The Bank of England had prepared emergency funding if Scotland voted for independence, and warned over the possible impact it could have on the UK's credit rating, it has emerged.
Minutes of discussions by the BoE's financial policy committee (FPC) published today show detailed contingency plans had been put together, including provisions for banks to be given access to loans “as a precautionary measure to backstop sterling money market liquidity”.
The FPC said:
Based on regular liquidity monitoring, the PRA [Prudential Regulation Authority] had assessed that the large UK banks’ wholesale funding positions were stable. Nonetheless, a key element of the Bank’s contingency planning work concerned the potential provision of liquidity support to individual institutions.”
The FPC had also highlighted that if Scotland did not accept its share of the UK's debt, it could have “modest implications” for the rest of the union's credit rating, while the impact on Scotland's rating itself “could have been more material”.
The impact on firms domiciled in Scotland could have been “significant” and the FPC said the greatest risks arose from a lack of clarity over financial security, which could create a run on some institutions, and the possibility Scottish domiciled banks' credit rating could be downgraded.
“In the extreme, it was possible that the prospect of that risk materialising in the future could have threatened financial stability in the present,” the minutes add. “If depositors, policyholders and other creditors believed that an independent Scotland would adopt a new currency, they might have preferred not to take the risk that their assets might be redenominated into that new currency.
“If financial companies believed they would face currency mismatches and therefore potential capital losses in the event that Scotland adopted a new currency, they too might have preferred to reduce their exposures to Scottish assets."