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Jump into a DeLorean today and set the date to 1994 (a jump of only 20 years – Marty McFly managed 30). On arrival you will find the UK’s banking system more fragmented than it is today. Bank of Scotland, Royal Bank of Scotland and Clydesdale controlled the Scottish market. In England, Lloyds, NatWest, Barclays and HSBC dominated.

In the event of a Yes vote in the Scottish referendum, banks should go back to the future. RBS (which bought NatWest in 2000) and Lloyds (which bought Bank of Scotland in 2009) are registered in Scotland. According to Credit Suisse, Scottish banking assets are 1200 per cent of GDP – even at the height of the mid-2000s boom, few countries reached that level. The last thing a newly independent country would need is an outsized banking system. And RBS and Lloyds, seeking certainty on currencies and deposit guarantees, would likely decamp for the UK.

But thought should also be given to what would be left behind. If RBS and Lloyds are run from outside Scotland, then Scotland is unlikely to be their top priority. So Lloyds and RBS should look to reverse the consolidation of the past 20 years. The former could carve out its Scottish business (which Bernstein estimates has £30bn of loans) and rename it Bank of Scotland. RBS would leave its name and £20bn of loans in Scotland and rename the English part NatWest. Demergers are not easy or cheap, but both banks have recent experience of them. The split-out businesses could be given to shareholders, floated or sold.

The question of which regulators and central banks would supervise the banks and guarantee deposits (and in which currency) is taxing. The Bank of England, ECB and an independent Scottish bank are all possible. But none are likely to object to the country having a small, independent banking system whose sole focus is the Scottish economy.

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Letter in response to this article:

Give Scottish banks a run for their money / From Mr Ray Perman

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