £40 billion of Sterling as payment. That becomes our Foreign Exchange reserves. You should note that the UK net reserves are US$88 billion (BoE data for August 2020), so pro-rata Scotland would need $8 billion. As there are around £160 billion that belong to us and which will be gradually exchanged then the Scottish Reserve Bank will end up with very large reserves. If we allow the Scottish Banks to carry on issuing their own design of bank notes then the £4.5 billion they hold on deposit at the Bank of England would also move to the SRB, while the SRB will get the £3 billion Bank of England notes and coins that currently circulate in Scotland when they are replaced by the new SRB ones.

18. What happens to the Banks?

Commercial banks and building societies that wish to continue to do business in Scotland will need a Scottish subsidiary company that is registered in Scotland and obtains a banking licence from the Scottish Reserve Bank. It is standard practice that foreign banks, which would after Independence include rUK banks such as NatWest, would not be allowed to offer services in Scotland if they do not comply with the requirements of the Scottish Reserve Bank.

Sterling can’t be held in a bank in Scotland and S£ can’t be held in a bank in rUK other than as cash notes and coins. That is because holding the currency in an account requires that the account and the bank are connected to the relevant central bank payment system and account ledgers. So for a bank such as Tesco Bank it will divide into Tesco Bank (rUK) Plc and Tesco Bank (Scotland) Plc, with both companies being owned by Tesco Banking Group Plc. Prior to Independence our sterling accounts (and loans, etc) will become part of the rUK part of the relevant bank. In the case of Tesco Bank (rUK) Plc it would carry on being a Bank of England regulated bank that works in Sterling. Tesco Bank (Scotland) Plc would initially have no accounts or funds and thus a zero balance sheet. When the currency is created the new S£ accounts will be opened in the relevant Scottish bank company. If you ask to exchange £500 into the S£, then the rUK bank holding your Sterling account will sell that £500 to the Scottish Reserve Bank. The SRB will deposit S£500 to the Scottish Bank company Reserve Account at the SRB (of the same banking group, e.g. Tesco Bank) for onward deposit to your new S£ bank account.

The SRB works in S£ so the Sterling it buys from us can’t be held in the SRB accounting ledger. The way banks work this is to hold the foreign currency in a correspondent bank that works in that currency. It is likely the SRB would use the Bank of England, but it could use Barclays or another Sterling bank. In the above example the £500 would be paid into the SRB correspondent bank.

19. I have been told the banks will have unmatched assets and liabilities and that this will cause a big problem?

No they won’t. It is a bit complicated as it is all double entry accounting but here goes. The first thing to note is that every bank has a Reserve Account at its central bank. The reserve account is where the bank keeps its money. So just as my company has an account at Santander, so the Bank of Scotland has an account at the Bank of England. If I ask Santander to pay a supplier who banks at Barclays £500 then £500 is debited to my Santander account and it is also debited from the Santander reserve account. The Bank of England credit the £500 to the Barclays reserve account for onward credit to my supplier.

When I ask for £1000 from my Santander account to be exchanged into S£ this is what happens. Santander (rUK) debits my account by £1000 and credits the Scottish Reserve Bank sterling correspondent bank £1000. Lets say that is the Bank of England for simplicity. So £1000 is debited from the Santander Reserve Account and credited to the SRB Reserve Account. Deposits in a bank are a liability of the bank, so Santander (rUK) has a fall in liabilities of £1000. The Reserve Account is the bank’s own money and thus an asset. That has also fallen by £1000. Thus Santander (rUK) has seen the assets and liabilities fall by the same £1000 and all that has happened is the balance sheet has fallen by £1000. The exact opposite happens at Santander (Scotland) as the customer deposits increase by S£1000, and the assets in the Reserve Account increase by S£1000, so both match and the balance sheet has increased by S£1000. There is no mismatch and nothing is owed between Santander (rUK) and Santander (Scotland).

20. It has been claimed that the commercial banks will face huge foreign exchange risks?

This is not true. We have already seen that the banks will have to divide into a Scottish Bank and an rUK Bank. The S£ customer deposits and new loans and mortgages in the S£ will be entirely in the Scottish Bank. The old Sterling deposits and old Sterling mortgages and loans will be entirely in the rUK Bank. As we already saw the balance sheets in the rUK banks will fall with no mismatch between assets and liabilities. The balance sheets in the Scottish banks will rise, again with no mismatch between assets and liabilities. There is nothing owed from the Scottish Bank to the rUK Bank, or vice versa. If there is nothing owed, then there is no foreign exchange risk.

What risks there are, are taken by the Scottish Reserve Bank. Those are any risks during the short fixed rate of the official Exchange Period when banks and the public are indemnified against FX movements / costs, and later as the SRB will have a large holding of foreign currency that might rise or fall in value. Equally we (individuals and companies) will have a currency risk to the extent that we retain Sterling deposits in our old bank accounts (now located in the rUK part of our bank), leave our mortgages and loans in Sterling, or remain in receipt of a pension paid in Sterling. The public information campaign will educate us about those risks and ensure we can take suitable action in good time if we wish to do so. Many people may choose to leave their arrangements as they are, perhaps keeping a Sterling loan because they also have a Sterling income (e.g. a pension or share dividends). The more adventurous might choose to speculate that the S£ could rise against Sterling, but that is not recommended for anyone without a clear understanding of the risks and a willingness to accept that could cause a loss just as easily as a gain.

For more information see www.reservebank.scot, or email info@reservebank.scot

So the banks will leave Scotland

Thu, 20 May 2021 15:13:40 GMT

So the Banks will leave Scotland

It is regularly claimed that the Royal Bank of Scotland, Bank of Scotland and other banks operating in Scotland, will leave Scotland at the first hint of Independence.

