THE creation of a new currency in an independent Scotland could spark panic on the High Street as people withdraw their money from Scottish banks because the new currency might initially be worth less than the UK pound.
The scenario of "a run on banks" in Scotland, and in England, is raised in an analysis paper from Deutsche Bank, Europe's largest investment bank, which stresses that to avoid mass withdrawals as deposits are redenominated in the new Scots currency, there would have to be full agreement between Edinburgh and London on how to manage its introduction.
The research runs through options should Scots vote Yes:
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l a currency union would require "full fiscal and banking union";
l using the pound without a currency union, so-called sterlingisation, would carry "substantial risks for Scottish growth" and
l a new Scottish currency would be "complex and risky" and require a transparent banking settlement - without one both governments risk capital flight.
The paper stresses it would be impossible to split Scottish banking from the UK unilaterally without major risks to financial stability, noting how for currency separation to be successful the governments of a newly-independent Scotland and the rest of the UK (rUK) would have to work together.
"Due to the complexity of the task, we recommend contingency plans begin to be drawn up now," the bank's study says.
The research, by Deutsche Bank's macro strategist Oliver Harvey, considers redenomination of contracts as the new Scottish currency replaced sterling. This, it argues, would be "messy and beset by legal challenges" as some contracts are governed by Scots law and some by English law. All three main Westminster parties have ruled out a currency union. The Deutsche Bank paper notes that it "would not be impossible", it would carry risks. The analysis stresses it would require "full political commitment" by the two governments in the form of full fiscal and banking union. If a new currency were set up, it might initially fall against sterling as "market perceptions of Scotland as less safe" but could rise but would be "correlated to oil prices".
Severing the Scottish banks from the UK's monetary system would not be easy as a new currency would mean cutting off the Scottish banking system from the liquidity provided by the Bank of England; the settlement accounts of three banks headquartered in Scotland - Royal Bank of Scotland, Bank of Scotland and Clydesdale Bank - would need to be terminated. "These cannot be considered purely Scottish banks in the sense that a vast majority of their business takes place south of the border." By cutting institutions off from the sterling system, the rUK Government would redenominate the deposits of depositors in rUK.
"As well as presenting a legal problem," says the report, "this could engender a run on these banks as depositors sought to withdraw funds prior to an anticipated redenomination. It would have meaningful consequences for financial stability in the rUK."
Mr Harvey said the two governments would have to use the 18-month period between any Yes vote and independence coming into operation to smooth out the way to a new currency; failure to do so would create "a big problem".
The analysis refers to "deposit flight", saying: "In Scotland's case this could take the guise of Scottish residents rushing to open bank accounts south of the border."
The report goes on to point out that because RBS and Bank of Scotland are regarded as "systemically important" for the UK's financial system, then the prospect of a run on the banks would be unlikely; more likely it says is for the rUK Government to require banks headquartered in Scotland to move to London, allowing them to be supervised by regulators in London.
The analysis suggests it would be in the interests of an independent Scotland and the rUK to work out the currency issue as a failure to do so "would have major adverse consequences for market confidence in the UK financial sector".