SCOTLAND: Heightened uncertainty has limited short-term impact on UK banks

On 18 September, Scottish voters will be able to vote in a referendum on independence from the UK (Aa1 stable), but the evolution of the polling has led to heightened market volatility, Moody’s Investor Service said. Uncertainty over the outcome has also prompted intensified interest from the customers, depositors and creditors of banks exposed to a possible independence scenario about the potential implications for them.
Moody's believes that any potential short-term risks that could therefore arise for banks are mitigated by the actions that the banks, as well as the Bank of England, have taken. These risks are particularly relevant for banks registered in Scotland that have a reasonable proportion of funding, assets or operational exposure to this region, namely: the Royal Bank of Scotland (Baa1 negative, D+ negative/ba1), Lloyds Bank (A1 negative, C- stable/baa1) and Clydesdale Bank (Baa2 stable, D+ stable/ba1). The measures taken to counteract the short-term risks are:
• Banks have put in place contingency plans, which Moody’s believes to be extensive. In the rating agency’s view, these would include a significant increase of their on and off balance-sheet liquidity, a reduction in their short-term funding requirements and a considerable increase in cash cushions available to meet any increased withdrawal demands. Moody's also expects these banks to have temporarily boosted their operational capacity to face higher transaction volumes.
• Aside from contingency plans prepared by each of these banks, the Bank of England has stated that it has taken contingency measures and reiterated its ability and willingness to be a fully effective lender of last resort to all UK banks over the foreseeable future, irrespective of their domicile in England or Scotland.
As stated in May, at this stage, Moody's believes that a majority vote for Scottish independence would have a more limited short and longer-term impact on the other large UK banks that have smaller operations in the region. For example, HSBC (Aa3 negative, C stable/a3), Barclays (A2 negative, C- stable/baa2) and Nationwide Building Society (A2 negative, C stable/a3) all have significantly smaller operations in Scotland.