1. Scottish Banks to Relocate Headquarters to England, (not much change then since 80% of the functions are already there)
a. The dirty tricks campaigners continue their single minded targetting of Scotland in pursuit of the removal from UK financial services of any risk to the Bank of England and Westminster. It now appears that Scottish banks are intent upon relocating their headquarters to London despite getting the, “no” vote they vociferously advocated, assisted by Sir Jeremy Heywood and his dirty tricks team in HM Treasury. A kick in the teeth for those that fell for the hype.
b. Jeremy Peat opened his article stating, ” A senior figure in the finance sector has warned that firms could move their legal headquarters out of Scotland due to continued uncertainty over independence”.
c. Peat accepted that the vast bulk of regulations applicable to the financial sector in Scotland are in place in support of financial control systems outwith London. Approximately 70% emanates from the European Union and this would be placed at risk in the event of a European referendum. To facilitate it’s continuing function he conceded that Scotland would need to focus on the retention of highly-skilled, highly-paid jobs particularly in the asset management sector, where Scotland already has an excellent reputation and large firms including Aberdeen Asset Management and Standard Life Investments.
d. John Finney commented; “We continue to see the advantages of Scotland being a full participant in the European markets and what the EU referendum threatens to do is to jeopardise that direct relationship between Scottish companies and European markets.” http://www.bbc.co.uk/news/uk-scotland-30526396
2. Extract and Summary of a Meeting of the Financial Policy Committee 26 September 2014
a. Stability of the financial markets in of utmost importance and to facilitate this briefing information will be widely distributed, through the media, banks and other information distribution organisations/systems.
b. In the event of a ‘yes’ vote the Bank of England will issue a statement immediately reaffirming its responsibilities for financial stability, prudential regulation, banknotes and monetary policy in the entire United Kingdom, including Scotland, until legislation enacting independence comes into force. This statement will be coordinated with the Financial Services Compensation Scheme (FSCS) and HM Treasury, as appropriate, to provide a comprehensive explanation of financial stability arrangements during any transition period.
c. The incidence of risks will be much reduced if Scottish-domiciled banks chose to, and announce without undue delay, their intent to redomicile their holding companies into the rest of the United Kingdom. To this end and ahead of the vote, a number of Scottish based financial services firms had announced that they would redomicile in the event of a ‘yes’ vote. Prudential Regulation Authority (PRA) supervisors have been working with these firms to understand their intentions and ensure their operational readiness.
d.The Bank of England have in place arrangements to meet any potential increased demand for Bank of England notes from holders of Scottish notes and provisions will remain in place providing that Scottish banknotes are backed fully by their issuers’ holdings of Bank of England notes, UK coin and deposits at the Bank of England. This would have been a key public message in the event of a ‘yes’ vote.
e. It is noteworthy that large UK banks are required and maintain significant liquid asset buffers and that their Discount Window allows banks to access liquidity against the substantial amounts of pre-positioned collateral.
3. Record of Financial Policy Committee Meeting Held On 26 September 2014
a. The Committee reviewed economic prospects and the outlook for financial stability , as summarized below. Scottish referendum 2. In the United Kingdom, there had been intense focus on the referendum on Scottish independence. The Committee had discussed and received briefings on the possible financial stability risks associated with the Scottish referendum and associated contingency planning by the Bank in June, July and September. At those sessions, the Committee had reviewed the developments relating to the Scottish referendum focusing on financial stability implications. In July the Committee had received a detailed briefing on the Bank’s contingency planning.
b. The Committee had noted the possible impact of a ‘yes’ vote on market perceptions of the United Kingdom’s creditworthiness. If an independent Scotland were not to accept its
proportionate share of the debt, the Committee felt this could have modest implications for the United Kingdom’s sovereign credit rating. The implications for the implied credit rating of an independent Scotland could have been more material.
c. The impact of a ‘yes’ vote on regulated firms would likely have been varied. No significant concerns had been identified for UK financial market infrastructures but there could have been significant effects for those major UK banks and insurers which were domiciled in Scotland or had substantial Scottish assets and liabilities. The main financial stability risks would have arisen if: ? a lack of sufficient clarity over deposit insurance arrangements and/or credibility of central bank liquidity support had led depositors and other creditors of Scottish institutions to transfer their business to other financial firms; and/or ? Scottish-domiciled banks had been subject to ratings downgrades, as implied home government support was reduced, potentially affecting their ability to act as counter parties to other institutions and/or to access wholesale funding markets.
