George Kerevan continues his examination of the modern Scottish economy by examining the foreign control of Scotland’s banks, and how this relates to sterlingisation and the Scottish Government’s 10 year strategy.
Traditionally, the dominant and most dynamic element of Scottish capitalism was in banking. The peculiarities of the 1707 Union settlement left Scottish banking legally protected from English competition. A very dynamic local branch banking system emerged to centralise limited domestic savings and channel it into working capital. This financed the transformation of a Scottish rural subsistence economy into an early industrial powerhouse. From this emerged a financial bourgeoisie of some local economic and political importance.
However, the period since the millennium – and in particular since the 2008 global banking crisis – has seen an existential change in the Scottish financial sector. For the first time in three centuries, locally owned banking has disappeared to be replaced by foreign domination of domestic lending. Compared with other small and medium-sized nations in western Europe, the Scottish economy is now dominated almost completely by foreign-owned financial groups.
Most of this shift took place under SNP administrations at Holyrood. Paradoxically, successive SNP governments have actively encouraged foreign penetration of the Scottish financial system. The latest Scottish Government marketing brochure aimed at attracting foreign banks to Scotland proudly proclaims the advantages of “property and salary costs up to 40 percent less than London”. In other words, the Sturgeon government is selling Scotland as a low wage, low cost venue for big international finance groups. The Scottish Government’s 10 year economic plan, likewise promotes this vision. As a result, an independent Scotland would find itself uniquely beholden to external economic control of lending and investment decisions.
It comes as no surprise, therefore, that there is a direct link between the new influence of foreign banking interests in Scotland and the reluctance of the SNP leadership to support the creation of a separate Scottish currency after independence. Indeed, this writer was told privately by Andrew Wilson, author of the SNP’s infamous Growth Commission, that his decision to change tack and recommend the retention of sterling followed close consultations with the banking sector.
Foreign Control of Banking and the Scottish Economy
We should note that the Scottish banking and financial sector is extremely large compared to the size of Scotland’s economy overall, contributing circa 9.4 percent of output. The equivalent for the UK is around 8.6 percent. Finance provides 3.3 percent of UK jobs but 6 percent in Scotland. The strategic and political weight of this sector in Scotland is therefore significant.
We are concerned in this article with retail banking rather than insurance or asset management. The latter are also important in Scotland, but we will discuss their significance in a future article. Retail banking covers domestic deposits, the payments system, mortgage lending, consumer credit, and business finance (essentially working funds rather than investment capital). Retail banks regulate the flow of credit and spending by consumers and by most small and medium-sized companies in Scotland. If the retail banking system withdraws or limits credit, the economy slows.
Prima facie, a banking system almost wholly owned and directed by foreign capital is unlikely to be sensitive to Scottish economic policy needs. State injunctions to, say, provide more credit to small businesses are unlikely to be successful if foreign banks think it is not in their commercial interests, or is too risky. Attempts by a socialist-leaning government in Scotland to raise commercial loans for state industries could well run into sabotage by banks controlled externally or under pressure from London or Washington.
This potential problem is exacerbated by the fact that the Scottish retail banking market is essentially a monopoly of two London-controlled banks – Nat West (which operates in Scotland as RBS) and Lloyds (under the name of Bank of Scotland). Previously RBS and BoS were Scottish owned and controlled. That changed with the global banking crisis of 2008. There are other retail banks operating north of the border, including TSB (Spanish owned) and Virgin/Clydesdale (registered on the London and Australian stock markets). But these latter control a modest share of the Scottish domestic banking market.
It is true that the UK Treasury retains a majority stake in NatWest/RBS. However, the remaining state participation is being rundown throughout 2022. As of February 2022, non-public, institutional holdings of NatWest Group shares were very diffuse. However, as one might expect, the usual suspects of US finance capital all hold a stake in NatWest including Goldman Sachs, Blackrock, Bank of New York/Mellon, Citigroup, and Morgan Stanley. The largest single private shareholder is Parametric Portfolio Associates, a US investment house which manages a portfolio of circa $400 billion. Parametric is part of Morgan Stanley. Post Scottish independence, RBS would be a minor subsidiary of a London-based bank, whose major commercial control resides on Wall Street.
Scottish Banking Self-Immolates
The collapse of Scottish bank capital represents the biggest defeat – economically, socially and politically – for the Scottish bourgeoisie and Scottish capitalism in at least the past hundred years. The SNP government has flirted with re-establishing some domestic financial structures (eg the Scottish National Investment Bank) but its main strategy has been to facilitate the entry of foreign financial concerns into Scotland. This stunning capitulation to foreign capital has hardly raised a ripple of concern inside the national movement.
The catastrophic collapse of domestic Scottish banking had a variety of causes, but we can identify three key ones:
First, hubris on the part of a tiny establishment elite – insular, conservative and arrogant – who found themselves out of their depth in the new neoliberal era which saw a major reconstruction of global finance dominate by US investment banks. At one point in 2008, RBS was the biggest bank in the world by assets. But RBS had expanded too rapidly and beyond its own competence, for example with its move into America through the purchase of Citizens Bank; and with the fatal acquisition of ABN Ambro which ultimately brought the bank down and led to its nationalisation in 2008.
Second, this hubris was compounded by the attempt by RBS and Bank of Scotland to move into investment banking and proprietary trading and away from the narrow commercial lending business they had thrived on traditionally. This was done under shareholder pressure to boost profits and share values – retail banking is safer and so less profitable. This move led to risk-taking on an epic and ultimately insane level. BoS, for instance, began to take investment stakes in property deals it was funding for commercial clients. But the commercial property market is endemically cyclical – meaning that eventually these bank investments would lose value.
