Scotland's banknotes 'under threat in Treasury shake-up'

THE future of Scottish bank-notes could be in doubt following proposed new measures to protect customers from failing financial institutions, it was claimed last night.

Clydesdale Bank, one of three banks allowed to print Scottish banknotes, has admitted it would have to consider whether to continue issuing notes north of the Border if the Treasury proposals get the go-ahead.

Alex Salmond, the First Minister, has also voiced fears over the move, claiming the changes posed the "biggest threat" to Scottish notes in more than 160 years. Under current laws, Clydesdale Bank, Royal Bank of Scotland and Bank of Scotland have to lodge funds with the Bank of England to cover the value of their notes, but only for three days of the week – the other four days they can be invested elsewhere, gaining millions of pounds in interest.

However, the new proposals, announced last week by Alistair Darling, the Chancellor, would require funds to be lodged with the Bank of England for the entire week.

A spokesman for Clydesdale Bank said it was "very concerned" about the potential impact of the proposals and was seeking a meeting with the Treasury. He added: "If this were to go ahead, it would force us to consider whether issuing bank-notes would be viable in the future, a position we do not want to be forced into."

A consultation on the measures, aimed at improving financial stability and protecting depositors, has been launched.

Mr Salmond said the changes could cost the Scottish and Northern Irish banks which issue their own notes a total of £100 million a year.

The First Minister said: "This is a dagger at the heart of Scottish bank-notes, which are a proud tradition in Scotland and hugely popular with the Scottish public. It would remove any advantage from issuing notes; therefore I am certain one or more of the banks would stop the notes issue."

He added: "Under the cover of a consultation on financial stability, the Treasury are launching a smash-and-grab at the Scottish note issue.

"What makes this a particularly underhand and shabby attempt is to cloak it in a document about financial stability. The Scottish banks are among the most stable financial institutions in the world."

Mr Salmond pledged that the Scottish Government would respond to the consultation in "the strongest terms", adding: "I think Alistair Darling should be hanging his head in shame that a Scottish Chancellor could allow his Treasury to attempt to undermine the Scottish note issue."

However, a Treasury spokesman said: "The changes outlined in the consultation document will ensure customers of Scottish and Irish banks are protected in the same ways as the rest of the UK's depositors, and will leave all British banks and their customers on a level playing field.

"The consultation proposes changes which will reduce the likelihood of individual banks facing difficulties, reduce the impact if, nevertheless, a bank gets into difficulties, and also provide effective compensation arrangements in which consumers have confidence – changes which as are important to Scottish banking customers as they are to those across the UK."

A spokesman for the Bank of Scotland said: "We understand the authorities are very comfortable with our approach to issuing banknotes."

A spokesman for the Royal Bank of Scotland refused to comment, but confirmed it would take part in the consultation.

TRADITION STRETCHES BACK 300 YEARS

THE Bank of Scotland became the first to issue notes north of the Border when it was founded in 1695.

Scots coinage had been in short supply and of uncertain value compared with the English, Dutch, Flemish or French coins, which were preferred by the majority of Scots.

Early notes were printed in black only. It was not until September 1777 that the Royal Bank of Scotland pioneered the use of colour in banknotes, with a blue rectangle displaying the words "One Guinea" and the King's head shown in red.

The Banknote (Scotland) Act was passed in 1845 and this act regulates today's note issue. Around £2.8 billion of Scottish banknotes are in circulation, split roughly equally between the three issuing banks.