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”.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA celebration of British elections
  • Get to the point
2015 General Election
May2015

Poll of Polls

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Ashdown Group: Marketing Manager (B2B) - Romford - £40,000 + car

£35000 - £40000 per annum + car and benefits: Ashdown Group: Marketing Manager...

Ashdown Group: Helpdesk Analyst - Devon - £20,000

£18000 - £20000 per annum: Ashdown Group: Helpdesk Analyst - Devon - £20,000 ...

Ashdown Group: Data Scientist - London - £50,000 + bonus

£35000 - £50000 per annum + generous bonus: Ashdown Group: Business Analytics ...

Ashdown Group: IT Project Coordinator (Software Development) - Kingston

£45000 - £50000 per annum: Ashdown Group: IT Project Coordinator (Software Dev...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power