Independent Scotland ‘Could Follow Iceland’s Path’

Scotland’s banking system could face a similar fate to those of Iceland in the 2008 financial crisis if this autumn’s referendum sees voters back separation from the UK, warns Standard & Poor’s (S&P).

The credit ratings agency’s (CRA) analysts suggest that an independent Scotland might lead to the creation of a financial system with parallels to that of Iceland six years ago when the island was forced to allow all its major banks to fail with massive losses for savers and creditors.

In a report on the implications of independence for Scotland-based banks such as Lloyds Banking Group and Royal Bank of Scotland (RBS), S&P said the country could face a scenario where the assets of its lenders were more than 10 times the size of its economy, leaving it unable to support them if a future financial crisis struck.

The report focuses on the likely deposit assurance arrangements post-independence and warns that even if Scotland were to join the euro any guarantee to protect the country’s savers would probably fail.

“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,” said S&P. “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.”

The CRA adds that while Icelandic banking assets in the run up to the crash peaked at 880p% of its gross domestic product (GDP), in post-independence Scotland they would equal 1,254% of GDP.

“In our view, the willingness and ability of a future Scottish government to support its banking system is challenging at this point,” added S&P.

Life insurer Standard Life, currently based in the city of Edinburgh, has already warned that much of its business would probably relocate to other parts of the UK if Scottish voters support separation.

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