By Ian Fraser
Date: 17 June 2011
Since Alex Salmond’s Scottish National Party secured a majority in Scotland’s parliamentary elections on May 5, there has been much debate about how well or badly an independent Scotland might fare. The debate both north and south of the border can be expected to get even more heated in the run up to Salmond’s mooted referendum on independence scheduled for 2014.
Economists who would prefer Scotland to remain part of the UK have been marshalling their statistics to prove their case, while economists who believe in Scottish independence have been picking other numbers to reinforce theirs.
In this blog, the first of two on the economics of Scottish independence (the second available here), I want to focus on the banking sector. At the height of the financial crisis in September 2008, the combined assets of Scotland’s two big banks – Royal Bank of Scotland and HBOS – both of which narrowly avoided insolvency thanks to UK government intervention, were 21 times Scotland’s GDP. In Iceland, a poster child of incompetent regulation and banker recklessness, the bank assets to GDP ratio reached 9.8 times in 2008, while in Ireland it was a mere 4.4 times.
Had Scotland been independent in those stomach-churning days of near-total financial implosion three years ago, the North European country would now be on its knees.
Some commentators have argued that, if Scotland had been independent, the banks would have been better regulated. The Scottish equivalent of the FSA would have stopped them from pursuing self-destructive courses, barred them from ballooning their balance sheets with dodgy loans and toxic assets, and insisted on higher capital ratios. But I’m not so sure.
One symptom of “small country” syndrome is that relations between government/regulators and national champions tend to become cozy and sometimes even corrupt. Politicians and regulators tend to egg seemingly successful banks on. We saw that in places like Switzerland, Ireland and Iceland ahead of the crisis. There’s absolutely no reason to believe that Scotland would have been any different. As Jeremy Warner put it in a recent Telegraph blog: The idea that had the Scot Nats been in charge, these two banks would have been better regulated, is an interesting theory but also completely fanciful. The Edinburgh financial and political elite is, if anything, even more defined by cronyism than Dublin’s. Puffed up with its own sense of self importance, the hubris would very probably have been worse still.
In a recent article in Prospect, John Kay said: “The liabilities of the two banks were 30 times Scotland’s GDP—far larger than the equivalent figure even for Iceland. It’s clear that a Scottish government could not have mounted a credible support operation. But that calculation also makes clear that it is preposterous to suggest the liabilities of a bank are liabilities of the population of the country where the head office of that bank is located. Nations should determine the size of banks, not banks the size of nations.
“The right response from Salmond would have been to say that an independent Scottish government should have seized the groups’ commercial banking operations within Scotland, and left the rest to be supported by international efforts. If that international rescue failed to reach a deal, then the non-Scottish operations of the banks should have been put into administration. There are strong arguments that this would have been the right response for the UK, too, given the costs of the rescue.”
Salmond was a major cheer-leader for the two Scottish banks when they seemed like world-beating financial powerhouses, particularly his ex-employers at RBS. And he carried on cheer-leading these two banks until weeks before they collapsed. On March 31, 2008 when it was already clear to many investors and analysts that RBS and HBOS had massive holes in their balance sheets and were struggling to fund themselves, Salmond insisted that, with RBS and HBOS, “Scotland has global leaders today, tomorrow and for the long-term”. [Speech given to Harvard University – Free to prosper: Creating the celtic lion economy] On August 7th, 2008, the day it announced massive first-half losses of £692m, and a few weeks after it had had to tap investors for £12bn to patch up its balance sheet, Salmond told The Times that RBS was… “one of the highest-performing financial institutions in the world” which would soon “overcome current challenges to become both highly profitable and highly successful once again”.
His kneejerk response when things went pear-shaped for HBOS was to blame its collapse on “a bunch of short-selling spivs and speculators in the financial markets”, including short-sellers in the City of London. On September 17th, 2008, Salmond told BBC Scotland: “I am very angry that we can have a situation where a bank can be forced into a merger by basically a bunch of short-selling spivs and speculators in the financial markets. We should not have situations where well capitalised, properly funded financial institutions are subject to incredible speculative attack, and that drives them into decision making which they otherwise might not have done. You have got to put the hems on that sort of activity, otherwise we will have a succession of companies going through the same process. All financial regulators have got to wake up to where we are at the present moment.”
These were always ludicrous claims (especially the bit about HBOS being well-capitalised and properly funded!), which were soon shot down in flames by opposition politicians including Wendy Alexander. Salmond has since been extraordinarily tight-lipped about the Scottish banks whilst failing to acknowledge the role of the British government and taxpayer in preventing their implosion.
For me, he lost a lot of credibility with his laughable “spivs and speculators” remarks; and his subsequent silence about the banking sector has become the ‘elephant in the room’ for his administration and plans for independence. In my next blog, I intend to examine some of the wider economic and fiscal issues that have bearing on Scotland’s chances of thriving as an independent nation.
A slightly different version of this article was published on QFINANCE on June 16th, 2011