Friday 8 August 2014 4:26 am

Without currency union independent Scotland's banks would be at risk - Niesr

Scottish banks may not have the option of a government bailout if the country decides to go independent and has no formal currency union with the UK, according to a report from the National Institute of Social and Economic Research (Niesr).

Without the formal arrangement Scotland enjoys at the moment, the Scottish banking system would need a new "lender of last resort", the study says.

However, the SNP has argued that Scotland would be able to keep the pound in a formal union should the country secede, a claim both the Labour and Conservative parties have rejected.

Commenting on the report, chief secretary to the Treasury Danny Alexander said: "Borrowing the pound would be damaging for a separate Scotland's economy and a terrible choice for Scotland's financial sector."

Should Scotland opt for an informal union, the country's financial sector and ability to export financial services could be could also take a hit.

The report said the option of sterlingisation, where Scotland retains the pound informally without the Bank of England acting as the lender of last resort, may involve "terms that are unlikely to be acceptable to an independent government".

However, there seems little doubt that an independent Scotland would be within its rights to declare sterling sole legal tender and borrowing it on the financial markets to hold in reserve.

"Everyone says Mr Salmond needs a Plan B if the UK does not agree to a currency union with Scotland. But unilateral adoption should be Plan A, making Scotland’s economy more stable and secure. The UK’s obstinacy would be Scotland’s opportunity," said Sam Bowman, research director of the Adam Smith Institute on Wednesday.

The creation of a Scottish central bank with its own currency, was also considered. The report comes as Labour leader Ed Miliband prepares to demand that Alex Salmond sets out plans for an alternative monetary arrangement if Scotland is unable to stay in the UK currency union.