Million-pound banknotes exist, as do hundred-million-pound ones. They’re used to back the notes issued by commercial banks in Scotland and Northern Ireland.

This is explained by the Committee of Scottish Bankers, a trade body three of whose four members are the Scottish note-issuing banks:

In accordance with the terms of the 2009 Act and the associated Banknote Regulations and Rules, issuing banks require to fully back their notes at all times with ring-fenced assets held partly in Bank of England notes and UK coin and partly in deposits held at the Bank of England. This, of course, means that holders of banknotes issued by the Scottish banks receive the same level of protection as that provided to holders of Bank of England notes.

So, given that all banknotes issued by Scottish and Northern Irish banks have to be backed by Bank of England notes and deposits, what’s in it for issuers? Why do they bear the costs of printing, distribution, and disposal?

This question had puzzled me for a long time, until I found what seemed to be an explanation in a Scotsman editorial:

However, Scottish bankers being clever types, they spotted that the value of their note issue was calculated on its value at the close of business on a Saturday. So they figured if they put the necessary deposits into the BoE on a Friday and took them out on Monday, the letter, if not the spirit of the law, would be complied with. Why do this? Because when their money is in the BoE, no interest can be earned on it, but for the other four days it can be deposited in an interest-bearing account, thus earning money for the note-issuing bank.

But what does the law say? First, the original Bank Notes (Scotland) Act 1845:

VI […] it shall not be lawful for any Banker in Scotland to have in Circulation, upon the Average of a Period of Four Weeks, to be ascertained as herein after mentioned, a greater Amount of Notes than an Amount composed of the Sum certified by the Commissioners of Stamps and Taxes as aforesaid and the monthly average Amount of Gold and Silver Coin held by such Banker at the head Office or principal Place of Issue of such Banker during the same Period of Four Weeks, to be ascertained in manner herein-after mentioned.

Or, stripped of some of its floridity: the limit of the value of banknotes that may be issued by a Scottish bank is the average of its holdings over a four-week period. The next clause elaborates:

VII […] every Banker who […] shall issue Bank Notes in Scotland shall, on some One Day in every Week […] transmit to the said Commissioners a just and true Account of the Amount of Bank Notes of such Banker in Circulation at the Close of the Business on the next preceding Saturday, […] and also an Account of the total Amount of Gold and Silver Coin held by such Banker […] at the Close of Business on each Day of the Week ending on the same Saturday, and also an Account of the total Amount of Gold and Silver Coin in Scotland held by such Banker at the Close of Business on that Day; and on completing the first Period of Four Weeks, and so on completing each successive Period of Four Weeks, every such Banker shall annex to such Account the average Amount of Bank Notes of such Banker in Circulation during the said Four Weeks […].

So: once a week, Scottish note-issuing banks must report:

1. the value of banknotes in circulation on the preceding Saturday;
2. the value of their holdings at the close of each weekday;
3. the value of their holdings at the close of that day; and
4. the average value of banknotes in circulation over a four-week period.

This all seems a bit sketchy to me, especially as it’s written in that impenetrable dialect of English used only by people drafting laws, but if you interpret the averages of notes and coin to be based on (1) and (3) respectively, and ‘that day’ to mean Saturday, then I think it works.

Or at least, did work: the Banking Act 2009, introduced after the financial crisis of 2007-8, probably in response to the fact that several of the UK’s note-issuing banks had been bailed out by the taxpayer, repeals most of the 1845 Act. To ensure that private banknotes would continue to have worth regardless of the business practices of their issuing banks, the Act requires banks to back their notes with cash or Band of England notes or deposits.

What keeps Scottish and Northern Irish banknotes being printed is an agreement between the Treasury, the Bank of England, and the note-issuing banks:

Under the deal revealed last night, the banks will have to deposit 100 per cent of the value of their notes seven days a week, but they will get interest on 40 per cent of that.

As far as I can see, this agreement is not enshrined in law, and is therefore subject to the continued agreement of the parties involved.

Finally, if you’re thinking that printing your own notes and getting interest sounds like a good deal, I have bad news: the 2009 Act only allows banks that were already issuing banknotes to continue to do so.