An independent Scotland might find itself unable to guarantee the deposits of savers in the event of another financial crisis, the Treasury warns today.
In highly provocative document officials liken the Scottish financial sector to that of Cyprus – which was bigger than the capacity of the state to bail it out.
And it also suggests that an independent Scotland might be unable to afford to protect pensioners whose employers become insolvent – because of the high number of defined contribution schemes in Scotland.
The document, to be published today, is the latest of three studies by the British government to sway opinion in Scotland ahead of next year’s referendum on independence.
Last month the British government suggested that an independent Scotland would not be able to keep the pound and would have to either adopt its own currency or embrace the euro.
The new study, warns that an independent Scottish banking sector, would rely almost exclusively on Bank of Scotland and Royal Bank of Scotland and that the Government would be unlikely to have the resources to bail them out if one of them were to fail.
“A serious banking crisis in an independent Scotland could pose a significant risk to Scottish taxpayers,” it concludes.
“Banking sector contingent liabilities for the UK in September 2012 were around 100 per cent of the whole UK GDP – or around £30,000 per capita. This would be more than double in an independent Scotland at £65,000 per capita.”
It adds that consequently a Scottish might not be able to guarantee bank deposits as it does in the UK.
“An independent Scotland could have significant difficulties providing standalone Scottish protection to match schemes such as the UK’s Financial Services Compensation Scheme (FSCS) which protect deposits in UK banks up to £85,000,” it concludes.
In a section which will cause intense irritation to nationalists the paper also compares an independent Scotland to counties like Iceland and Cyprus that had disproportionately large financial sectors.
It points out the value of the financial sector in Scotland stands at 1,254 per cent of Scotland’s gross domestic product, compared with banking assets in Britain worth 492 per cent of GDP.
“By way of comparison, before the crisis that hit Cyprus in March 2013, its banks had amassed assets equivalent to around 700 per cent of its G.D.P. — a major contributor to the cause and impact of the financial crisis in Cyprus and the ability of the Cypriot authorities to prevent the systemic effects when it hit,” the study says.
The document adds that by the end of 2007 Icelandic banks had amassed consolidated assets equivalent to 880 per cent of Icelandic G.D.P.
It cites the verdict of the Organization for Economic Cooperation and Development, which said that “the banks grew to be too big for the Iceland government to rescue.
“Banking in these circumstances became very dangerous when the global financial crisis deepened,” it says.
But John Swinney, finance secretary of the Scottish government, which supports independence, dismissed that document as “a discredited, feeble attempt to undermine confidence in Scotland’s ability to be a successful independent country” adding that “it will not work.”
Mr Swinney added that much of the paper seemed to be based on a “flawed, outdated view of the world which takes no account of the substantial banking reforms which have been on-going across Europe since 2008.”