10.1 Bank Regulation and Resolution
A Scottish regulatory authority — operating under or alongside the Scottish Central Bank — would take responsibility for the prudential regulation and supervision of banks and other financial institutions operating in Scotland.
Who would regulate banks operating in Scotland, and how would failing banks be handled?
A Scottish regulatory authority — operating under or alongside the Scottish Central Bank — would take responsibility for the prudential regulation and supervision of banks and other financial institutions operating in Scotland. A clear bank resolution regime would be established so that failing institutions can be dealt with in an orderly way that protects depositors, maintains critical services and minimises cost to the taxpayer. Close cooperation and information-sharing arrangements with UK regulators and relevant international bodies would be maintained, especially for groups that operate across the border. High capital and liquidity standards would be required from day one to reduce the likelihood of failure.
Under sterlingisation, Scotland would not control monetary policy and would lack automatic access to the Bank of England as lender of last resort. In that setting, the quality of bank regulation and the credibility of the resolution framework become central to financial stability. A newly independent state that left prudential oversight entirely to another jurisdiction, or that had no clear way to deal with a failing bank, would expose depositors and the wider economy to unnecessary risk.
The main design choice is a domestic prudential authority and statutory resolution regime from the outset, paired with formal cross-border cooperation and elevated capital and liquidity standards. The main constraints are the thinner monetary safety net under sterlingisation, the prevalence of UK-wide and international banking groups, the need for UK regulatory cooperation, and the time required to build full supervisory and resolution capacity. Prevention and orderly resolution are the primary defences; the framework is built to provide both.
Under sterlingisation, Scotland does not control monetary policy and lacks automatic access to the Bank of England as lender of last resort. In that setting, the quality of bank regulation and the credibility of the resolution framework become central to financial stability. A newly independent state that left prudential oversight entirely to another jurisdiction, or that had no clear way to deal with a failing bank, would expose depositors and the wider economy to unnecessary risk. Domestic regulation is not a symbolic attribute of statehood; it is the operational counterpart of the constraints accepted under sterlingisation. When lender-of-last-resort capacity is limited, the first line of defence is stronger ex-ante supervision and a credible plan for failure.
This section sets out the position. A Scottish regulatory authority — operating under or alongside the Scottish Central Bank — would take responsibility for the prudential regulation and supervision of banks and other financial institutions operating in Scotland. A clear statutory resolution regime would give the authorities the powers and tools to deal with failure in an orderly way that protects depositors, maintains critical services and minimises cost to the taxpayer. Close cooperation and information-sharing arrangements with UK regulators and relevant international bodies would manage cross-border groups. High capital and liquidity standards would apply from day one. Transitional arrangements would ensure continuous supervisory coverage while Scotland builds capacity. Prevention and orderly resolution are the primary defences. The pieces are designed to work together with the deposit-protection scheme, the Central Bank’s limited liquidity support and the fiscal framework: strong regulation lowers the odds of failure; resolution handles failure when it occurs; deposit protection protects ordinary depositors; the Central Bank and fiscal framework provide the limited backstops that sterlingisation allows.
Current Position and Legal/Institutional Baseline
Prudential regulation and supervision of banks operating in Scotland currently sit within the UK framework, centred on the Prudential Regulation Authority and related bodies. Resolution planning and powers operate under the UK’s statutory resolution regime. Many banks active in Scotland are part of UK-wide or international groups; supervision and resolution of those groups are organised accordingly. Scotland has no separate prudential authority with full responsibility for banks operating in its territory, no separate statutory resolution regime, and no automatic claim on Bank of England lender-of-last-resort facilities once independence and sterlingisation take effect.
Independence under sterlingisation would change the baseline. Without automatic access to the Bank of England as lender of last resort, the quality of domestic prudential standards and the credibility of the resolution framework become first-order stability issues. The institutional baseline includes experienced supervisors and resolution practitioners within the UK system, a mature body of international standards, and a banking sector with significant cross-border group structures. The task is to establish a Scottish prudential authority and a statutory resolution regime from the outset, put formal cooperation arrangements in place for cross-border groups, apply high capital and liquidity standards from day one, and ensure continuous supervisory coverage through transitional arrangements while building full capacity. International practice among small advanced economies that host cross-border banking groups confirms that domestic authorities with high standards, clear resolution powers and formal cooperation arrangements are the realistic model; leaving supervision wholly to external authorities or operating without a resolution regime is not.
