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Independent Scotland ‘could face Icelandic banking crisis’

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Scotland’s banking sector could suffer an Icelandic-style crisis if the vote for independence is approved, Standard & Poor’s has warned.

In a report published today (24 April), the ratings agency said it typically factored in government support when rating prominent banks.

An independent Scotland within a sterling currency union would inherit financial safety nets, it suggested, such as the lender of last resort.

However, in the absence of a currency union, the report described the prospects of a bail-out as “challenging”.

For example, S&P’s said if Scotland joined the euro it would be required to set up its own deposit insurance arrangements, but said it would struggle to fund such a scheme, leaving the country open to an Icelandic-style meltdown.

“These arrangements would likely be unfunded, leaving the comparatively very sizable deposit bases of the largest Scottish banks backed with an implicit guarantee by the Scottish government,” it said.

“We note a possible parallel here with Iceland, where in 2008 the national deposit insurance scheme could not honour claims when the country’s outsized banking system failed.”

All Western European governments are classified as “supportive” by S&P in its analysis of bank ratings, with the exception of Iceland, which is labelled “support uncertain”.

Of course much depends on whether independence negotiators could get their way on a sterling currency union and European Union membership, the report added.

In that case, European directives on banking regulation would remain the same, while Scottish banks would have a lender of last resort in the form of the Bank of England or European Central Bank, it said.

Scottish voters are due to vote on whether to stay part of the United Kingdom in September this year.

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