Why did the banks only become Scottish – after they failed?

This joke reminds me though, of the one of the rallying calls of the ‘No’ campaign. The accusation that independent Scotland’s banks were bailed out by the UK specifically Royal Bank of Scotland (RBS) and Halifax Bank of Scotland (HBoS).

Let’s ignore for now that an independent Scotland might have regulated its banks like Sweden and not had a collapse. Let’s also ignore the probability that we would almost certainly have regulated lenders differently to those with a London centric Westminster view, given that our economy would probably be more balanced between energy and manufacturing and finance and not so finance led, had we become independent in the 1970s.

Instead let us concentrate on the questions: were the banks exclusively Scottish companies, and if they were, who’s responsibility would the bailouts have been?

Some relevant facts

The banks were wholly regulated from London. They were only allowed to change the way they lend money by the Westminster Parliament who were following the neo-classical economic strategy of little or seemingly no regulation, and a no limits on lending strategy as long as the loan is secured against an asset. The joint architect of this economic strategy that helped to collapse the global economy was Alistair Darling now the leader of the ‘No’ campaign. 90% of RBS and HBoS UK employees were based in out-with Scotland so 90% of employers income tax was paid to Westminster, and not counted as Scottish or Scottish Government revenue. Likewise 90% of the banks national insurance contributions were paid to Westminster and not counted as Scottish. 80% of the losses of RBS for example were generated from the banks London based operations. As with all companies corporation tax is not considered regional and therefore the corporation tax paid by the banks is not considered to be a Scottish Government revenue, it is all paid directly to Westminster. Note: RBS paid £16 billion in corporate taxes from 1998 to 2007, NONE of this was counted as Scottish Government revenue.

So if all the Government revenues associated with the banking operations in the ‘boom years’ were added to the UK balance sheet, why should all the losses in the ‘bust years’ only be added to Scotland’s balance sheet?

In other words why did the banks only become Scottish when they failed, when they were quite clearly British when they were successful?

However, if RBS and HBoS were purely Scottish banks and their taxes were all paid to Scotland (and also as an independent nation Scotland had the benefit of thirty years of oil and gas revenues) it is most probable that the country would be in a better position to bail out the banks than the UK was when it came.

Would we have needed to bail out the banks?

The UK Government, regulated the banks, or rather de-regulated the banks, decided to bail out the banks, when they failed, and let ordinary citizens take the hit, not just the shareholders. In doing this they transferred a banking liquidity issue into a (so far) unsolvable sovereign debt problem. It is worth noting that the austerity measures implemented as a result of the bail out mean that for every five pounds of cuts planned by the UK Chancellor, only about £1.00 of cuts has yet been applied.

Would Scotland, as a smaller independent nation, have made the same regulatory mistakes as the UK? Would we have regulated the banks so they couldn’t collapse like Sweden? There were plenty voices heard in heated discussion in economic circles in Scotland warning that lending was reaching unsustainable levels – my own voice among them. Would those voices have held more sway in a smaller self governing nation?

But that is all academic, not because no-one can guarantee what would have happened, but because of one undeniable economic/international banking fact. That the country that a bank has its headquarters in has no relevance to the share of the cost of the bail out.

In case you need to read that again ‘the country that a bank has its headquarters in has no relevance to the share of the cost of the bail out’.

The real point

As Andrew Hughes Hallett, Professor of Economics at St Andrew’s University, put it: “The real point here, and this is the real point, is by international convention, when banks which operate in more than one country get into these sorts of conditions, the bailout is shared in proportion to the area of activities of those banks, and therefore it’s shared between several countries.

“In the case of the RBS, I’m not sure of the exact numbers, but roughly speaking 90% of its operations are in England and 10% are in Scotland, the result being, by that convention, therefore, that the rest of the UK would have to carry 90% of the liabilities of RBS and Scotland 10%.

“And the precedent for this, if you want to go into the details, are the Fortis Bank and the Dexia Bank, two banks which were shared between France, Belgium and the Netherlands, at the same time were bailed out in proportion by France, Belgium and the Netherlands.”

Did you know that RBS was also bailed out by the American Federal Reserve and the Australian Central Bank? The UK government bail out of RBS and HBOS amounted to £65bn a lot of money but the US federal reserve made emergency loans available to RBS of £285bn and to HBOS of £115bn and $552.32bn to Barclays – sorry who bailed out the British banks again?

Again it is worth noting that 80% of all losses generated by RBS came from their London based investment banking division.

Conclusion

The Scottish banks bail out argument is a falsehood, a scare story that bears no relation to the actual international conventions that cover banking bail outs. As an independent country we would have contributed roughly the same amount as we paid as part of the UK – about 10%.

And if you are still not convinced, Halifax is in England, isn’t it?

Further Reading – Fed Reserve Bails out UK banks

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