Page last updated at 13:03 GMT, Monday, 13 October 2008 14:03 UK

Damage to Scotland's canny ways?

By Douglas Fraser
Business and economy editor
BBC Scotland

RBS branch
The Royal Bank of Scotland has received 20bn from the government

Seismic shifts in Britain's finances have focused attention on the two biggest giants of Scottish banking, which have grown into major international players in recent years, but have been saved from collapse this morning in a massive government bail-out.

Both chief executives and both chairmen are losing their jobs. But that will not be the limit of the employment implications for the Scottish economy.

There is also the question of how much damage these high-profile rescue packages are doing to Scotland's centuries-old reputation for canny money management.

The most pressing question, of course, is about the future of the world economy, having had the equivalent of a major heart attack, and now requiring emergency resuscitation by governments around the world. The Scottish dimension of this is a small part of a global picture.

But what does this mean for the future of the Edinburgh financial sector, the effects for Scotland, and what about the public finances?

Among the questions that will remain unclear for some time is how much clout newly appointed directors will have

HBOS remains on track for a takeover by Lloyds TSB, the deal having been hastily re-arranged over the weekend in light of the lowered share price of HBOS over recent weeks, and the effect of the UK Government's capital injection. The appeal of this deal is that it will create a banking giant, that would not otherwise have been allowed by the competition regulators.

Lloyds TSB says the Scottish headquarters will remain on the Mound in Edinburgh, there will still be a Scottish annual general meeting and Bank of Scotland bank notes will still be printed. That does not mean, however, that the big corporate decisions will be made in Edinburgh.

The bail-out for the Royal Bank of Scotland, taking 20bn of capital from the government, is likely to be relatively good news for its Edinburgh headquarters. The company now has a chance to stabilise under the government's wing, with key operations still at the Gogarburn HQ, whereas it could otherwise have come under pressure for a hasty sale to another bank.

Sir Fred Goodwin
Sir Fred Goodwin was RBS chief executive for nine years

With Sir Fred Goodwin stepping down as chief executive of RBS, former Abbey finance chief Stephen Hester is moving in. He set out this morning to focus on cutting risk, building its depositor base and its strong brands, with better customer focus, and he wants it to remain strongly international.

However, he stressed there are "no sacred cows".

Among the questions that will remain unclear for some time is how much clout newly appointed directors will have, and how much they will reflect the demands of the new public owners.

What happens, for instance, if Britain is heading into recession, and public anger grows at the difficulty people face from mortgage and credit card defaulting, in getting new mortgages, while the banks shed staff.

Significant pain

Public ownership of major industries in the 1960s and 1970s has a track record of extensive intervention for political reasons. An economic downturn will surely increase pressure to intervene. Will this government withstand the pressure and temptation to use its clout to steer these banks' commercial operations?

And what does this mean for the taxpayer? This new public investment drives a coach and horses through the Government's fiscal rules.

The intention is to stabilise the banks over the next few years and sell off the government's shares in them, with the intention of turning a profit. But if a huge increase in borrowing is required over the next few years, Alistair Darling, the Chancellor, will be looking again at his budgets for 2009-11.

Tax receipts are falling fast, the costs of unemployment will rise in a recession, and his previous plans were already pushing at the limits of sustainable borrowing. It is hard to see how he could avoid significant pain in public spending.

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