THE eight commercial banks in Scotland and Northern Ireland that retain a right to issue their own banknotes are facing a collective bill of £80 million a year for the privilege, under plans set out yesterday by Gordon Brown.

The Treasury published a consultation document on its plans to “strengthen and modernise” the historic arrangements, dating back at least a century and a half, which have allowed Scotland and Northern Ireland to continue to have their own banknotes.

But a helpful side effect for the Treasury of the planned “modernisation” will be that the Scotsman Mr Brown, apparently undeterred by any feeling of patriotic kinship with the Scottish banks affected, will be able to secure an extra £80 million a year towards paying down the United Kingdom’s national debt.

The additional bill that will be faced by some of the eight banks — Bank of Scotland, Royal Bank of Scotland, Clydesdale Bank, Bank of Ireland, First Trust Bank, National Bank, Northern Bank and Ulster Bank — arises from the way in which they are obliged by law to back the notes they issue with “risk-free” holdings of other assets, as a protection to noteholders.

Originally this backing for Scottish and Northern Irish notes had to be in the form or gold or silver coins. Today it is largely in the form of Bank of England notes. However, because of the way in which the eight banks’ backing for their note issues is only officially checked weekly, at the close of business each Saturday, some of them have been substituting “alternative” assets as backing on weekdays. The benefit of this has been that they have escaped the cost of so-called “seignorage” fees due to the Bank of England when its notes form the backing — fees that add up to £80 million a year and eventually go to the Treasury.

Mr Brown has decided that this gives the eight banks involved an unfair advantage over other institutions, as well as cutting into his revenues.

The Treasury proposes a Bill to oblige all eight of the Scottish and Northern Irish banks to back their own notes with Bank of England notes at all times. That would also hand supervision of the arrangements to the Bank of England, rather than the Revenue Commissioners who now police them.

The eight affected banks said that they would “co-operate” with the Treasury consultation.

Historic right, jealously guarded

SCOTLAND and Northern Ireland are highly unusual in retaining a legal right for their commercial banks to issue currency, a privilege that in most countries is reserved to a national central bank, such as the Bank of England (Gary Duncan writes).

The right of the Bank of Scotland, Royal Bank of Scotland and Clydesdale Bank, and of their counterparts in Northern Ireland, to issue banknotes is an historical legacy — and one that has been jealously guarded, not least since the banks regard it as a valuable marketing tool that is denied to competitors.

Bank of Scotland issued notes as early as 1695, one of the first banks in the world to do so.

Interestingly, no concept of legal tender operates in Scotland, with neither Scottish notes nor those of the Bank of England commanding this status.

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