All this was hidden by the ease with which both RBS and BoS were able themselves to borrow staggeringly huge sums on the inter-bank lending markets, to fund their acquisitions and spending. But when inter-bank lending suddenly froze in 2008, as a result of the collapse of the US housing mortgage market, both RBS and HBOS (as it had become) found themselves effectively insolvent. As a result, they had to be taken over by the UK government.
(Incidentally, this takeover was engineered by Scottish PM Gordon Brown and his Chancellor, Alastair Darling, who was an Edinburgh MP. Clearly Brown and Darling – whatever else they were up to – acted to bail out the Scottish financial bourgeoisie faster than might have been the case with Conservative ministers.)
Third and finally, the Scottish financial bourgeoisie were destroyed because of their deep ambiguity regarding creating their own state to protect its own interests. True, from the 1970s onwards, sections of Scottish finance capital flirted with the notion of Scottish independence – but they could never make up their minds whether to make this a political reality. This was best reflected inside RBS.
A key figure in this history was the RBS chief economist Grant Baird, an engaging maverick and excellent drinking companion (as this writer can attest). Baird was a mentor to both Alex Salmond and subsequently Andrew Wilson, himself a sometime RBS bigwig. Baird (1943-2020) was not only a major intellectual influence inside RBS, he was also pivotal to hiring Salmond in 1980 as the bank’s expert on the oil industry. This brought Salmond to media attention, but it effectively fused SNP and RBS in an energy and economic policy symbiosis.
Another key link between the SNP and RBS was George Mathewson, a high-tech engineer turned boss of the state development agency Scottish Enterprise during the Thatcher years. But Mathewson was also a closet Scottish nationalist, like a lot of former expats and technology engineers of the time. His background made him open to the idea of a separate Scottish state driven by free market liberalism, in opposition to the conservative UK.
In 1987, Mathewson joined RBS and masterminded its strategy of growth through global acquisitions (paid for by debt). By 1992 Mathewson was RBS chief executive, in which role he orchestrated the takeover of the much larger City bank NatWest. Later, as RBS chair, Mathewson hired the charmless Fred Goodwin to run the bank. It was Mathewson who persuaded Goodwin to buy Dutch bank ABM Ambro, the deal that destroyed RBS. Goodwin got the blame while Mathewson escaped scrutiny.
Scottish Finance Capital and Independence
Despite these close links between RBS and the SNP, Scottish finance capital either stayed publicly neutral during the 2014 independence referendum or was openly hostile. Witness closet nationalist banker and sometime RBS board member Angus Grossart, who describes himself privately as “the last Jacobite”. Together with his business partner Iain Noble (a prominent SNP member and doner), Grossart created a local merchant bank which grew profitable advising North Sea oil companies. From that platform he became arguably Scotland’s most influential financier. Yet in the 2014 referendum, Grossart remained studiously neutral in public lest it interfere with business. That did not stop him subsequently bankrolling Charlotte Street Partners, a PR and lobbying firm run by Andrew Wilson.
This political ambiguity towards Scottish statehood needs analysis. The Scottish bourgeoisie enjoyed privileges under the Union – privileges guaranteed and protected by that Union. The very existence of a separate Scottish banking capital was written into the Union settlement. But the continued existence of a separate Scottish bourgeoisie (buttressed by a protected legal and educational structure) also maintained frictions between it and the rest of the Anglo-English ruling establishment. There were occasions when this friction became overt. For instance, during the Depression of the 1930s when the Bank of England was openly supportive of insolvent English companies but starved Scottish competitor firms of financial support. At that time, sections of the Scottish ruling class and the Glasgow Tory party machine did flirt with nationalism, abetted by Lord Beaverbrook’s Scottish Daily Express. But the mood passed with the rise of the threat from Nazism.
Deindustrialisation in the 1970s destroyed most of the old industrial bourgeoisie in Scotland – a social layer that had strong links to the Union with its imperial and military markets. After the discovery of North Sea oil and gas, there were elements of the remaining Scottish bourgeois class (especially those associated with finance, like Angus Grossart) who saw the end of the Union and the creation of their own national state as a way to secure control – political and personal – over the new energy bonanza. At the same time, they were repelled by the decline of the post-war British state and its inability to face down the trades unions or end inflation.
However, the pro-independence wing of the Scottish bourgeoisie remained both small and indecisive. It was characterised by the same innate conservatism that also infuses the Scottish petty bourgeois professional classes and even the trades union and Labour Party bureaucracy. This is a stubborn conservatism born of the Union settlement, which froze social hierarchies in stone. It also reflects the failure of either revolutionary currents or reformist social democracy to make any dent in this sclerotic edifice. It was the innate, traditional conservatism of the Scottish bankers that led them to dither and then oppose any radical break with the Union in 2014. That left the door open to the capture of Scottish retail banking by City and US interests.
A nominally independent Scotland – whose financial structures, domestic savings, interest rates and investment decisions are controlled from abroad – is only independent in name. It would remain a neo-colony of Wall Street and the City of London. Thus the SNP has contrived to create a new, hidden financial establishment – albeit a foreign one – that will continue to hold Scotland’s political apron strings. For the meantime, it also underpins Finance Minister Kate Forbes’ 10 year National Economic Strategy – which is designed with a foreign investment model in mind.
The obvious solution is either to nationalise the local retail banking system or create a rival by setting up a mutual savings bank system as found in several European countries. This has already been proposed by Common Weal and the New Economics Foundation. It remains on the agenda.