Email
Mark Carney was dragged further into the debate about the currency implications for an independent Scotland on Wednesday, telling MPs that in the event of a yes vote Scotland would need to amass billions of pounds of currency in reserves if it uses sterling without a formal agreement with Westminster.
The Bank of England governor insisted that he would not provide new information to the Treasury select committee on such a politically sensitive topic, but indicated that a Scottish central bank could need at least 25% and possibly more than 100% of GDP in reserves if sterling was used after independence.
Reiterating that the Bank of England had drawn up contingency plans if there is a vote to break away on September 18, Carney said Scottish GDP was £106bn – although this figure is lower than estimates of £140bn when the oil industry is included.
Under intense questioning by Andrew Tyrie, the Conservative MP who chairs the Treasury select committee, and other MPs on the panel, Carney said that countries with a large financial system require larger reserves if they use another country's currency. He said Scotland's banks had assets around 10 times the country's GDP and the size of the banking sector would ultimately determine the scale of reserves.
He repeatedly sidestepped attempts by MPs to produce a definite figure, pointing only to the Baltic states – aligned to the eurozone – which need 25% of reserves and to Hong Kong, which had reserves of more than 100% of GDP.
Tyrie secured a pledge from the governor to provide by Thursday morning the detailed analysis conducted by the Bank of England of what a Scottish central bank might need, based on how other countries have handled such situations.
He put it to Carney that amassing the necessary level of reserves would require higher taxes and spending cuts, running a budget surplus or even turning to the International Monetary Fund for support.
The governor refused to get into discussions about fiscal policy. However, he appeared to agree with Tyrie's assessment that Scotland may have access to £15bn in reserves at the outset.
Carney was giving evidence after telling delegates at the TUC conference in Liverpool on Tuesday that a currency union was "incompatible with sovereignty". The governor's view is a major setback for the claim by Alex Salmond that Scotland could share the pound and become an independent nation.
He said that in the event of a yes vote the Bank of England would continue to back Scottish bank notes until a formal separation of the two nations – expected in March 2016.
Without offering specifics, Carney said: "We've been doing contingency planning. We have contingency plans. We would of course implement (them) if required to support financial stability."
Asked about capital flight from Scotland, Carney appeared to acknowledge the risk. He said: "The Bank of England is the continuing authority for financial stability … the contingency plans we have developed … we would put in place and that is the assurance we would give." In the immediate aftermath of the vote, he said: "The institutions in Scotland have access to Bank of England facilities, deposits in Scotland are backed by the FSCS. There are reasons why we have contingency plans in place," he said.
The Financial Services Compensation Scheme promises to back the equivalent of €100,000 (£85,000) held in bank accounts in the UK, as part of arrangements put in place across the EU after the 2008 banking crisis.
Earlier on Wednesday the FSCS had admitted there was uncertainty about the plans: "We cannot speculate at this time on what the Scottish referendum might mean for consumers. This will depend on decisions to be taken by the Scottish government. However, EU directives place a clear requirement on countries in the EU to provide a deposit scheme. The current European limit is €100,000."
The FSCS added: "The matter of Scottish independence is for the Scottish voters to decide. If the vote is in favour of Scottish independence, there is likely to be a transitional period. During any such period, we expect consumers will continue to be protected by the FSCS as at present, and compensation cover would continue unaffected."
;