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.
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 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.
A Scottish Government spokeswoman said: "The Scottish Government's position is to keep the pound, which is as much Scotland's pound as the rest of the UK, as part of a formal currency union.
"In fact this report demonstrates precisely why a currency union and a shared system of financial stability is in the overwhelming interest of Scotland and the rest of the UK.
"The Fiscal Commission Working Group have set out detailed proposals for how financial stability - including lender of last resort facilities - could be successfully provided under independence.
"These proposals set out how the Scottish Government would make a fair and proportionate contribution to the stability of the shared financial system."
Scottish Conservative finance spokesman Gavin Brown said: "A separate Scotland would struggle to find a lender of last resort - that would lead to a loss of jobs and serious regulatory problems.
"Major financial services companies would be forced to domicile themselves somewhere else.
"These are all questions the Scottish Government is running out of time to answer."
Liberal Democrat leader Willie Rennie said: "This research matters because people deserve to know if their mortgages and pensions would be protected securely in the event of a financial crisis.
"By refusing to tell us what his Plan B is for currency or the consequences of that policy Alex Salmond ignores the domino effect of questions which remain for every other option available to him."
John McFall, former chair of the Treasury Select Committee, vice-chair of the cross-party Banking Commission said: "This latest expert intervention makes clear that using the pound without a currency union, and without the Bank of England acting as the insurance policy for our economy, would be a huge risk for Scotland.
"It means higher prices and cuts to public services. It would mean families losing everything in a crisis."