d. The Committee had noted that the main parties in the Westminster Parliament had ruled out a formal currency union with an independent Scotland. It had also noted the potential instability of any informal currency arrangement, such as sterlingisation. In the absence of credible institutions and resources to back financial stability and fiscal credibility, such arrangements could have led to expectations of future redenomination, particularly if an independent Scotland were seen to be on an overall path of economic
divergence from the rest of the United Kingdom.
e. In the extreme, it was possible that the prospect of that risk materialising in the future could have threatened financial stability in the present. If depositors, policy holders and other creditors believed that an independent Scotland would adopt a new currency, they might have preferred not to take the risk that their assets might be redenominated into that new currency. If financial companies believed they would face currency mismatches and therefore potential capital losses in the event that Scotland adopted a new currency, they too might have preferred to reduce their exposures to Scottish assets.
f. The Committee had noted that affected firms were undertaking extensive contingency planning – in liaison with the Prudential Regulation Authority (PRA) – in areas such as liquidity management, operations and communications.
g. A number of risks would have been enmitigated if Scottish-domiciled banks chose, and were able to announce quickly, and with credibility, their intention to redomicile their holding companies into the rest of the United Kingdom. Prudential Regulation Authority (PRA) supervisors had been working with those firms to understand their intentions and ensure their operational readiness. Ahead of the vote, a number of Scottish-based financial services firms had announced that they would redomicile in the event of a ‘yes’ vote.
h. The Committee had discussed the practical issues associated with redomiciling. It had judged that both the speed and certainty with which firms would be able to redomicile could be significantly improved by new legislation. Any such legislation would have been a matter for the Westminster Parliament, whose view could not be pre-supposed.
i. The Committee noted that redomiciling would not mitigate all risks to financial stability. For example, currency risk could also affect holders of Scottish assets or financial instruments (such as asset-backed securities) which contained underlying Scottish assets. The Prudential Regulation Authority (PRA) had been discussing with firms how they would manage their potential currency exposures.
j. Based on regular liquidity monitoring, the Prudential Regulation Authority (PRA) had assessed that the large UK banks’ wholesale funding positions were stable. Nonetheless, a key element of the Bank’s contingency planning work concerned the potential provision of liquidity support to individual institutions. The Committee had noted that the large UK banks had significant liquid asset buffers and that the Bank’s Discount Window allowed banks to access liquidity against substantial amounts of pre-positioned collateral.
k. A routine market-wide Indexed Long-Term Repo operation (ILTR) had been scheduled for 7 October, but the Bank was ready and able to announce extra operations at very short notice. It was subsequently decided by the Bank that, in the event of a ‘yes’ vote, and as a precautionary measure to backstop sterling money market liquidity, the Bank would immediately announce its intention to conduct additional operations in each of the two succeeding weeks, bridging to the already scheduled 7 October operation.
l. The Committee noted that the Bank had in place arrangements to meet potential increased demand for Bank of England notes from holders of Scottish notes. Under current arrangements, Scottish banknotes are backed fully by their issuers’ holdings of Bank of England notes, UK coin and deposits at the Bank of England. This would have been a key public message in the event of a ‘yes’ vote.
m. The Committee noted that the Bank had been developing and implementing its post-referendum communication plans. In the event of a ‘yes’ vote it would issue a statement
immediately reaffirming its responsibilities for financial stability, prudential regulation, banknotes and monetary policy in the entire United Kingdom, including Scotland, until legislation enacting independence came into force. This statement would be co-ordinated with the Financial Services Compensation Scheme (FSCS) and HM Treasury, as appropriate, to provide a comprehensive explanation of financial stability arrangements during any transition period.
n. The Committee welcomed the contingency measures taken by the Bank and emphasised the importance of readiness of the Bank, in conjunction where appropriate with HM Treasury, to take steps rapidly in the event of a ‘yes’ vote. It also recognised the need for careful communications in advance of the referendum, both to maintain the political independence of the Bank and to avoid inadvertently triggering the very risks the contingency planning was designed to mitigate.