UK: Currency Union Or A Separate Currency In An Independent Scotland And Some Possible Implications Of Both

Last Updated: 18 February 2014
Article by Philip Mackay

This bulletin focuses on the currency elements of the paper entitled 'Scotland's Future - Your Guide to an Independent Scotland1 ' (the 'White Paper') in the context of a speech given by Mark Carney, Governor of the Bank of England on 29th January 2014 and the possible implications of a currency union or a separate Scottish currency.

Currency Union

The White Paper proposes a sterling currency union between an independent Scotland and the rest of the United Kingdom ("RUK") with the Bank of England remaining the central bank and lender of last resort for both RUK and an independent Scotland.

The concept of a currency union is dependent upon RUK approval and negotiation, as well as the outcome of negotiations with the EU on the terms of any Scottish membership (including any possible future membership of the Eurozone). The Scottish Government believes that a Sterling currency union is in the interests of RUK.

Governor Carney offered initial talks on the currency union concept in the Autumn and was in Edinburgh on 29 January to commence these with the Scottish Government: Although they were not framed that way, his comments could be interpreted as the initial technical negotiation stance of the Bank of England in the event of a 'Yes' vote in September 2014.

Governor Carney – "a durable, successful currency union requires some ceding of national sovereignty"

Governor Carney emphasised the following high level comments in relation to any such currency union (the words in italics are direct quotes):

  • Any arrangement to retain sterling in an independent Scotland would need to be negotiated between the Westminster and Scottish Parliaments. Whilst constitutionally Governor Carney's comments are correct, it is likely that the Bank of England's views will influence the Westminster Government and the international financial markets.
  • The costs and benefits of sharing a currency include the elimination of the transactions costs in using different currencies but this needs to be balanced against the potentially large costs of giving up an independent monetary policy tailored to the needs of the specific country, including a flexible exchange rate that can help absorb shocks.
  • The success of a currency area hinges on whether its features mitigate the costs of losing the flexibility that comes from an independent monetary policy. In other words, the loss of flexibility should be mitigated if the relevant economies are closely aligned. The Scottish Government has emphasised that the Scottish and RUK economies are highly integrated but Governor Carney noted that there is a body of evidence that national borders can influence trade flows, even between otherwise highly integrated economies. The high degree of integration between Scotland and the rest of the UK may in part depend on their being part of the same sovereign nation.
  • The existing banking union between Scotland and the rest of the United Kingdom has proved durable and efficient. It involves common standards and protections such as a single deposit guarantee scheme backed by the central government and a common central bank, able to act as Lender of Last Resort across the union, as well as common supervisory standards. The euro area has shown the dangers of not having such arrangements, as well as the difficulties in agreeing the necessary pooling of sovereignty to build them. An independent Scotland would therefore need to consider carefully how to develop arrangements with the continuing United Kingdom that are both consistent with its sovereignty and sufficient to maintain financial stability.
  • The fiscal arrangements surrounding a currency union are particularly sensitive in the political debate given the importance of fiscal independence to the arguments of the 'Yes' camp. He emphasised that in a monetary union between an independent Scotland and the RUK the two Parliaments would have to agree on fiscal arrangements and he cited the example of the Eurozone which highlighted that fiscal risk sharing may be necessary to make a currency union work satisfactorily.
  • In summary Governor Carney emphasised that if a currency union between an independent Scotland and RUK ever were to happen, it would have to be built on strong common foundations in order to avoid the problems associated with the Eurozone. In short, a durable, successful currency union requires some ceding of national sovereignty. It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.

What are the other relevant implications of the proposals in the White Paper for the financial sector?


An advantage of currency union is that there would be no consequences for payment provisions in contracts as such payments would still be in Sterling.

Interest Rates

If there was a currency union with Bank of England remaining as the lender of last resort in Scotland, then the base rate would be set by the Bank of England and would be the same in Scotland and RUK.

Interest Rate Caps

The White Paper proposes a cap on certain interest rates in line with some other developed nations. Not much detail is provided but it does appear to be aimed at consumer credit, particularly payday lenders. The scope and level of the proposed cap needs to be clarified and, in particular, confirmation is required that it would not apply to commercial arrangements such as high-yield bonds and notes.

Capital Adequacy

It is proposed that the capital adequacy regime would be the same between Scotland and RUK and this would be relevant to the capital raising costs of Scottish financial institutions post-independence.

Banking Bill

The White Paper endorses the approach of the Vickers Report and UK Government proposals about the ringfencing of "less risky" bank activities.

Banking Act 2009

The White Paper does not mention the special resolution regime created by the 2009 Act. However, on the basis that the Bank of England would remain the central bank of a currency union and similar prudential conduct regimes would apply, it may be presumed that the special resolution regime would continue to apply in Scotland. However, it is not clear what would happen if there was a disagreement between the Scottish and RUK Governments (or the relevant national regulators) on how to deal with a distressed Scottish financial institution. From Governor Carney's speech, it is clear that he would view it as vital for a currency union that a common policy (with common resources) be put in place.

