Scottish banks could be plunged into an Iceland-style crisis in an independent Scotland

Major report from a leading credit ratings agency draws stark parallels to Iceland's 2008 financial collapse in latest blow to pro-independence supporters

Scottish banks could be thrown into an Iceland-style financial crisis in an independent Scotland, according to a major ratings agency.

The stark warning was issued by Standard’s & Poor after they calculated that the assets of Scottish lenders would be more than 12 times that of the entire country’s economy – far higher than Iceland’s banks before their meltdown.

It means that the government would likely be unable to maintain savings in the event of a financial collapse without the support of Westminster.

Although Westminster has insisted that Scotland would operate entirely independently if it votes yes in September’s referendum, Standards & Poor said it would be “challenging” for Scottish banks to function properly in such circumstances.

The report from the ratings agency said: "If an independent Scotland were to join a currency union with the remaining UK, we assume that regulation would remain under the Bank of England and that financial services compensation scheme [FSCS] coverage would be unchanged.

“Alternatively, Scotland would very likely be required to set up its own deposit insurance arrangements if it adopted the euro”.

It is the latest warning to First Minister Alex Salmond, who has insisted that the Scottish economy is strong enough to operate independently.

Prior to the financial crisis, he referred to Iceland as part of an “arc of prosperity” which showed small economies could flourish.

But in the 2008 crash savers lost billions when the Icelandic government was unable to bail them out as assets totalled 880 per cent of GDP.

And according to recent estimates, banks in an independent Scotland would have even higher assets worth 1,200 per cent of GDP.

Supporters of Scottish independence have suggested that a deal could be struck which would allow the Bank of England to continue setting interest rates and act as a lender of last resort for the whole of the UK.

Others have claimed that joining the EU would allow the Scottish economy to thrive. But according to Standard’s & Poor, even membership to the EU would not protect the bank’s assets in the event of a collapse.

A spokesman said: “These arrangements would likely be unfunded, leaving the comparatively very sizeable deposit bases of the largest Scottish banks backed with an implicit guarantee by the Scottish government.

“In our view, the willingness and ability of a future Scottish government to support its banking system is challenging at this point”.

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