In an analysis paper on the Scotland referendum, Credit Suisse said UK residents living in Scotland aged 16 and over will vote on Scottish independence on 18 September, with negotiations around Scotland’s secession from the UK to begin following a majority ‘yes’ vote.
The paper said UK chancellor George Osborne and shadow chancellor Ed Balls have ruled out a formal currency union between Scotland and the rest of the UK ('UKLS') in the event of independence.
Permanent Secretary to the Treasury Nicholas MacPherson has also strongly advised against a currency union with an independent Scotland, said Credit Suisse.
“In our view this makes it politically difficult and unlikely for any future UKLS authorities to enter into such a currency union,” said Credit Suisse.
“In the absence of support or a formal currency union with UKLS, Scotland's prospective monetary arrangements would likely be inconsistent with it maintaining its large banking and financial sector.”
Credit Suisse believes Scotland’s large financial sector could be a catalyst for “financially and economically destructive capital flows” if independence and different currency arrangements were to eventuate.
The paper explained that Scotland’s legacy banking sector would be “disproportionately large”.
“The prospective currency arrangements for an independent Scotland would render the central bank's ability to provide liquidity to its banking sector subordinate to the need to maintain a currency peg,” said Credit Suisse.
“Given the scale of the Scottish banking sector, a Scottish central bank could not be a credible lender of last resort, in our view.”
In addition to the risks from the banking sector, there are also implied contingent liabilities of the sovereign from bank deposit insurance schemes.
“In Scotland they would likely sum to over 100 per cent of GDP,” Credit Suisse estimated.
“Once again, the central bank could not be a credible lender of last resort. UKLS would be faced with a choice of providing support or suffering the consequences.”
A vote for Scottish independence, the paper argued, will therefore “call into question Scotland’s ability to maintain a viable currency arrangement and the large financial services sector which currently supports a large tax base”.
As a result, Credit Suisse said banks legally incorporated in Scotland are likely to face a tougher retail and wholesale environment following Scottish independence.
This would encourage institutions to change the location of their legal incorporation and headquarters to UKLS, according to Credit Suisse.
Credit Suisse said the economic impact could, however, still be significant, given financial and associated professional services make up around seven per cent of Scottish employment and 13 per cent of GDP.
“Consequently, as well as employment, this sector represents a sizable chunk of Scottish GDP, demand and, critically, tax revenues,” said the paper.
The process of capital flowing from Scotland to UKLS in the form of legal residency of banking institutions, Credit Suisse said could generate a “negative feedback loop in which the migration of that capital further undermines the perceived capacity of the Scottish authorities and economy to sustain and support its financial sector”.
