The creation of an informal currency union between an independent Scotland and the rest of the UK means Scottish banks could not be sure they would be bailed out in the event of another financial crisis, according to a new report.
Dollarisation - also referred to as sterlingisation - would have consequences for Scotland's financial sector, its capacity to export financial services, its new balance of payments and its economic prosperity, the research from the National Institute of Economic and Social Research (NIESR) found. Pro-unionist campaigners seized on the report as proof that independence would be "disastrous" for Scotland's banking sector.
The Scottish government favours a formal currency union with the rest of the UK in the event of a Yes vote, which would see the Bank of England retained as its lender of last resort, but the UK Government has already dismissed this option.
Dr Angus Armstrong and Dr David McCarthy, from NIESR, have looked at the options for an independent Scotland to be lender of last resort to Scottish institutions in a financial crisis, if it was to opt for the possible "Plan B" of sterlingisation.
They considered three options: creating a new Scottish Insurance Fund, negotiating a commercial lender of last resort line of credit with the Bank of England, or having the European Banking Union assist with lender of last resort, but suggest these may "involve terms that are unlikely to be acceptable to an independent government".
"Finding a credible solution to the lender of last resort problem is important if Scotland ends up with dollarisation," the report states.
Part of the solution may require Scotland to have its own currency and a functioning central bank, it says.
The authors also considered the impact of bringing an end to the existing monetary union in the UK.
The report states: "An independent Scotland would require a financial border to create its own balance of payments accounts.
"This would include cross-border trade and capital flows to and from the rest of the world and the rest of the UK.
"Under dollarisation, the balance of payments would become the key barometer of whether the Scottish economy prospers or declines."
Banking groups such as RBS will have to decide which side of the financial border to register, the experts said.
"Without a credible solution to the lender of last resort, the Prudential Regulatory Authority is likely to require systemically important banks using sterling to be domiciled in the UK," the report states.
"Shareholders, customers and rating agencies are also all likely to prefer systemically important banks to be located in the UK."
Commenting on the report, chief secretary to the Treasury Danny Alexander said: "This report from NIESR confirms that borrowing the pound would be damaging for a separate Scotland's economy and a terrible choice for Scotland's financial sector, which has been built up over the last 200 years.
"The First Minister yesterday described sterlingisation as 'quite attractive', even though his own Fiscal Commission has said that it 'is not likely to be a long-term solution'.
"This report shows that the Plan B Salmond now seems to be flirting with would be disastrous for the Scottish economy. The only way for Scotland to keep the pound as we have now is to vote No."
The report has been published as Alex Salmond has come under renewed pressure to announce his "Plan B" on currency if a formal monetary union is not negotiated.
Scottish Independence: Who Stands Where
No: Barack Obama(01 of12)
Open Image ModalThe American electorate may have gone off their president after five and a half years in office but Barack Obama still enjoys 2008 levels of popularity in the UK. People from the No Campaign probably fainted when Obama said "the key word is 'united'" when asked about Scotland. (credit:ASSOCIATED PRESS)
Yes: Sir Sean Connery(02 of12)
Open Image ModalAustin Powers may be against independence but James Bond isn't. Sir Sean has told his fellow Scots that independence "is too good an opportunity to miss". He also said the potential boosts to the film and creative industries are "particularly exciting". (credit:Danny Lawson/PA Archive)
No: Hillary Clinton (03 of12)
Open Image Modal"I would hate to have you lose Scotland," the potential next American president told Jeremy Paxman on Newsnight. "I hope that it doesn't happen but I don't have a vote in Scotland. But I would hope it doesn't happen." She added: "I would think it would be a loss for both sides but, again, I don't have a vote." (credit:ASSOCIATED PRESS)
Yes: Brian Cox (Not That One)(04 of12)
Open Image ModalThe face of BBC science has not declared for or against Scottish independence but his namesake, actor Brian Cox is firmly in favour of it.He has provided the voice of Duggy Dog, an animated Highland Terrier created by the Yes campaign who aims to "sniff out fact from fiction" in the independence debate. (credit:ASSOCIATED PRESS)
No: David Bowie(05 of12)
Open Image ModalSince dabbling in right-wing politics in the 1970s, Bowie's views appear to have mulled somewhat.When Kate Moss collected his BRIT award earlier this year, she read a statement on behalf that asked Scotland to "stay with us".The statement said: "In Japanese myth the rabbits from my old costume that Kate's wearing live on the moon. Kate comes from Venus and I from Mars, so that's nice. I'm completely delighted to have a Brit for being the best male, but I am, aren't I Kate? I think it's a great way to end the day. Thank you very, very much and Scotland - stay with us." (credit:Martin Rickett/PA Wire)
Yes: Alan Cumming(06 of12)
Open Image ModalThis Scot is firmly pro-independence. So much so, the New York-based actor bought a flat in Edinburgh last year so he would be able to vote in September's referendum. Unfortunately, it was deemed not to be his "main address" and, by extension, he will not be able to vote. (credit:Andy Kropa /Invision/AP)
No: JK Rowling(07 of12)
Open Image ModalJK Rowling, who wrote her first Harry Potter book while living in Edinburgh and still lives in the Scottish capital, has given £1 million to defeat Alex Salmond.She wrote she was "no fan of the Westminster government".She added: "The simple truth is that Scotland is subject to the same 21st century pressures as the rest of the world. The more I listen to the Yes campaign, the more I worry about its minimisation and even denial of risks."A Twitter account digested this and reflected: "What a #bitch after we gave her shelter in our city when she was a single mum." (credit:Ian West/PA Wire)
Yes: Billy Bragg(08 of12)
Open Image ModalAlways outspoken, Bragg's take on Scottish independence is that it would be as good for his native England as it would for north of the border. The left-winger said: "Scottish independence throws up the possibility of a more progressive England. We won’t be British any more, we’ll be English." (credit:Jonathan Short/Invision/AP)
No: The BBC, According To Protestors(09 of12)
Open Image ModalNo...ish: Pope Francis(10 of12)
Open Image ModalPope Francis voiced concerns about Scottish independence - but his comments were non-commital to the point where both the yes and no camps welcomed them.Speaking about secession movements across the world, the infallable representative of God on earth said countries breaking away from larger states should be considered on a "case-by-case basis".He acknowledged the case was "clear" in in some cases but listed Scotland as one of the cases where "I ask myself it is so clear".He said: "Let's think of the former Yugoslavia. Obviously, there are nations with cultures so different that couldn't even be stuck together with glue."The Yugoslavian case is very clear, but I ask myself if it is so clear in other cases - Scotland, Padania, Catalunya."No campaigners said the Pope was "right to warn about the impact of division" while No campaigners said: "As His Holiness says, these matters should be looked at on a case-by-case basis." (credit:ASSOCIATED PRESS)
Yes: Glasgow's Sunday Herald(11 of12)
Open Image ModalThe Sunday Herald became the first Scottish paper to back the yes campaign in May with this front cover. It wrote: "We understand the past, as best we can, and guess at the future. But history is as nothing to the lives of the children being born now, this morning, in the cities, towns and villages of this country."On their behalf, we assert a claim to a better, more decent, more just future in which a country's governments will be ruled always by the decisions of its citizens.'' (credit:Sunday Herald)
Yes. No. Wait, What?: Elijah Wood(12 of12)
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