Call to 'rebuild banking sector'

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Economic advisers to the Scottish Government have said it should attract new lenders to Scotland to compete with the major high street banks.

The Council of Economic Advisers (CEA) raised concerns that the country's businesses have been finding the terms for credit too restrictive.

It said the Scots banking sector should be rebuilt by attracting institutions willing to lend more innovatively.

The CEA is chaired by the former RBS boss, Sir George Matheson.

It was set up by the SNP government when it came to power two years ago.

At its most recent meeting in May, for which minutes have just been published, members of the council observed that banking in Scotland has historically been dominated by a small number of institutions "which are understandably intent on restoring their own financial health".

"There is therefore a need to rebuild the Scottish banking sector by attracting institutions which do not currently have large operations in Scotland and may be willing to lend in more innovative ways."

Borrowing powers

The council recommended to ministers that "there should be promotion of the opportunities that exist for other institutions to lend in Scotland".

Competition from banks based outside Scotland was much stronger before the credit crunch, including lending by Irish, Icelandic and American banks, but they have retreated from the UK market.

Concern about the dominance of lending markets by the Royal Bank of Scotland and Lloyds Banking Group, which includes the Bank of Scotland, has been raised by the European Commission in recent weeks.

Competition commissioner Neelie Kroes has said they will have to scale down to ensure adequate competition in the market, as well as reducing their reliance on the UK government since their bailout last October.

Getting credit

The UK government is also expressing concern about the behaviour of the major lenders.

The chancellor, Alistair Darling, is to hold meetings with senior bankers over the next fortnight to discuss the problems of getting credit to business.

The minutes of the CEA also revealed backing for the Scottish Government to have its own borrowing powers.

It was noted that a report by the Organisation for Economic Co-operation and Development found only South Korea and Denmark denied borrowing powers to their regional governments.

Following a discussion about the Scottish food and drink sector, it challenged ministers to do more to keep the value added by the Scotch whisky industry within the country, and to improve co-ordination of the marketing of Scottish food as a premium product.