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British banks face a serious risk of Scottish depositors shifting their money south of the border if there is a Yes vote in September’s independence referendum, economists at Swiss bank UBS have predicted.
Drawing parallels with the flow of deposits out of Slovakia after its separation from the Czech Republic in 1993, UBS said depositors were likely to withdraw money from banks in a country that is “perceived to be the weaker part of the fragmenting monetary union”.
George Osborne, chancellor, has said that if Scots wanted to continue using the pound after declaring independence, they would do so without the authority of the Bank of England. But Alex Salmond, Scotland’s first minister, says there is nothing to stop the country continuing to use the pound, even without a formal monetary union.
“In a scenario where there is even a possibility that Scotland could have anything other than full monetary union, we believe Scotland is likely to be perceived as the weaker part of the sterling area,” UBS said in the report. “On that basis, aversion on the part of depositors may lead to savings shifting rapidly.”
Royal Bank of Scotland is already training its staff about how to answer questions from customers in Scotland about the safety of their deposits if the Yes campaign is victorious. Executives privately admit it is a concern.
The Bank of England would almost certainly remain the lender of last resort during the likely 18-month transition period following a Yes vote in which the British government would negotiate the terms of independence.
But UBS said: “The ultimate outcome of negotiations is, in a sense, potentially academic in that depositors could pre-empt any political decision.”
The Swiss bank said deposits shifted out of Quebec around the time of its independence referendum in 1995, even though it produced a No vote.
Any shift of deposits to England would be “an incentive to reduce credit creation in Scotland in the absence of full monetary union, or raise interest rates for Scottish domiciled customers in order to induce deposits to stay north of the border”.
The report added that “it does not seem feasible” for RBS and Lloyds Banking Group, which are both partly owned by the British government, to remain domiciled in Scotland in the event of a Yes vote.
“An obvious conclusion is that they may have to relocate south of the border,” it said, pointing out that EU regulation requires financial groups to be domiciled in the country where they conduct most of their business.
A Scottish government spokesperson said: “The Fiscal Commission Working Group published its report on a macroeconomic framework for an independent Scotland in February 2013, which examined several different potential currency options, but concluded that a formal currency union in a sterling area with the rest of the UK was in the best interests of Scotland and in the overwhelming economic interests of the rest of the UK.”
Standard & Poor’s, the credit rating agency, warned this year that an independent Scotland would struggle to support a banking sector in times of trouble because there was no credible public sector backstop.