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As the referendum on Scottish independence draws closer, some bank customers are becoming nervous. Should they withdraw their cash before September 18 and stuff it under the mattress, or in an English bank?

There are three questions which the risk-averse customer should ask before making a financial transaction.

Where is the head office of the ultimate owner of the business I am dealing with? That country will (probably) take the lead in sorting out the mess if the organisation fails, or in co-ordinating a rescue to prevent it failing. Where is the regulated entity with which I am dealing based? That determines the country to which I must write to obtain compensation if the organisation fails. And under what legal jurisdiction am I making this transaction? That determines the court to which I must go to seek redress.

A multinational financial institution can operate in another country through a branch, or through a subsidiary registered in the country where it collects deposits. HSBC broadly operates throughout the world through local subsidiaries, whereas Sweden’s Handelsbanken is expanding rapidly in Britain through branches on the authority of its EU passport.

I suspect you will not find the people in your local branch ready with answers to the questions. The answers may each take you to a different country – for example, a Scottish customer of Santander (a Spanish bank) may be making a transaction governed by Scots law with a company registered and regulated in England. If your mind is spinning at this point, slow down. These issues become relevant only when things go wrong, and when they do go wrong what happens reflects practical exigencies and political pressures, not legal formalism.

When Icelandic banks went bust, it should have, but didn’t, matter whether you banked with a branch or a subsidiary, nor should it have mattered what the details of the relevant deposit protection scheme were: the British government paid UK personal customers their money back anyway. The British government, or an independent Scottish one, could pass legislation expropriating all bank deposits (subject to some tiresome restrictions from the EU and the European Convention on Human Rights) but it won’t. Risks always exist, but they are governed by the underlying politics.

There are two relevant risks for bank customers – credit risk and currency risk. The credit risk associated with a retail bank deposit is negligible. EU rules require a protection scheme, underwritten by other financial institutions, to guarantee deposits up to €100,000. Scotland could be expected to become an EU member or (like Norway) to behave as if it were one. There are strong reasons for deposit protection in any event, and providing a backstop to the guarantee is well within the resources of a Scottish government.

What is not within the resources of a Scottish government is the comprehensive rescue of a major international bank. But that is a matter for the wholesale market creditors of Royal Bank of Scotland, not its retail depositors, and is a reason why RBS would shift the brass plate identifying its head office, though probably not its operations, to London.

Currency risk is the worry that a depositor suddenly finds that the cash in the branch comprises freshly minted Scots bawbee notes of dubious value bearing the head of William Wallace or Sean Connery. There is at present a stand-off on currency with the Scottish government declaring there will be a currency union and the British government declaring that it will not even negotiate on one.

Scotland cannot make the UK agree to a currency union, and the UK cannot make Scotland introduce its own currency. The only means of introducing a Scottish currency is for a Scottish government to legislate for one, and the Scottish government has no desire to do so.

If Scotland did introduce the bawbee, what would its legislation prescribe? Consideration of the practicalities of a Greek exit from the eurozone has revealed the complexities of this question. A Scottish government can legislate to change contracts made under Scots law, which covers some bank deposits, most mortgages and few commercial loans. Any change to contracts made under English law will inevitably end in the courts in London.

But Scotland is not Greece, with unsustainable public finances, and there is a simpler Scottish solution: agreements made before the introduction of the Scots bawbee remain unchanged.

The Scottish government would alter the terms of future payments under its control, so that pensions and civil service salaries would be paid in bawbees, but other contracts, including bank accounts, would remain in sterling until the parties chose to convert them at the going rate. For an independent Scotland to do anything else would involve a morass of litigation, random windfalls and losses, and politically unacceptable anomalies between households.

If there is a Yes vote, the first minister of Scotland should say on September 19, or perhaps earlier, that Scotland has no intention of adopting its own currency, but that if it does all contracts made in sterling – or dollars – will continue to be payable in that currency. The obligations entailed fall mainly on global banks, which are well able to honour that commitment.

johnkay@johnkay.com

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