Banks warned on currency union

A recent report has warned that Scottish banks might not be bailed out in a financial crisis, if an independent Scotland had no formal currency union with the rest of the UK.

The National Institute of Social and Economic Research said without a formal arrangement Scottish banks would need a new “lender of last resort”.

It comes as the question of which currency an independent Scotland would adopt has become an increasingly key issue in the referendum campaign.

First Minister Alex Salmond has said a formal currency union with the rest of the UK – in which an independent Scotland would keep the pound – was the best option, saying: “It’s Scotland’s pound and we are keeping it.”

He has argued that a currency union would be in the interests of Scotland and the rest of the UK.

However Labour, Conservative and Liberal Democrat leaders have all ruled out a currency union with an independent Scotland and have urged Mr Salmond to come up with a currency “Plan B”

The National Institute of Social and Economic Research considered other currency options, including “sterlingisation” – in which Scotland continued to use the pound without a formal agreement with the rest of the UK and without the Bank of England as lender of last resort.