Independent Scotland at risk from bank crash

The analysis of the economic implications of independence, which will be launched in Edinburgh tomorrow by the Scottish Secretary Michael Moore, is the third in a series of papers launched by the UK government as it gears up its attacks on a Yes Vote in next year’s independence referendum.

It will argue only the UK has the capacity to manage the risks associated with a financial meltdown such as the 2008 crisis, which saw two of Scotland’s banks, RBS and HBOS, bailed out by the British taxpayer to the tune of £66 billion.

Moore will be joined by the Economic Secretary to the Treasury, Sajid Javid, for the publication of the paper, which was dismissed last night by SNP Finance Secretary John Swinney as a “discredited, feeble attempt to undermine confidence in Scotland’s ability to be a successful independent country”.

A key argument deployed by the UK government will be that an independent Scotland would have a exceptionally large banking sector compared with the size of its economy, an imbalance that would make it extremely difficult to respond to a banking crisis.

Although a thriving banking industry gives a country financial clout, the paper will suggest that Scotland’s ability to cope during the bad times would be reduced if the nation were to go for independence.

It will say that within the UK, Scotland enjoys a “best of both worlds” position that enables the country to maintain a large financial sector based north of the Border within a UK-wide regulatory system to manage risks.

“Scottish financial services firms also benefit from the UK’s stability and markets’ confidence in the larger UK economy,” the paper says.

“The UK-wide regulatory framework, which maintains the stability of the financial system, is vital to all firms that operate in the UK. Location in a larger economy also helps to reduce firms’ cost of borrowing because markets perceive these firms as less of a risk.”

The paper will argue that a lack of clarity over borrowing costs would lead to banks, insurance companies and other major employers leaving Scotland for a larger economy.

“There would likely be significant incentives for large firms to make changes to their group structure in order to address the funding and financial stability risks arising from independence, most importantly moving their domicile from an independent Scottish state to the continuing UK or another jurisdiction,” Treasury officials conclude.

The document’s authors calculated that the Scottish economy would be more reliant on banking than