Councils' investments in Icelandic banks - Q&As
- How much money was invested and by how many local authorities?
- Who else had money invested in Iceland?
- Why did they invest in Icelandic banks?
- How much money are councils going to get back and what is the administration process?
- Will the system change now?
- What happened with credit ratings and why did councils continue to invest even though the signs
on Iceland were not good? - Have any councils been left with severe budgetary problems and is this having an impact
on council tax? - Why do councils have £31bn of investments?
- The Audit Commission says that some councils were ‘negligent’ for investing after significant
downgrades in the credit ratings? - What is the role of treasury advisors?
- What is the role of the Audit Commission?
How much money was invested and by how many local authorities?
Three out of four councils had no exposure to Icelandic banks at the point of their collapse. 283 councils out of 388 in England had no investments in Icelandic banks.
127 English local authorities (comprising 105 councils, 12 police authorities and 10 fire and other authorities) on 7 October 2008 had invested £953m in four Icelandic banks – Landsbanki, Glitnir, Heritable and Kaupthing, Singer & Friedlander.
Local authority deposits in Icelandic banks halved between January and October 2008. The number of new deposits also fell and declined sharply after April 2008.
Local authorities had just 3.1% of total investments in Icelandic banks or less than 1% of the annual spend for all councils.
Who else had money invested in Iceland?
Many other institutions including building societies, universities, charities, the Audit Commission and other public bodies invested in Iceland. The AC report notes: “Press reports suggest that private sector institutions, including a number of building societies, hold deposits of at least £10bn.”
Why did they invest in Icelandic banks?
Like any saver, councils invest money to earn interest. This keeps council tax down and funds vital frontline services. The AC report recognises that ‘It is both practical and prudent for local authorities to draw an income from its surplus cash’.
Last financial year, it is estimated that councils earned around £1.8bn from interest, roughly the equivalent of £80 a household in England and Wales.
The AC reports that the pattern of deposits at the start of October 2008 were ‘in general making appropriate judgements regarding risk and return’.
As part of investing in Icelandic banks, local authorities:
- Stuck closely to Government guidelines stating that councils should balance risk and potential returns. The AC report states that there is ‘no direct evidence that local authorities prioritise yield above financial security and liquidity’, although there is pressure in some councils to ensure investments perform well.
- Took independent advice from financial advisers and credit ratings agencies. The ratings agencies continued to give Icelandic banks relatively high credit ratings right up until a few days before they went bankrupt.
- Invested money in a broad range of financial institutions to ensure that risk was spread evenly. The AC reports that at the start of October 2008, councils held deposits in 144 different organisations and that deposits were ‘widely spread’.
How much money are councils going to get back and what is the administration process?
Indications suggest that councils will get most of the money back through the administration process and the LGA is fighting hard to ensure that the council taxpayer is a priority as and when repayments are made.
As an example, the report notes that creditors from the failed bank BCCI have recovered 86.5% of their losses. We understand several councils have recovered their BCCI investments in full.
The administration process is long and thorough to ensure that as much money comes back as possible. A quick and easy ‘fire sale’ would not benefit council taxpayers – we want to ensure that the administrators get a decent price for the banks’ assets.
Will the system change now?
The LGA recognises that treasury management needs to be done differently in the future.
However, the Audit Commission concludes that councils’ treasury management system is ‘the right one’ and that the system needs to be ‘adjusted rather than replaced’. It goes on to say that the national investment framework is ‘broadly sound’.
What happened with credit ratings and why did councils continue to invest even though the signs on Iceland were not good?
During 2008, the creditworthiness of Icelandic banks changed as a number of downgrades were announced.
However, the Icelandic banks continued to get relatively high credit ratings until the afternoon of 30 September. Some had their ratings reaffirmed after reviews by the agencies. The LGA has called for an independent inquiry into the role of the ratings agencies.
Local authority deposits in Icelandic banks halved from January to October 2008 – from £2bn to £953m. The number of new deposits fell and declined sharply after April 2008.
Have any councils been left with severe budgetary problems and is this having an impact on council tax?
The LGA is not aware of any councils that have been left with short term financial problems because of Icelandic investments.
A recent Government announcement means that councils do not have to include Icelandic deposits on next year’s books for 2009/10. Consequently the LGA does not expect Icelandic investments to have any immediate impact on council tax or services.
The Audit Commission reports ‘no evidence as yet that potential losses in the Icelandic banks will lead to service cuts or to council tax rises and it is unlikely that the performance of local government will be affected in the short or medium term.’
Why do councils have £31bn of investments?
Local Government has a budget of over £100bn, employs over 2 million people and provides 800 services to local people seven days a week.
Councils invest money from the sale of assets and invest significant amounts of Government revenue grant paid to councils in regular intervals, before they have to spend it. This is with the aim of earning interest to support services and keep council tax down.
In addition, when the economy was booming councils set aside money for a rainy day in the form of reserves. In 2008, English local authorities had around £12.6bn reserves.
The Audit Commission says that some councils were ‘negligent’ for investing after significant downgrades in the credit ratings?
The AC reports that just six councils and one pension authority deposited money after significant downgrades.
All of these councils have carried out their own reviews. We understand that some of these councils had contractually committed to the deposits in question before the downgrades.
What is the role of treasury advisors?
Councils take independent advice from fund managers and pay for this advice.
Typically authorities will tender for this service at regular periods, will take references and set out roles and duties in a contract. Councils generally then use brokers for processing transactions to ensure that there is no conflict of interest.
What is the role of the Audit Commission?
The Audit Commission regularly monitors and scores councils’ financial performance. The latest Audit Commission figures from 2008 show that three quarters of councils are performing well or very well on financial management. None of the councils that invested on or after 1 October were rated as inadequate for financial management of internal control in figures published in March 2009.
The Audit Commission should not advise on or second guess specific investments made by councils. However councils would challenge the Audit Commission's reported position that they cannot comment on treasury management strategies and in doing so clarify the ongoing role of audit.