Pursuant to the article published on the Financial Times’
website on August 17th – US banks plan ahead for UK exit from EU
– we should take a little time to explore the implications of what a
Brexit (British EU exit) might mean for the Scottish financial sector.
The article proceeded from the premise that should the UK
vote to leave the EU then the major foreign banks, especially those from the
US, would be motivated to move their European operations to another EU
jurisdiction. The favourite destination mentioned was Dublin with the three
main selling points being that Ireland is an English-speaking country, it uses
the euro and there is absolutely no risk of it leaving the EU. That’s a fairly
straightforward choice proceeding from the logic of the options available
today.
However, let’s consider what can occur between now and 2017,
the probable earliest date of any in-out referendum on the UK’s EU membership.
Let’s do some thinking out loud and see where that leads:
1.
Scotland votes for independence,
2.
Scotland and the rUK agree a currency union,
3.
Scotland negotiates EU membership,
4.
Scotland becomes independent,
5.
The rUK votes to leave the EU – Brexit.
Point one is simple and that’s what we believe will be the
outcome on September 18.
Point two is the logical conclusion to the on-going
arguments between Edinburgh and London – once independence is assured there
will be bigger matters to deal with and currency union will be a trade-off
somewhere along the line.
Point three is now pretty much agreed as being on the agenda
after a Yes vote.
Point four is the ending of the process started by the
referendum.
Point five is a realistic assumption based on the way that
England feels just now. The Conservatives are the only party to have promised
an in-out referendum up to now but we can be relatively confident that Labour
will offer exactly the same before the General Election in May 2015. What the
LibDems may wish to offer is about as irrelevant as they have become as a party
and UKIP will see an in-out referendum as the absolute minimum requirement to
back any government in Westminster at all. So an EU referendum is pretty much a
racing certainty. Based on this scenario there is a very realistic chance that
the rUK will vote to leave the EU.
So for the big banks considering alternatives to being based
in London is a logical and mature act.
The game changer to the FT article though would be an
independent Scotland. This would be an alternative domicile for these banks.
The language position is the same as with Ireland as would be EU membership and
if we are dealing in sterling then the banks will not need to redenominate the
currency of their commerce – it will be business as usual but with the address
moved 400 miles up the road. Allied to that Edinburgh already has a mature
financial industry so there will certainly be eager and experienced hands for
the banks to employ. Undoubtedly this would also spark a wave of highly
qualified immigrants from the City of London but that would be no hardship.
One thing that we have not taken into account yet is how the
currency union might work on a technical basis. Currently the three Scottish
banks that issue their own banknotes have their currency liability covered by
Bank of England tender. The issuing banks do not just manufacture money out of
thin air – for every Scottish pound that is printed and issued there must be an
English pound held back in reserve. Thereby the Scottish notes are guaranteed.
Following the independence vote it will probably be regarded as reasonable and necessary
for the Scottish Government to establish a Scottish Central Bank (SCB) and one
of the tasks of that institution could be to hold the guaranteed backing of the
notes in circulation. By holding the currency reserves the SCB would be
guaranteeing the notes issued to the Bank of England on behalf of the Scottish
state.
So now back to the big foreign banks potentially heading up
to Edinburgh. Of course there is no guarantee that all the banks would head in
one direction and it might be logical and desirable for a dispersal of the
banking industry around several financial centres such as Paris, Frankfurt and
Amsterdam as well as Dublin and Edinburgh. Nevertheless Edinburgh would have
many attractions as mentioned above but also when we bear in mind that between
11 to 12 per cent of all currency trading is done in sterling it might be
reasonable and logical to have a trading floor in the sterling zone and to be
able to make sterling settlements in the same domicile as the bank. The large
banks have US dollar, euro and Japanese yen provision taken care of so it would
seem smart to cover sterling in the same manner but also from inside the EU
which critically gives the automatic passport to carry out services in all member countries.
On the one hand if London would lose this huge amount of
financial business from the City there would certainly be consequences with the
stability of sterling. If on the other hand that business would remain in the sterling zone but on the other side of
the currency union then Scotland’s banking sector would lend much needed
stability back to sterling. A currency union works both ways. At the moment
it’s viewed as London being stuck with having to guarantee Scotland’s debt but
in reality Scotland could very easily end up being the guarantor of sterling’s
continued credibility.
Then there is the not insubstantial matter of currency
transfers and correspondent banking. When a foreign bank sends a transfer to
another currency zone – for the sake of argument a Finnish bank sending euros
to a sterling account in the UK – the initiating bank in Finland will have a
limited scope for landing that transfer in the receiving country as they will
have correspondent banking facilities – a correspondent account – with only a
small number of banks in the UK or even only one. In the case of Nordea Bank in
Helsinki all their sterling business hits the UK through HSBC in London. Then
from HSBC the payments radiate outwards to the intended receivers across the
UK. If Brexit occurred there is absolutely no guarantee that the rUK would join
the Single Euro Payments Area (SEPA) as the UK is now in. However Scotland
would be in SEPA as an EU member. Therefore there is a decent likelihood that
Scottish banks would be more integrated with other EU institutions than their
kin down in the rUK. Taking this to a reasonable conclusion there is every
probability that Scottish banks would then find themselves with the lion’s
share of the correspondent account business for at least the majority of banks
in the Eurozone and the rest of the EU. Very tasty business indeed.
Overall then, the Brexit scenario could be a very
invigorating boost for the Scottish economy in general and the banking sector in
particular. Scotland could very well end up being the saviour of sterling. Now
who’d have thought that when Alistair Darling was banging on about a Plan B?
No comments:
Post a Comment