Mechanism and Delivery
The Scottish authority would be responsible for licensing and authorisation of banks and relevant financial institutions operating in Scotland; setting and enforcing capital, liquidity and risk-management standards; ongoing supervision, including stress-testing and early intervention when risks build; conduct of business rules insofar as they fall within the prudential and consumer-protection perimeter set by Scottish law; and coordination with resolution authorities so that supervision and resolution form a coherent pipeline. Scottish legislation would set the regulatory perimeter and the detailed rulebook, drawing on international standards and the practical need to remain compatible with the UK and other major financial systems, given the volume of cross-border activity. Compatibility is a design goal; subordination is not. The authority would form part of, or work in close formal partnership with, the Scottish Central Bank, whose financial-stability mandate is already defined in the monetary framework.
Because the monetary safety net is thinner under sterlingisation, preventive standards must be stronger. High minimum capital and liquidity requirements would apply from day one. Supervisory expectations would be conservative, particularly in the early years of independence while institutions and market confidence are still being established. The aim is to reduce the probability of failure and to ensure that, if failure occurs, the institution is more likely to be resolvable without systemic damage. Elevated standards have a cost: they constrain balance-sheet growth and can raise the cost of credit relative to a looser regime. That trade-off is accepted. Under sterlingisation, the cost of weak standards is higher than the cost of conservative ones.
A clear statutory resolution regime would give the authorities the powers and the tools to deal with failure in an orderly way. Core objectives would be protection of depositors — especially those covered by the deposit protection scheme; maintenance of critical services — so that payment systems and essential banking functions continue; minimisation of cost to the taxpayer — by using the institution’s own resources, creditor hierarchy and resolution tools before public money; and preservation of financial stability — by containing contagion and maintaining confidence. Resolution tools would include the standard international set: transfer of business, bridge institutions, bail-in of eligible liabilities and orderly wind-down, subject to the detailed design adopted in Scottish law. The regime would align with international norms so cross-border cooperation remains workable. Alignment improves cooperation; it does not replace the need for a Scottish legal basis and Scottish decision-makers.
Many banks operating in Scotland are part of groups that also operate in the rest of the UK or internationally. Purely unilateral supervision and resolution would be incomplete for those groups. Formal cooperation and information-sharing arrangements with UK regulators and with relevant international bodies would therefore be put in place to cover supervisory colleges and joint risk assessments for cross-border groups; coordination in recovery and resolution planning; exchange of information under clear legal gateways; and practical protocols for intervention when a group is in stress. These arrangements would respect the independence of the Scottish regime while recognising economic and corporate reality. They are a necessary counterpart to the cross-border nature of much of the banking system.
On Independence Day there must be no gap in the supervision of banks operating in Scotland. Transitional arrangements — including continued cooperation with UK authorities under agreed terms while Scottish capacity is built out — would ensure continuous coverage. The permanent Scottish authority and resolution regime would reach full operational strength on a published timetable. Staffing, data access, stress-testing capability and resolution playbooks are capacity items that must be sequenced, not assumed.
Continuity Design
Continuity of supervisory coverage is a design requirement. Transitional arrangements, dual-running or delegated supervision under agreed terms, and pre-agreed information gateways ensure no gap on Independence Day. Continuity of the resolution framework is secured by having statutory powers and playbooks in place, even if full intensity of capacity is still being built. Continuity of depositor protection is secured by aligning the resolution regime with the deposit-protection scheme already set out in the wider framework. Continuity of contract for sterling deposits and loans is supported by the same continuity-of-contract principle applied elsewhere: the legal relationship between customer and bank persists; regulation and resolution provide the ordered framework within which that relationship is supervised and, if necessary, resolved.
Published standards, visible cooperation protocols, and early communication of the regulatory and resolution design support continuity of market confidence. The design therefore treats continuous supervision and a usable resolution regime as non-negotiable from day one. It treats the build-out of full capacity as a sequenced programme rather than as a precondition that would leave a gap.
Constraints and Trade-offs
Legal constraints
Scottish legislation must establish the prudential authority, define its perimeter and powers, set capital and liquidity standards, and create the statutory resolution regime with clear objectives and tools. Cooperation agreements with UK and international regulators require legal gateways for information exchange and protocols for joint work. Transitional arrangements must have legal force to ensure continuous supervisory coverage. Scottish decision-makers must take resolution decisions under Scottish law; alignment with international norms supports cooperation but does not substitute for a domestic legal basis. Legal design must avoid gaps in supervision and in resolution powers at the point of independence.
