Analysis: Scottish banks plan quietly as independence debate gets louder

Fri Feb 7, 2014 1:04pm EST
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By Matt Scuffham and Chris Vellacott

EDINBURGH, Scotland (Reuters) - In a burst of national pride at its annual shareholder meeting in 2007 Royal Bank of Scotland (RBS) (RBS.L: Quote) was blasting out the theme tune to Braveheart, a Mel Gibson film about the first Scottish fight for independence from England.

Seven years later, and six since the bank was rescued with a 45 billion-pound ($73 billion) bailout from British taxpayers, its management is now preparing for the consequences should the residents of Scotland decide in September's referendum to end its 307-year union with England.

Several banking industry sources have told Reuters that RBS and its part-nationalized rival Lloyds Banking Group (LLOY.L: Quote), which owns Bank of Scotland and is registered in Edinburgh since it took over HBOS in 2009, are already drawing up contingency plans should the vote on September 18 be for independence.

The main concern for these Scottish-registered banks are whether they will still be able to count on the Bank of England as a "lender of last resort" and whether their cost of funding would go up if they were downgraded by credit rating agencies because of Scotland's relatively small economy, according to industry sources.

Both banks declined to comment on the matter.

But Business Secretary Vince Cable said this week that RBS would "inevitably" move its headquarters to London from Edinburgh in the event of independence, citing the greater stability offered by Britain's established financial system and regulation.

RBS and Lloyds, a third-owned by British taxpayers after a 20 billion bailout, have stayed out of the debate, stating that the decision is down to the people of Scotland but, behind the scenes, executives have admitted they are concerned about the consequences.

Scotland's three banks, including National Australia Bank's (NAB.AX: Quote) Clydesdale, are nearly 12-and-a-half times the size of the Scottish economy, meaning that if they got into trouble in an independent Scotland, Edinburgh could not afford to bail them out. The UK's banks, in comparison, are 4.3 times the size of its economy.   Continued...

A man walks past a Royal Bank of Scotland building in central London January 28, 2014. REUTERS/Paul Hackett