There are nearly £3 billion-worth of Scottish banknotes in circulation (and half as much in Northern Irish banknotes). For odd historical reasons, the issuing banks have to back their note issue with a deposit of 95% the value of notes outstanding, but only at the weekends! Seriously. So during the week they can lend the money out and earn seigniorage. The Scottish banks currently earn good money this way so the change
would lose Scottish banks some of the £65m they now earn in interest and “seigniorage” (income from selling their notes to other banks).[From Scottish banknotes | Under threat | Economist.com]
The Treasury, presumably still wondering what to do about Northern Rock, wants to spoil the party and force Scottish and Northern Irish note-issuing banks to keep the deposit backing the note issue at the Bank of England all the time, just in case (eg) RBS goes bankrupt but not on Saturday or Sunday. In the England and Wales there is a different system: the Bank of England, the most profitable nationalised industry in British history, backs its notes not with deposits of euros or gold bars but with fixed-interest instruments bought from the British government and remits the interest earned to the Treasury.
I don’t imagine that I might agree with Alex Salmond, leader of the Scottish National Party, on much beyond the issue of independence for Scotland, but I do agree with him on his defence of the Scottish note issue: he said that there’s no need for the Treasury to take this action because Scottish banks are among the most stable in the world. The SNP’s defence is robust…
The changes suggested will cost Scotland’s financial sector £80 million a year. This is daylight robbery by the UK Treasury and will provide Scotland’s financial sector no advantage whatsoever.[From MP Warns Treasury – ‘Hands Off Scottish Bank Notes’ — SNP – Scottish National Party]
As it happens, I have a particular interest in the history of Scottish banks because of the lessons of that period of “free banking”. This does not, as you might think, mean that Scottish banks were once operated as charities but that they were free to compete in note issue. And the result, as most historians would confirm, was a period of incredible innovation when the more tightly regulated London and country banks failed more often than the less tightly regulated Scottish banks did (I know this is an appalling precis of a complicated and interesting period, but I’m trying to make a bigger point).