The governor of the Bank of England has warned that an independent Scotland would have to “carefully consider” relations with the rest of UK in order to “sustain a banking system whose collective balance sheet is substantially larger than its GDP”.

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In a “technocratic assessment” to Scottish business leaders Mark Carney was careful to be diplomatic, making no judgement on whether Scotland would be better or worse off if independent. But the speech pointedly contained a table comparing the size of Scotland’s banking sector unfavourably with Ireland, Iceland, Cyprus,  and Spain.

In all these places, a bankrupt banking system too big for the host country led to the need for a national bailout. These countries had a banking system of between three and seven times the size of their GDP. Scotland’s banking system is 12 times the size of its GDP.

Mr Carney pointed out the “dangers” and “difficulties” in the eurozone of not having arrangements to share banking risks.

The governor said there were “potentially large costs” to giving up an independent monetary policy, though the SNP argue that this will not happen. His main focus was to point that the Scottish government’s preferred option: a sterling area between two sovereign states, would require it to learn the lessons of the Eurozone crisis in advance.

He suggests that an independent Scotland would have to immediately reshare fiscal risks, and cede sovereignty back to Westminster. So what sort of independence would it be? The same independence Belgium has for Holland? Or the same dependence Spain has on Germany?

The challenges of making a sterling area function are surmountable. The question arising from the governor’s speech is why the rest of the UK would acquiesce in a very favourable negotiation in favour of Scotland. More to come.

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