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 or 2015.
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 published early next week here), I want to focus on the banking sector.
The Scottish Banks
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.
A better future?
One symptom of "small country" syndrome is that relations between government/regulators and national champions tend to become cozy and even corrupt. There's no reason to think 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.
However, Salmond, a former cheerleader for Scotland's dysfunctional banking sector (in March 2008 he claimed that, with RBS and HBOS, "Scotland has global leaders today, tomorrow and for the long-term") has remained tight-lipped about Scottish banks since their near collapse. His kneejerk response at the time of the crisis was to blame their collapse on "spivs and speculators", including short-sellers in the City of London. However, these were always ludicrous claims, which were soon shot down in flames by opposition politicians including Wendy Alexander. Salmond has been notably silent since.For me, he lost a lot of credibility with those laughable "spivs and speculators" remarks, and his subsequent silence about banking has become the 'elephant in the room' for his administration. 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.
Tags: Alex Salmond , banking , FSA , HBOS , Iceland , independence , Jeremy Warner , John Kay , Prospect , RBS , Royal Bank of Scotland , Scotland , Scottish National Party , SNP , Telegraph , UK