LONDON—An independent Scotland would have an exceptionally large banking sector compared with the size of the rest of its economy, making it vulnerable to financial shocks and putting Scottish taxpayers at significant risk if the country is hit by another banking crisis, the U.K. Treasury said Sunday.
In an analysis paper, the third in a series the U.K. government is releasing ahead of the independence referendum next year, the treasury estimated an independent Scotland would have banking assets worth more than 1,250% of Scottish gross domestic product.
The scale of Scotland's banking assets dwarfs those of Iceland and Cyprus, which had banking assets around 880% of GDP and 800% of GDP before their respective collapses in 2008 and 2013.
Both countries suffered severe financial problems due in part to the disproportionate size of their banking sectors.
"The experience of financial crises shows that countries with a large banking sector compared to the size of their GDP are significantly more vulnerable," the report says. The treasury analysis found banking sector assets for the whole U.K. at present are around 492% of GDP.
"The size of the U.K. economy relative to its financial sector means that the U.K. authorities are in a position to effectively coordinate the resolution of failing firms, and to stand behind any resolution arrangements," the paper said.
"Resolving large banking failures with confidence is likely to be impossible unless there is a strong and large fiscal base underpinning actions to mitigate financial risk." Scots go to the polls Sept. 18, 2014, to vote on whether to stay in the U.K. or to become an independent nation.
As the date draws nearer, the London-based U.K. government, which is staunchly in favor of maintaining the 300-year-old union between Scotland and the rest of the U.K., is pointing out the economic risks and uncertainty that it believes an independent Scotland would create.
By contrast, the semiautonomous Scottish government, which is pro-independence, is campaigning to convince Scots that their small nation, which is rich in natural resources such as oil and gas in the U.K. sectors of the North Sea, would be better off if it cut its ties to the rest of the U.K.
Alex Salmond, Scotland's first minister and the leader of the Scottish National Party, last month told The Wall Street Journal that the independence referendum isn't deterring foreign companies from investing in the country, despite 'scaremongering' from the U.K. government.
"In the last 18 months we have seen record levels of investment in Scotland," Mr. Salmond said. The first minister said the Scottish government would use its natural resources as a bargaining chip in negotiations with the U.K. government about forming a sterling monetary union.
The U.K. treasury paper also said that independence could cause difficulties for financial services firms, particularly impacting their cost of borrowing. "There is a substantial area of uncertainty around the reaction of large firms to these risks," according to the paper.
"These would be difficult decisions for industry, particularly those firms that have strong historic and cultural links to Scotland."
It is not clear whether an independent Scotland would be presented with a bill from London for bailing out Royal Bank of Scotland Group RBS.LN +2.47% PLC and Bank of Scotland, now part of Lloyds Banking Group LLOY.LN -1.24% PLC, at the height of the global financial crisis in 2008.
wsj.com
In an analysis paper, the third in a series the U.K. government is releasing ahead of the independence referendum next year, the treasury estimated an independent Scotland would have banking assets worth more than 1,250% of Scottish gross domestic product.
The scale of Scotland's banking assets dwarfs those of Iceland and Cyprus, which had banking assets around 880% of GDP and 800% of GDP before their respective collapses in 2008 and 2013.
Both countries suffered severe financial problems due in part to the disproportionate size of their banking sectors.
"The experience of financial crises shows that countries with a large banking sector compared to the size of their GDP are significantly more vulnerable," the report says. The treasury analysis found banking sector assets for the whole U.K. at present are around 492% of GDP.
"The size of the U.K. economy relative to its financial sector means that the U.K. authorities are in a position to effectively coordinate the resolution of failing firms, and to stand behind any resolution arrangements," the paper said.
"Resolving large banking failures with confidence is likely to be impossible unless there is a strong and large fiscal base underpinning actions to mitigate financial risk." Scots go to the polls Sept. 18, 2014, to vote on whether to stay in the U.K. or to become an independent nation.
As the date draws nearer, the London-based U.K. government, which is staunchly in favor of maintaining the 300-year-old union between Scotland and the rest of the U.K., is pointing out the economic risks and uncertainty that it believes an independent Scotland would create.
By contrast, the semiautonomous Scottish government, which is pro-independence, is campaigning to convince Scots that their small nation, which is rich in natural resources such as oil and gas in the U.K. sectors of the North Sea, would be better off if it cut its ties to the rest of the U.K.
Alex Salmond, Scotland's first minister and the leader of the Scottish National Party, last month told The Wall Street Journal that the independence referendum isn't deterring foreign companies from investing in the country, despite 'scaremongering' from the U.K. government.
"In the last 18 months we have seen record levels of investment in Scotland," Mr. Salmond said. The first minister said the Scottish government would use its natural resources as a bargaining chip in negotiations with the U.K. government about forming a sterling monetary union.
The U.K. treasury paper also said that independence could cause difficulties for financial services firms, particularly impacting their cost of borrowing. "There is a substantial area of uncertainty around the reaction of large firms to these risks," according to the paper.
"These would be difficult decisions for industry, particularly those firms that have strong historic and cultural links to Scotland."
It is not clear whether an independent Scotland would be presented with a bill from London for bailing out Royal Bank of Scotland Group RBS.LN +2.47% PLC and Bank of Scotland, now part of Lloyds Banking Group LLOY.LN -1.24% PLC, at the height of the global financial crisis in 2008.
wsj.com
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