The X account, John Stuart Wilson, recently posted a flow chart detailing the author’s understanding of the transition of mortgage agreements from rUK banks and building societies to institutions in an independent Scotland.
The author is skeptical of the financial outcomes of the independent state and most, if not all, of the pronouncements made support this view. Whether it is the facts driving thinking or ideology driving facts is difficult to ascertain.
In this response, I aim to point out flaws in this perception of the financial outcomes. I assume that Scotland is fully independent, has a functioning central bank issuing a free-floating Scottish currency, which I will call the Scottish Pound (SCP).
The flow chart is titled “What does the iSG do about pre-independence mortgages? There follows a list of options A-L illustrated to show the outcomes and consequences of each choice and decision.
A-E are the 5 initial base case answers, as the author sees it, to the origin question. None of these options looks historically at other examples of countries going through a similar transition. The most geographically local example of such a transition of private sector mortgages would be when the Eurozone nations gave up their domestic currency regimes to adopt the Euro. Millions of mortgages were transferred from numerous currencies to a Euro denomination, with European citizens hardly even aware of the change. There was certainly no difficulty.
JSW seems to find problems, however, that the Eurozone nations didn’t foresee or failed to mitigate. These centre around a theme of lack of trust by banks in the Scottish government, the Scottish currency or the Scottish Financial institutions as a whole. Here I believe he forgets that the UK commercial banks and financial institutions in question are profit-seeking, risk-avoiding, and capitalist in nature. Additionally, the author seems to forget that these are private sector transactions.
These Scottish citizens, holding UK mortgages, originally agreed to pay in GBP because this was the currency wages were paid to them in. The UK banks accepted the agreement from their side, based on the risk assessment of potential default under these conditions.
With the change in currency, the risk of default, and hence threat to profitability of these mortgage agreements hits unacceptable levels when the borrower receives wages in a foreign currency. The banks would rather continue to have regular payments in any currency than suffer the loss and inconvenience of a default. Therefore, it is in the banks interest to redenominate the agreement and obviously saves the borrower foreign exchange charges. It is mutually beneficial for the redenomination to go ahead.
The banks do not even require to “trust” the currency, to any great degree, as the risk remains with the borrower to pay the mortgage. The borrower must earn enough to pay the agreed amount whatever the currency.
The Scottish Government has no need to get involved at all, but could fund the transition costs, to save both sides of the transaction any additional financial impact.
In conclusion, there seems to be no justification for the insistence that mortgage redenomination is impossible. In fact, by examining historical examples of similar processes, the Eurozone nations for example, it seems a straightforward arrangement.
Furthermore, the idea that commercial banks would work against their self-interest to add risk to a product when this would undermine the profitability and standard of the loan is unlikely.