* Referendum on independence due in Sept. 2014
* Breakaway would leave Scotland vulnerable-British Treasury
* Scottish financial sector would dwarf economy, says report
By William James
LONDON, May 19 An independent Scotland would
have a vastly oversized financial sector that would leave it
vulnerable to a Cyprus-style banking crisis, Britain's finance
Before a referendum due in September 2014 on whether
Scotland should split from the United Kingdom, the British
government is analysing the impact of independence on Scotland,
which has a population of about 5 million.
A report from the finance ministry - or Treasury - says that
without the British government's regulatory framework, Scotland
would be left vulnerable by having a banking sector that dwarfs
its economy, driving businesses out of the country.
"An independent Scotland would have an exceptionally large
banking sector compared to the size of its economy - with
banking assets of more than 1250 percent of Scottish GDP -
making it more vulnerable to financial shocks and the volatility
of the sector," said a Treasury statement which contained
excerpts from the report, due to be published on Monday.
The Scottish National Party (SNP), which controls Scotland's
devolved government and is behind the independence campaign,
dismissed the report and said it would produce its own study on
Tuesday highlighting the benefits of a split from Britain
"An independent Scotland will be an economic success story,
as we will outline this coming week, and the tall tales from the
Treasury can't hide that reality," said Scottish Finance
Secretary John Swinney of the SNP.
Opinion polls indicate the pro-independence movement in
Scotland has the support of about a third of voters, while
nearly 60 percent want to stay in the United Kingdom. British
Prime Minister David Cameron has campaigned against Scottish
At 12-1/2 times the size of Scotland's economic output,
Scotland's banking sector would be even more out of proportion
to the economy than that of Cyprus, which ground to a standstill
earlier this year as the cost of recapitalising its banks, which
had assets worth nine times its GDP, spiralled.
"Overall, 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 Treasury
Scotland currently benefits from the British government's
capacity to support struggling banks.
During the 2007/08 financial crisis, government support for
Britain's financial sector peaked at more than 1 trillion
pounds' ($1.5 trillion) worth of guarantees and cash injections.
The Treasury report will say any future bank rescues would
place a heavy burden on Scottish taxpayers, and could generate
concerns about state finances that might discourage firms from
basing their operations there.
Previous reports from the British government have said that
there is no clear case for an independent Scotland to share use
of the British pound, and that it might have to reapply for
membership of international bodies such as the European Union.