U.K. Treasury Says Independent Scotland Would Fail to Aid Banks

An independent Scotland would have a banking system too big to save in the event of a crisis and may lack enough resources to compensate depositors, the U.K. Treasury said, in a study into the economic implications of the nation breaking away from the rest of the country.

Scotland would have a banking system with assets worth 1,254 percent of gross domestic product, higher than Cyprus and Iceland before their financial crises, the Treasury said. Taxpayers would each have 65,000 pounds ($98,670) of potential liabilities in a bailout, versus 30,000 pounds while in the U.K. An independent state would also be less able to guarantee deposits and stand behind private pensions, it said.

“Faced with a serious banking crisis, the possibility of bank failures would pose a very serious risk to taxpayers in an independent Scotland,” the Treasury said.

The governing Conservative Party, its Liberal Democrat coalition partner and the main opposition Labour Party are united in favor of preserving the U.K., which was formed by the Act of Union in 1707. The study is the third from the Treasury in London to make an economic case against independence.

The Scottish National Party, which runs the semi-autonomous government in Edinburgh, is campaigning for a breakaway from the U.K. and has set a referendum for Sept. 18, 2014.

Less Risky

The Treasury said today that Scotland benefits from having lenders such as Royal Bank of Scotland Group Plc based in Edinburgh, together with U.K. regulation and a financial stability framework. Scottish banks also enjoy cheaper funding costs because they are perceived to be less risky as part of a bigger economy, the ministry said.

The Treasury also dismissed proposals from the Edinburgh government which would allow Scotland to maintain its large financial sector while leaving British taxpayers on the hook in case of a bailout. Scottish banks would be “crucially dependent on one state’s taxpayers being willing to support another’s.”

Current proposals “would weaken the U.K. authorities’ control over macro prudential supervision and dilute the U.K. government’s responsibility for fiscal decisions about bank failures and resolution,” the Treasury said. “These proposals would also not give the government of an independent Scotland the levers it needed, particularly as the smaller partner.”

The U.K’s Financial Services Compensation Scheme that stands behind 85,000 of deposits for every saver, if replicated for Scotland alone, would saddle taxpayers with liabilities equivalent to a year’s annual economic output. Similarly, the U.K.’s Pension Protection Fund for defined benefit pension plans is easier to fund than an equivalent in Scotland because risk can spread more easily, the Treasury said.

“As was clear from the 2008 financial crisis, where there are doubts about the ability of the sector to meet claims through the compensation scheme, it can be necessary for governments to step in to guarantee deposits in order to prevent deposit fight,” the Treasury said.

The British government last month closed the door to a formal agreement with Scotland for its continued use of the pound in the event of a vote for independence next year, citing the tumult in the 17-nation euro region during the debt crisis.

Three commercial banks -- RBS, Lloyds Banking Group (LLOY)’s Bank of Scotland (RBS) and Clydesdale Bank -- print their own Scottish pound notes under an agreement dating back to 1845.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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