by a Newsnet reporter
In what now appears to be the opening salvo in an anti-independence broadside by the Westminster Government, Scottish Secretary Michael Moore, speaking at the David Hume Institute, posed six questions which he says the Scottish Government must answer before any referendum on independence takes place. The questions are:
1. What regulation would be applied to our banks and financial services and who would
2. Which currency would Scotland adopt and how could entry and influence be guaranteed?
3. How would membership of international organisations, including the EU, be assured?
4. What will be our defence posture and the configuration of our armed forces?
5. How many billions would we inherit in pension liabilities and who would pay for future
6. How much would independence cost: what is the bottom line?
I have a question for Michael Moore and that is, “Should you not also be demanding answers to these questions from your political colleagues in Westminster since the political construct which is the United Kingdom will cease to exist if Scotland chooses to become independent?”
The short answer to Mr Moore’s questions is that these are matters which will have to be the subject of negotiation prior to independence. The longer answer is that since we live in a global village where countries are interdependent rather than independent any negotiations will have to take place within a pragmatic framework of trading relations, international relations and international payments systems.
Over the next few days I would like to examine some of the parameters within which choices will have to be made in response to Mr Moore’s questions, starting with his first question.
Question 1 “What regulation would be applied to our banks and financial services and who would enforce it?”
In regard to what regulation would be applied, this is a relatively simple question to answer. The Bank for International Settlements (BIS) is the Central Bankers bank and within the BIS is the Basel Committee for Banking Supervision (BCBS) which sets out and constantly reviews and updates guidelines for the supervision of banks. Most international Central Banks and other organisations charged with the supervision of banks, including the UK, have adopted these guidelines, the most recent version being Basel Three.
Who would enforce it? There are two questions to be answered here:
- Who will enforce the regulations in regard to Scottish banks and financial institutions in Scotland?
- Who will enforce the regulations in regard to Scottish banks and financial institutions operating outside Scotland and branches or subsidiaries of non Scottish Banks operating in Scotland?
I will take the second question first. An agreement exists within the European Economic Area (EEA) which provides a “single passport” for banks i.e. a bank incorporated within one country of the EEA is able to operate in any other country of the EAA with the responsibility for supervision lying with the country of incorporation. In practice, however many of the trans European banks operate as subsidiaries in the host countries and then they are under the supervision of the host country.
I have taken the second question last since it also leads into the area of Mr Moore’s second question which I will address in another article as to which currency Scotland should adopt. Scotland will need to establish its own Central Bank, for now lets call it the Reserve Bank of Scotland.
A good definition of the role and responsibilities of a Central Bank was given by Roger Ferguson, Vice Chairman of the Board of Governors of the US Federal Reserve;
“Central Banks have two principal duties under their financial stability objective, namely the prevention of instability, and management of the consequences once markets become unstable.
“The former involves the formulation of appropriate and sound financial regulations, effective financial institution supervision, and management of an efficient payment system.
“On the other hand, to mitigate consequences of instability, the central bank can employ various tools such as lender of last resort, discount window, or even reserve requirements and appropriate interest rate policy.”
We have the answers to Mr Moores first question then. We will adopt the same international standards to which the UK already subscribes for banking regulation, namely Basel Three, and we will establish a Scottish central bank as the regulator.