Monday, September 15, 2014

Another Wild Card out There: What will Scotland do this week?

Scotland takes its vote on independence this week. While most would assume this is just a local matter, this Bloomberg article points out the impact this vote could have on stability in the financial system. And keep in mind, because of the interconnected global financial system and all the derivatives out there, a problem anywhere can turn into a problem everywhere.


This Bloomberg article notes that the financial authorities realize this vote has the potential to disrupt the banking system so they are making contingency plans ahead of time. Below are some quotes from the article:

'As Scotland stares history in the face, London's financial guardians are preparing for their worst-case scenario."
"Less than a week before a referendum that could see Scotland ending its 307-year political bond with the UK, officials at the Bank of England and the Treasury are gaming out how they would shore up the financial system if that happens."
"BOE Governor Mark Carney and Chancellor of the Exchequer George Osborne may need to act within hours, say former policy makers, economists, academics and government officials. That will then buy them enough time to start the 18-month negotiation process that would follow any Scottish secession."
“What Carney will be worried about initially is the potential flight of deposits,” said former deputy governor John Gieve, who was in charge of financial stability at the central bank during the run on Northern Rock Plc in 2007."
"In an extreme scenario, officials could implement temporary controls such as limiting the amount bank customers could withdraw each day, or closing lenders by imposing a special so-called bank holiday, said Bell at Stirling University. Authorities could also re-capitalize institutions, restructure their liabilities and help them raise funding -- though Gieve said he thought such steps would not be necessary."
“Everybody will want to do the best for Scotland whatever we decide, but at the end of the day, nobody’s going to put their own savings or their own mortgage at risk,” Alistair Carmichael, the Scottish secretary in the U.K. government, said in an interview in Edinburgh this week."
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My added commment:
Just another reminder that any event can trigger instability these days. It appears the UK is prepared ahead of time for this one, but we will keep an eye on this to see how it turns out.

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