Fiscal constraints
Regulatory and resolution authorities have operating costs funded through industry levies and, where necessary, the public budget. The larger fiscal exposure is the residual risk of bank failure: the deposit-protection backstop and any residual resolution costs that fall to the state. High prudential standards and a credible resolution regime exist to minimise that exposure. The resolution hierarchy and the deposit-protection design order who pays for failure; taxpayer exposure is the last resort, not the first. Under the opening fiscal position and the fiscal rules, residual public backstops are constrained; prevention and private-sector loss absorption are the primary defences. Elevated capital and liquidity standards constrain leverage and can raise the cost of credit; that trade-off is accepted under sterlingisation.
Operational constraints
Building full intensity of supervision and resolution capability takes time and specialist staff. Data access, stress-testing systems and resolution playbooks must be sequenced. Cross-border groups require information flows and coordination that depend on cooperation arrangements. Transitional coverage bridges the gap but is not a permanent substitute for domestic capacity. Operational sequencing that prioritises continuous coverage, early adoption of high capital and liquidity floors, and published build-out milestones reduces the risk of a supervisory or resolution gap when stress occurs. Under-estimating capacity requirements would leave the regime paper-thin when it is needed.
Political constraints
Market and public confidence in the regulatory and resolution framework is high-stakes under sterlingisation. Any perception of a supervisory gap or of an unusable resolution regime would raise risk premia and could trigger destabilising behaviour. The framework treats continuous coverage and high preventive standards as non-negotiable precisely because the cost of failure is higher when the monetary safety net is thinner. Cross-border cooperation requires political investment in formal arrangements with UK regulators. Domestic political management must present elevated standards as the necessary counterpart of sterlingisation, not as optional toughness. It must avoid any suggestion that resolution or deposit protection are automatic claims on the taxpayer ahead of private loss absorption.
Time constraints
Transitional supervisory arrangements and legal designation of the Scottish authority’s powers must be ready for Independence Day. High capital and liquidity floors should apply from day one. The full operational strength of supervision and resolution—staffing, data, stress-testing, playbooks—would be brought on over a published timetable. Cooperation agreements and information gateways should be advanced in the settlement or in early implementing arrangements. Delays in transitional cover create a gap; delays in capacity building extend reliance on dual or delegated arrangements. Early publication of standards and milestones supports market confidence.
Consistency with the Wider Framework
Bank regulation and resolution implement the financial-stability side of the monetary framework: sterlingisation without automatic lender-of-last-resort support requires stronger prevention and clearer resolution. The section aligns with the deposit-protection scheme, the Scottish Central Bank’s mandate, continuity of contract for sterling deposits and loans, and the fiscal rules that constrain any residual public backstop. The pieces are designed to work together: strong regulation lowers the odds of failure; resolution handles failure when it occurs; deposit protection protects ordinary depositors; the Central Bank and fiscal framework provide the limited backstops that sterlingisation allows.
It is consistent with the wider continuity approach: no supervisory gap on Independence Day, ordered treatment of failure, and protection of depositors as the priority. There is no tension with the rUK market priority or with free movement of people; cross-border banking groups are the financial counterpart of those integrated relationships and are managed by cooperation rather than by denial. It aligns with the partnership model of UK relations through formal regulatory and resolution cooperation. In every case, the design subordinates institutional build-out to continuous coverage and to the preventive logic required by a thinner monetary safety net.
Hardest Critiques and Direct Responses
Feasibility
Establishing a prudential authority and resolution regime is feasible. International standards and the experience of other small advanced economies provide templates. Building full intensity of supervision and resolution capability takes time and specialist staff; transitional cooperation bridges the gap. High capital and liquidity standards are implementable through rules and supervisory practice. Feasibility falls only if transitional coverage is neglected, if capacity building is left unfunded or unstaffed, or if cooperation arrangements for cross-border groups are left incomplete so that group-level risk remains opaque.
Cost and fiscal burden
Regulatory and resolution authorities have operating costs funded through industry levies and, where necessary, the public budget. The larger fiscal exposure is residual failure risk. High prudential standards and a credible resolution regime minimise that exposure by design. Taxpayer exposure is the last resort in the resolution hierarchy and the deposit-protection design. Elevated standards constrain leverage and can raise the cost of credit; that trade-off is accepted under sterlingisation because the cost of weak standards is higher when the monetary safety net is thinner. The framework does not claim that regulation and resolution are costless; it claims that prevention and private loss absorption are the primary defences, and that fiscal rules constrain residual public backstops.