Let us consider the Royal Bank of Scotland.

Firstly, we need to understand what is meant by The Royal Bank of Scotland (RBS). It is usually implied this means what is now called Natwest Group Plc (and which was RBS Group until 2020). The Group, though is NOT a bank, but simply a holding company that owns a large number of individual banks. The biggest bank in the group by far is Natwest Bank Plc, which is and always has been a London based bank registered in England. Natwest Bank Plc was purchased in a hostile takeover by the Royal Bank of Scotland in 2000. After the takeover RBS Group Plc was established as a holding company and thus Natwest Bank and RBS became banks owned by RBS Group. There are other banks such as Coutts & Co, Ulster Bank and Isle of Man Bank. The only Scottish bank within Natwest Group is the original Royal Bank of Scotland, which is still based at the registered office on St Andrew’s Square in Edinburgh as it has been for decades (though this has moved to the very grand bank branch rather than the office building that was sold off).

Secondly, we need to realise that the many component banks in the group are all legally separate and distinct companies. They have their own banking licences and file their own annual accounts. Natwest Bank has always been English and since the 1920s has been based in London. This means the Project Fear line that Scotland could never support or rescue the Natwest Group is a deliberate lie. Each bank in the group is the responsibility of the jurisdiction where it is registered and operates. So Natwest Bank has always been and would be in future the responsibility of the UK government and the Bank of England. The US Citizens Bank, which was part of the Royal Bank of Scotland until it was sold, was the responsibility of the US Federal Reserve, thus it was the Fed that provided it with emergency funding in 2008. As stated earlier there is only one bank in the Natwest Group that is registered and operates in Scotland, and that is RBS Plc (Adam & Co is just a trading name and not a stand-alone bank). So post-Independence it is only RBS Plc which would obtain a banking licence from the Scottish Reserve Bank, be regulated by the SRB and have the SRB as Lender of Last Resort. Whether the brass plate of Natwest Group Plc is in Gogarburn or London is irrelevant as it is not a bank and is not eligible for any such funding.

Thirdly, the Project Fear line is that the Royal Bank is simply too big for Scotland to be able to regulate and support if in financial difficulties.

The table above is from the latest RBS Plc accounts filed at Companies House. It shows the Balance Sheet as at the end of 2019. What this shows is that RBS is a medium sized bank with total assets of £90.6 billion. That is a small part (11%) of the overall Natwest Group balance sheet of £800 billion. In comparison Clydesdale Bank Plc had assets of £38 billion in 2015. As a result of branch closures and re-structuring within the Natwest Group, then it is now the case that RBS Plc has very few branches or business outside Scotland.

Would RBS be too big for the Scottish Reserve Bank to rescue? The answer is a clear NO. Scottish GDP is around £170 billion (rather erratic at the moment due to Covid), which would make the RBS balance sheet equal to 53% of GDP. The total HMG funding by buying new shares provided to RBS Group in 2008 was about £43 billion at a time when the balance sheet was over £1.5 trillion. Equivalent funding to the current RBS Plc would be about £3 billion. In practice there is no limit to the S£ that the Scottish Reserve Bank could provide in emergency funding if it wished to do so. In the worst possible total collapse of RBS Plc the SRB might be called on to repay the depositors’ deposits of £75 billion. However, much of that would be recovered from the assets and in particular the repayment of loans to customers.

Fourthly, it is worth noting the Bank has cash assets of £26.5 billion. Most of this is on deposit at the Bank of England in what is called the Reserve Account. The central bank acts as banker to the commercial banks so those banks hold their own money (as opposed to customer funds) in their Reserve Account at the central bank. After Independence then this £26.5 billion will be exchanged into the new Scottish Pound and will be held on deposit at the Scottish Reserve Bank instead of the Bank of England.

Finally, could the Royal Bank leave Scotland? The answer is a definitive NO. That is because almost all of its business and branches are in Scotland. After Independence foreign banks will not be allowed to operate in Scotland unless they establish a Scottish subsidiary, register as a bank with the Scottish Reserve Bank and hold sufficient reserves at the SRB to meet our regulatory requirements. If RBS left Scotland it would effectively close down as it would no longer be able to serve its clients in Scotland or carry out most of the current business.

We have already noted that where Natwest Group has the brass plate is essentially irrelevant as it is just a holding company. Corporation Tax is paid at the operating company level so for the year ended 2019 RBS Plc paid £338m in tax. After Independence that S£338 m would be paid to the Scottish Government. Would Natwest Group seek to transfer staff and group facilities from Gogarburn to London? That would not be a sensible business strategy due to disruption and to the significantly higher wages and other costs that would be incurred in London. In addition the Gogarburn building belongs to the Pension Fund so the rent remains within Natwest Group.

Another large bank in Scotland is the Bank of Scotland Plc. This is owned by the Lloyds Group , but as with RBS, the Bank of Scotland remains a legally separate company with its own banking licence. Surprisingly, you can see from the 2020 accounts below that BoS is actually over three times larger than RBS at £310 billion of assets. This is because it includes what was the Halifax Building Society and its very large mortgage book. The majority of that relates to properties in England. On Independence the Bank of Scotland would need to separate out the non-Scottish business into a rUK bank, probably by reviving Halifax as a legal entity. That would probably leave the Scottish part of Bank of Scotland at about £50 billion or so. The Clydesdale Bank Plc has assets of the order of £38 billion.

As with RBS then, neither the Scottish part of the Bank of Scotland or the Clydesdale could leave Scotland as that business can’t be moved without simply being lost entirely.