Independent Scotland at risk from bank crash AN independent Scotland would be more reliant on the banking sector than ­Cyprus or Iceland, making it vulnerable to a new financial crisis, a UK Treasury paper will warn this week. The paper will say that a banking collapse would pose a "very serious risk" to Scottish taxpayers while uncertainty over the cost of borrowing would force financial firms headquartered north of the Border to move out of Scotland. 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 Iceland or Cyprus, two countries whose concentration on the sector was blamed for their economic collapse in recent years. It also claims that after independence individual taxpayers would be liable for £65,000 each in the event of a banking meltdown, more than double the £30,000 each taxpayer would be liable for as part of the United Kingdom. "This means that faced with a serious banking crisis, the possibility of bank failures would pose a very serious risk to taxpayers in an independent Scotland," the paper says. The paper compared the Scottish situation with other countries by looking at the ratio of banking assets against Gross Domestic Product (GDP), a measure of a country's economic activity. Currently, banking assets for the UK as a whole are 492 per cent of the UK GDP, which is around £1.5 trillion. In ­Scotland, the scale of banking assets when compared with Scottish GDP (£150 billion) is far higher, reaching 1,254 per cent. The 1,254 per cent figure dwarfs the 880 per cent of GDP level of banking assets recorded in Iceland in 2007, that created economic risk just before the collapse of three of its commercial banks. The Treasury paper refers to a comment made by the Organisation for Economic Co-operation and Development (OECD) when it said: "The banks grew to be too big for the Iceland government to rescue. Banking in these circumstances became very dangerous when the global financial crisis deepened. Looking at Cyprus, the paper notes that before its financial crisis this year Cypriot banking assets were 800 per cent of its GDP. This situation, the paper says, was a "major contributor to the cause and impact of the financial crisis in Cyprus and the ability of the Cypriot authorities to prevent the systemic effects when it hit." Also criticised is the Scottish Government's proposal to maintain a UK-wide approach to managing risk post independence. Such an approach, it argues, would be "significantly more complex than those that currently exist." But Swinney, who will publish the Scottish Government's economic paper this week, disagreed with the Treasury saying: "This Treasury paper... is a discredited, feeble attempt to undermine confidence in Scotland's ability to be a successful independent country - and it will not work." The Finance Secretary claimed the paper was based on a time when the UK had a triple A credit rating. That Triple A rating has long since been shredded - and so has the Tory Treasury's credibility and the increasingly-flimsy arguments they use to attack Scotland. We know what this paper will say, and it doesn't stand up to the slightest bit of expert scrutiny. Andrew Wilson: British identity is key to debate on independence