Banking and financial services

The Treasury has published the latest in their Scotland analysis series on financial services and banking.

It certainly raises a large number of challenging issues for the Scottish Government to respond to. However, I have to admit to some irritation as I ploughed through the lengthy document. The general approach is to emphasise the strength of the UK financial services industry and the City. It's as if the financial crash never happened. And this delusion isn't limited to the UK government.  In response, Scottish Finance Secretary John Swinney said:

"Much of the Treasury paper seems to be based on a flawed, outdated view of the world which takes no account of the substantial banking reforms which have been ongoing across Europe since 2008".

Really? We still have banks that are too large to fail, an issue that would be particularly relevant to an independent Scotland. Others argue that a future financial crisis is an inevitable  feature of capitalist economies. Access to liquidity is also dependent on being part of a Sterling Zone, that only comes at the price of major constraints on monetary and fiscal policy.

In addition the UK would struggle to fund a second bail out, so Scotland just wouldn't be at the starting blocks. Robert Peston's blog covers all this well and the Deputy Governor of the Bank of England points to higher borrowing costs and institutions relocating headquarters to London.

The rest of the Treasury's arguments are less strong. Small countries don't generally have a problem establishing regulatory systems any more than large countries. Yes of course there would be disruption and cost, but this would be a short term problem. I would be sceptical about 'economies of scale' arguments, as again there are plenty of small countries with competitive mortgage and other financial services.

In fact some smaller countries do very much better. For example, private pensions in the Netherlands are better managed than in the UK. Annuity rates are much better, probably because of lower fees and other transaction costs. Overall, the Treasury paper is surprisingly light on pensions, unless it is to be the subject of another paper. It touches on the ICA paper, but that was really only posing questions. The Treasury has access to the Government Actuary Department's data and so you would expect an analysis on public service pensions as well.

The same applies to consumer protection. Yes, Scotland would lose the benefits of spreading risk, but our risks would be that much smaller. We could also legislate for much stronger regulatory controls as we would be distanced from the lobby stranglehold the City. Has on Westminster. Although the Scottish Government's approach to regulation doesn't inspire confidence. Not to mention the First Minister's support for the ABN Amro take over and his views on 'gold plated' banking regulation before the crash.

Overall, the Treasury paper is a mixed bag. Its detailed approach throws down a lot of questions for the Scottish Government to answer. However, it is also hugely complacent about the failings of the UK financial system. The challenge for the Scottish Government in their response will be to show us not just the failings of the UK system, but how an independent Scotland would regulate these matters better. So far there is little evidence of radical thought, rather lets not frighten the financial establishment - when they actually need a shake up!