If a Plan B involved Scotland establishing its own currency – What might it look like?/H3>


There is no Plan B in the White Paper and it is a matter of conjecture what the Scottish Government would do if no agreement on a currency union was reached. Just as the UK Government has declined to show its hand, the Scottish Government is not discussing what would happen if there was no deal on Sterling. Apart from the option of adopting the euro (which is not proposed by the Scottish Government and, in any event, would require the agreement of the members of the Eurozone) the remaining option would be for Scotland to establish its own currency.

This would be a difficult exercise but if a Scottish currency (which for these purposes, we call the Scottish Pound) were to be created, what would be the possible consequences for banks and businesses in Scotland and RUK?


We have some idea of how new currencies are created in the light of, in particular, the creation of the Eurozone. As most domestic payment obligations (both consumer and business) are denominated in Sterling, it would be necessary for the Scottish Parliament to pass legislation converting Sterling at a specified rate. We would envisage that the rate would be fixed after consultation with banks and other interested parties, not only for the purposes of seeking to maintain business confidence but also to avoid any possible Human Rights challenges if the rate was viewed as being fixed unfairly. It would be open to the Scottish Government to seek to peg the Scottish Pound to Sterling but the viability of such an arrangement is dependent upon market sentiment and the willingness of the Scottish Government to use financial tools such as interest rates to support parity.

The Scottish Parliament, in conjunction with the Scottish Government, would also need to consider the scope of the conversion process. It is presumed that debts between persons and entities situated in Scotland where the obligations are governed by Scots law would almost certainly be covered by the conversion process whereby amounts payable would be denominated in Scottish Pounds but other scenarios are more complex. For instance, if there is a Scottish debtor and a non-Scottish lender, it is possible that such payments would not be covered by the conversion process as the debt is not payable in Scotland. Also, if English law is the governing law of the underlying contract then it is possible that the English Courts would view Sterling as the relevant currency.

Specific Conversion Issues

Practically, it would be in the interests of the Scottish Government to implement a conversion proposal that maintained business confidence and it is possible that the conversion process could be drafted in such a way as to maintain Sterling payments for commercial agreements during their remaining lifetime. In any event, however, there would be "difficult" cases to be resolved.

For instance:

  • Would payments by Scottish debtors to branches of RUK or foreign banks be viewed as being payable in Scotland? We suspect that if the relevant account is in Scotland, then it could be viewed as being a Scottish payment unless governed by English law. It would be difficult to see a reason why the Scottish Parliament would favour non-Scottish banks over Scottish banks but it is, of course, open to banks to transfer accounts to England although that move may not be popular with some customers.
  • Would public bodies such as local authorities be obliged to pay in Sterling or Scottish Pounds? In some ways, it would be logical for such debt obligations to be denominated in Scottish Pounds but it may be the case that the lender is not resident in Scotland and that the loan agreement is governed by English law (in which case, as mentioned above, there is potential conflict as the English Courts may view the debt obligations as being denominated in Sterling). We think that there is a strong case for saying that pragmatism will prevail on the basis that the public debt market is limited and any adverse consequences for lenders as a result of redenomination could lead to a drying-up of lending to such public bodies although there could still be a mismatch between the public bodies' revenues and their Sterling obligations; however, this is not without precedent and public bodies in other European states have denominated debt obligations in currencies other than their national currency.
  • Would consumer credit or mortgage obligations be redenominated? There could be serious political ramifications if mortgage or other retail payments were denominated in Sterling whilst the debtor was being paid in Scottish Pounds.

Interest Rates

If the Scottish Pound was created and a contract was redenominated, then the Bank of England base rate would not apply and interest rate benchmarks for Sterling would no longer be relevant. A new Scottish central bank would set the base rate for the Scottish Pound.

Asset Value and Financial Covenants

Another consequence of redenomination would be the impact of currency fluctuation upon asset valuation. This would be of importance for company and fund accounts which are stated in Sterling but where the company has substantial assets situated in Scotland (particularly real estate) which are valued in Scottish Pounds. From a banking perspective, even if there was no redenomination of payment obligations, cashflow and asset cover ratios could be impacted where a borrower draws most of its revenue from, or has most of its assets in, Scotland.

Trading consequences

If a Scottish Pound is adopted and there is an adverse fluctuation in the exchange rate, this could impact upon Scottish exporters not only to RUK but to other overseas markets. It is possible that some exporters, especially where their costs are primarily in Scottish Pounds, could benefit from such fluctuations but there would be an additional (although common) burden of managing Sterling hedging costs. Importantly the consequences are not limited to Scottish exporters as businesses in RUK would also be affected. One statistic that highlights this is that whilst the US is RUK's biggest export market, its second biggest market is Scotland and indeed RUK exports to Scotland are believed to be greater than combined exports to Japan, India, Russia, South Africa and China. If the Scottish Pound was adopted, RUK exporters would have to look at whether they hedge such costs or if they continue to seek payments in Sterling but the latter route would not be a viable option for RUK retailers operating in Scotland.

Documentary Changes

It is difficult to advise whether lenders should revise their documents to mitigate any consequences of the adoption of the Scottish Pound, partly because not only are neither the Scottish nor UK Governments advocating such a move but also because, even if it were to happen, the exact terms are very unclear.


There is a lack of clarity on what currency arrangements would be in place if Scotland votes Yes this year. However, we will continue to monitor developments and update you in the lead-up to the Referendum vote.


1. Published by the current Scottish Government on 26th November 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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