Dependence on agreement
Dependence on the United Kingdom is high for effective supervision and resolution of cross-border groups, and for seamless transitional coverage. It is moderate for purely Scottish-focused institutions once the domestic regime is operational. If cooperation is limited, Scotland can still regulate entities within its perimeter and apply its resolution law. Still, group-level risk assessment and coordinated resolution become harder, and the probability of disorderly outcomes rises. Contingency planning prioritises domestic standards, resolution powers and deposit protection while extending transitional and information arrangements as far as agreement allows.
Transition risk
A supervisory gap on day one, incomplete resolution powers or playbooks when a stress event occurs early, loss of information flows on group entities, and market doubt about who stands behind supervision are material risks. Mitigation is dual-running or delegated supervisory arrangements, pre-agreed information gateways, published build-out milestones and early adoption of high capital and liquidity floors. Residual capacity limits in the early years cannot be eliminated; they are managed by continuous coverage arrangements and by conservative preventive standards that reduce the probability of early stress.
Alternatives (status quo and previous proposals)
Leaving prudential regulation entirely to UK authorities after independence would leave Scotland without domestic tools matched to sterlingisation constraints and is rejected. A light-touch regime to attract banking activity would raise failure risk when the safety net is already thinner and is rejected. Copying a large-jurisdiction rulebook without capacity to enforce it would create a paper regime and is rejected. A domestic authority with high standards, a full resolution toolkit and formal cross-border cooperation is the coherent design. The framework treats elevated preventive standards as the necessary counterpart of sterlingisation, not as optional policy.
Political and public credibility
The claim most likely to be called unrealistic is that Scotland can supervise and resolve banks effectively without Bank of England backstop, or that cross-border groups will submit smoothly to a new Scottish regime. The precise answer is that effectiveness rests on high preventive standards, a statutory resolution regime, deposit protection and cooperation arrangements — not on replicating the Bank of England’s balance sheet; and that group cooperation is secured by legal gateways and mutual interest in orderly outcomes, not by assumption. Credibility comes from continuous supervisory coverage, published standards, tested resolution powers, and visible cooperation protocols. Readers who prefer external-only supervision, light-touch standards, or an assumption of automatic official liquidity support are invited to evaluate the framework on the constraints of sterlingisation and on the design of prevention and resolution as the primary defences.
Position Summarised
A Scottish regulatory authority, under or alongside the Scottish Central Bank, would prudentially regulate and supervise banks and other financial institutions operating in Scotland. A clear resolution regime would allow failing banks to be dealt with in an orderly way that protects depositors, maintains critical services and minimises taxpayer cost. Close cooperation with UK and international regulators would manage cross-border groups. High capital and liquidity standards would apply from day one.
Under sterlingisation, prevention and orderly resolution are the primary defences; the regulatory and resolution framework is built to provide both. Transitional arrangements would ensure continuous supervisory coverage while Scottish capacity is completed. Elevated standards constrain leverage and can raise the cost of credit; that trade-off is accepted because weak standards cost more when the monetary safety net is thinner. Residual public backstops sit inside the fiscal rules and the deposit-protection design; taxpayer exposure is the last resort.
Conclusion
Who would regulate banks operating in Scotland and how would failing banks be handled? A Scottish prudential authority, linked to the Scottish Central Bank, would supervise banks under high capital and liquidity standards from day one. A statutory resolution regime would provide the tools to protect depositors, maintain critical services and limit taxpayer cost if failure occurs. Cross-border groups would be managed through formal cooperation with UK and international regulators.
The design meets the continuity test by ensuring no supervisory gap on Independence Day and by aligning resolution with deposit protection and the limited central-bank backstop. The claim limit is clear: sterlingisation constrains liquidity support; cross-border effectiveness depends on cooperation; and high standards come at the cost of constrained leverage. The next sections turn to deposit protection in more detail, the treatment of major financial institutions, and consumer financial protection.
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This analysis forms part of People’s Future Scotland: The Independence Debate, a non-party framework examining the practical design of independence. Each section is written to withstand professional scrutiny and to prioritise mechanism, constraint and continuity over aspiration.
