International News

By William James

LONDON (Reuters) - The cost of protecting Scottish savers would prove difficult to bear if the country broke away from the rest of the UK, a study by the Treasury said on Monday.

The findings come in the latest paper from the British government on how independence would impact the country. On Sunday the Treasury said an independent Scotland would have a huge financial sector relative to its economy, leaving it vulnerable to a Cyprus-style banking crisis.

Existing schemes to provide a deposit guarantee to British savers and protect pension payouts would not cover Scotland if its voters decide to break away from the UK in a referendum due to be held next September, the Treasury said on Monday.

"Arrangements that protect UK savers from financial shocks could be difficult and expensive to maintain in an independent Scotland," the report said.

The UK currently guarantees bank deposits up to 85,000 pounds ($129,100), paid for by a levy on its financial sector. However the likely structure of the Scottish banking industry would prove less suited to such a system.

"The retail deposit market in a separate Scotland would be dominated by only two large banks and, if one of these were to fail, the costs for compensating the depositors would fall almost entirely on the one remaining bank," a Treasury statement accompanying the report said.

The Scottish National Party which controls Scotland's devolved government and is behind the independence campaign has dismissed the Treasury report and is due to issue its own study on Tuesday, highlighting the benefits of a split from Britain. ($1 = 0.6582 British pounds)

(Editing by Robin Pomeroy)