EDINBURGH, Scotland In a burst of national pride at its annual shareholder meeting in 2007 Royal Bank of Scotland (RBS) (RBS.L) was blasting out the theme tune to Braveheart, a Mel Gibson film about the first Scottish fight for independence from England.
Seven years later, and six since the bank was rescued with a 45 billion-pound ($73 billion) bailout from British taxpayers, its management is now preparing for the consequences should the residents of Scotland decide in September's referendum to end its 307-year union with England.
Several banking industry sources have told Reuters that RBS and its part-nationalized rival Lloyds Banking Group (LLOY.L), which owns Bank of Scotland and is registered in Edinburgh since it took over HBOS in 2009, are already drawing up contingency plans should the vote on September 18 be for independence.
The main concern for these Scottish-registered banks are whether they will still be able to count on the Bank of England as a "lender of last resort" and whether their cost of funding would go up if they were downgraded by credit rating agencies because of Scotland's relatively small economy, according to industry sources.
Both banks declined to comment on the matter.
But Business Secretary Vince Cable said this week that RBS would "inevitably" move its headquarters to London from Edinburgh in the event of independence, citing the greater stability offered by Britain's established financial system and regulation.
RBS and Lloyds, a third-owned by British taxpayers after a 20 billion bailout, have stayed out of the debate, stating that the decision is down to the people of Scotland but, behind the scenes, executives have admitted they are concerned about the consequences.
Scotland's three banks, including National Australia Bank's (NAB.AX) Clydesdale, are nearly 12-and-a-half times the size of the Scottish economy, meaning that if they got into trouble in an independent Scotland, Edinburgh could not afford to bail them out. The UK's banks, in comparison, are 4.3 times the size of its economy.
However, Scottish nationalists say the country could keep the pound in a currency union and along with it the backing of the British economy for its banks by ceding control of monetary policy to the Bank of England and agreeing broad fiscal guidelines.
Theoretically that kind of agreement could enable the banks to stay registered in Edinburgh but Britain's prime minister David Cameron said in a speech on Friday that a currency union with an independent Scotland would be "extremely difficult".
The Scottish National Party (SNP) has declined to comment on the future of Scotland's two biggest banks and its 649-page white paper on Scotland's future, published last November, mentioned RBS just once.
But a spokesman for Scotland's finance secretary John Swinney dismissed Cable's suggestion that RBS would have to leave Edinburgh.
"Vince Cable's ridiculous comments are at odds with the common sense remarks from RBS's chief executive, who last week said if they had to operate in 39 countries around the world rather than 38, that is exactly what they would do," he said.
Formed in the 1700s, shortly after the Acts of Union which brought England and Scotland together, RBS was a small Scottish bank before growing to become one of the world's biggest thanks to a string of takeovers and aggressive expansion. It was brought to its knees in the 2008 financial crisis by a decade-long acquisition spree led by former chief executive, Fred Goodwin, and his strategy of running the bank with levels of capital that proved too low.
The bank made a loss of 24 billion pounds in 2008 and placed 325 billion pounds of its riskiest loans into a protection scheme backed by British taxpayers as part of the bail-out.
Scotland's total economic output last year amounted to 150 billion pounds and it would have cost Scotland about 8,800 pounds per member of its population to bail the bank out during the financial crisis, according to Reuters calculations.
Alex Salmond, Scotland's First Minister, leader of the SNP and once an RBS economist, was an enthusiastic backer of the bank's prolific expansion under Goodwin but has since said he would have "done things differently" with the benefit of hindsight.
A FORK IN THE ROAD
Executives in Scotland's financial services industry, which is credited with generating around 8 billion pounds a year, or about 8 percent of the country's gross domestic product, have been quietly pointing out the difficulties they face from a 'yes' vote for some time.
It is the base for some of the UK's biggest investment management brands, such as Standard Life (SL.L), Aberdeen Asset Management (ADN.L) and Lloyds-owned Scottish Widows Investment Partnership, and employs nearly 100,000 staff, about one in every 25 Scottish workers.
Standard Life mentioned Scottish independence as a risk factor when it issued a 3 billion euro-bond last year as did Dundee-based investment trust Alliance Trust (ATST.L) in a letter to clients at the start of this year.
"We are living in a very strange situation from a risk management point of view. It's a fork in the road moment. Independence will have pretty large consequences if it comes to pass," said Owen Kelly, the chief executive of Scottish Finance Enterprise (SFE) - a trade body.
Kelly said that in the event of a 'yes' vote Scotland would need its own financial regulator, placing an additional bureacratic burden on financial service firms who would still need to be regulated in the markets where their customers are based.
"If Scotland has its own currency it would have to set up its own central bank as well as a prudential regulator, conduct regulator and financial services compensation scheme," he said.
As polling day gets closer, financial services executives are discussing possible contingency plans including relocation south of the border, either to London or destinations in northern England such as Newcastle and Manchester, and many worry about the possibility of higher taxes in an independent Scotland.
"The things we end up thinking about are: 'will customers end up being disadvantaged from a tax viewpoint? From a compensation scheme (viewpoint)? Will regulation bring in a cost burden?' These are questions that can only be speculated on," the chief executive of one Scottish financial services group told Reuters recently.
But a reluctance by leading banks and insurers to enter the public debate on independence has dismayed Edinburgh-based lawmakers campaigning against a 'yes' vote and seeking to protect the Scottish capital's status as a financial services centre.
"It's quite frustrating as politicians because we do have meetings with big business and privately they are willing to say 'this would be a disaster, you must do all that you can to make sure this doesn't happen'," said Mike Crockart, Liberal Democrat MP for Edinburgh West.
RBS employs 12,000 staff north of the border and is headquartered in Gogarburn, to the west of Edinburgh, where around 3,200 staff are located in a complex featuring its own shops and restaurants that became an enduring symbol of the bank's oversized ambitions.
Although its senior managers have been based in London since the bailout, Chief Executive Ross McEwan, a New Zealander, has spoken of his Scottish roots and affinity with the country.
"Royal Bank of Scotland is part of the fabric of Scottish business and the Scottish economy," he told local lawmakers in a speech last year.
(Editing by Greg Mahlich)
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