Banks Prepare for Fallout If Scotland Leaves U.K

Daily Herald (Arlington Heights, IL), September 13, 2014 | Go to article overview

Banks Prepare for Fallout If Scotland Leaves U.K


Byline: Bloomberg News

As Scotland stares history in the face, London's financial guardians are preparing for their worst-case scenario.

Less than a week before a referendum that could see Scotland ending its 307-year political bond with the United Kingdom, officials at the Bank of England and the Treasury are gaming out how they would shore up the financial system if that happens. With the result being announced ahead of a normal trading day in the U.K., among the chief risks facing officials in the first 24 hours after any "yes" vote: a flight of deposits, a run on the pound and a drying up of bank liquidity.

Panic "grows exponentially so the key thing is to not let it start in the first place," said David Bell, professor of economics at the University of Stirling. "As soon as rumors start getting around, it seems to me that it's very bad news."

While polls currently suggest Scots will opt to stay with the U.K. by a narrow margin, the vote is so close that officials are girding themselves for the possibility of the biggest shock to the financial system since the collapse of Lehman Brothers Holdings Inc. in 2008. The pound has the potential to tumble 10 percent within a month, said 61 percent of the 31 respondents in a Bloomberg News survey conducted Sept. 5-11.

Taking Action

BOE Governor Mark Carney and Chancellor of the Exchequer George Osborne may need to act within hours, say former policy makers, economists, academics and government officials. That will then buy them enough time to start the 18-month negotiation process that would follow any Scottish secession.

"What Carney will be worried about initially is the potential flight of deposits," said former deputy governor John Gieve, who was in charge of financial stability at the central bank during the run on Northern Rock Plc in 2007.

While Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, Scotland's two biggest lenders, have said they plan to move their legal base to England if the country votes for independence, investors may still fret about any turmoil created by the transition.

Carney has said assets in the Scottish-domiciled financial industry are about 10 times the country's gross domestic product, totaling more than 1 trillion pounds ($1.62 trillion). With questions over Scotland's currency plans and lender-of- last-resort arrangements, that's generating uncertainty about the future of the country's banking system.

Tallying Votes

The first results, from Comhairle nan Eilean Siar, or the Western Isles council, are due around 2 a.m. local time. The urban centers of Glasgow and Edinburgh, where about a quarter of the electorate lives, may not start reporting until 5 a.m.

If the final outcome is "yes," a team of officials will be put together at the Treasury in the early hours of Sept. 19 to deal with the fallout, according to an official who spoke on condition of anonymity to discuss confidential internal matters.

Campaigning is intensifying after a YouGov Plc poll last weekend put the Yes vote ahead for the first time this year. A survey by the same company published Sept. 11 showed a reversal, with the "no" camp leading 52 percent to 48 percent. A poll by ICM released yesterday showed the "yes" vote on 49 percent and "no" on 51 percent after excluding undecided voters, making it effectively too close to call given the margin of error.

As the risk of Scotland severing its monetary, fiscal and political ties with the rest of the U.K. rises, London's politicians have deliberately avoided using the word "contingency" in case it's seen as preparing for defeat.

"The government has not been and will not do that type of planning," Cameron's spokesman, Jean-Christophe Gray, told reporters in London on Sept. 11.

Cameron, who didn't watch the two television debates between the leaders of the "yes" and "no" campaigns because he was on vacation in Portugal and then southwest England, made an emotional plea to Scottish voters on Sept. …

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