Memorandum from the Local
Government Association (LGA) (DAR 03)
Local Government investment with Icelandic banks
and their UK
licensed banking subsidiaries
1. The purpose of this memorandum is to provide
information about the extent of local government investment with Icelandic
banks and their UK licensed banking subsidiaries, and to report on the way in
which the Local Government Association's member councils are addressing the
issues arising from the receivership or administration of those banks.
2. This memorandum has been prepared by the
Local Government Association (LGA). The
LGA is a cross-party association. The
466 authorities in membership cover every part of England and Wales. Together
they represent over 50 million people and spend around £113 billion a year on
local services. They include county councils, metropolitan district councils,
English unitary authorities, London boroughs, shire district councils and Welsh
unitary authorities, along with fire authorities, police authorities, national
park authorities and passenger transport authorities. The Welsh Local
Government Association (WLGA) is a constituent part of the LGA, but retains
full autonomy in dealing with Welsh affairs.
3. The LGA notes that the Committee has launched
an inquiry into the general principles involved in
local authorities' Treasury Management, and looks forward to contributing
evidence to that Inquiry in due course.
The
Icelandic banks and their UK
licensed banking subsidiaries
4. There are four banks with which local
authorities made deposits that are either Icelandic companies or UK
subsidiaries of Icelandic companies.
These are, for convenience, referred to in the remainder of this
memorandum as 'the Icelandic banks'.
5. The four are:
· Landsbanki Islands hf, a public limited company incorporated
under the law of Iceland
(Landsbanki)
· Glitnir Bank (Glitnir), an
Icelandic Bank whose parent company is in receivership in Iceland
· Heritable Bank plc
(Heritable), a UK
subsidiary of an Icelandic group.
Heritable is in administration under UK law.
· Kaupthing Singer &
Friedlander Ltd (KSF), a UK
subsidiary of an Icelandic group. KSF is
in administration under UK
law.
6. Landsbanki and Glitnir are in Icelandic
receivership, whereas Heritable and KSF are in UK administration.
Local
government investment in the Icelandic banks
7. Following announcements made by the Icelandic
authorities in the early part of October, and by HM Treasury on 8 October, the
LGA began to gather information about the extent of local authorities' deposits
with the Icelandic banks. On 9 October,
following a meeting between the LGA, the Minister of State for Local Government
and the Economic Secretary to the Treasury, the information gathering process
was accelerated.
8. As a result, the LGA was able to announce on
Friday 17 October that it had reports that 123 authorities had deposited
£919.6m in the Icelandic banks. Of these
123 authorities where details were known, 104 were English Councils or English
Fire and Rescue Authorities. The LGA
published with its announcement a list of those 104 English Councils and Fire
and Rescue Authorities, giving information about the total Icelandic deposits
made by each authority. The list is
published at http://www.lga.gov.uk/lga/aio/1135431.
9. The LGA's analysis of the information
received from all local government sources to date shows that the deposits are
split across the four banks as follows:
Landsbanki £347m
Glitnir £208m
Heritable £284m
KSF £ 82m
10. The LGA has also analysed how much money has
been deposited by each type of English local authority within its membership:
Shire Counties £274m
Shire Districts £229m
London
Boroughs £148m
Unitary authorities £106m
Metropolitan
districts £ 32m
Fire and rescue
authorities £ 1.4m
11. There are, in addition to these amounts,
deposits by other types of authority such as Police authorities and Welsh local
authorities. Such amounts of those
deposits as have been reported to the LGA are included in the £919.6m total
mentioned above. But these authorities
are not in individual membership of the LGA.
Local
Government investment - wider context
12. Local Government is responsible for handling
very substantial amounts of public money.
Local Councils that are 'billing authorities' (District Councils, London
Boroughs and Unitary authorities) collect council tax, for which the estimated
2008-09 requirement across England was £24.8 bn[1]. These authorities also collect the national
non-domestic rate (NNDR). The proceeds
of NNDR are paid over to HM Treasury under arrangements laid down in the Local
Government Finance Acts. In the
Chancellor's Financial Statement and Budget Report 2008, the projected receipts
from NNDR in 2008-09 are £23.7 bn[2].
13. In addition, local authorities have over the
years accumulated reserves, both as part of prudent management of their day to
day operations and through events such as asset sales (in particular, sales of
council housing). Often, it is cash
rather than physical assets that backs these reserves, and that cash has to be
invested. The estimated earmarked and
unallocated financial reserves (excluding schools) of English local authorities
as at 1 April 2008 amounted to £9.8 bn[3].
14. The latest available figures for local
government's short-term investments show that, as at 31 March 2007, English
local authorities held short-term investments amounting to £21.7 bn[4]. It is estimated that, in 2008-09, interest
and other investment income from external sources, will amount to £1.26 bn for
English local authorities[5]. This income is available to support the
general operations of local authorities and, through the effective management
of it, councils may be able to enhance the services they deliver to local
people, reduce the council tax burden, or both.
15. Local authority investments are made and
managed in accordance with the law and taking account of statutory guidance
issued by the Government. The relevant
guidance was issued by the Office of the Deputy Prime Minister in 2004 and can
be accessed at http://www.local.odpm.gov.uk/finance/capital/data/lginvest2.pdf.
Action
taken following the receivership or administration of the Icelandic banks
16. The first immediate impact of the receivership
or administration of the Icelandic banks is that councils have no certainty
that they will receive any interest on monies deposited. An estimate of interest to be received will
have been included in a council's 2008-09 budget. Therefore, councils have been reviewing the
impact in the course of their regular monitoring of the trend of actual income
and expenditure against originally budgeted amounts.
17. Any significant adverse variance between actual
and budgeted income may require revisions to current year plans. It should be borne in mind, though, that:
· Any loss of interest,
though significant, will generally be small compared to the council's budgeted
expenditure.
· Any loss of interest will
also usually be small compared to the level of general unearmarked reserves
that the council maintains.
· It is normal for a council
to expect to use reserves to cover minor variances between budgeted and actual
income and expenditure.
18. Therefore, in the majority of cases, the
immediate impact of potential loss of interest on a council's day to day
operations will be relatively small and containable.
19. A second immediate impact of the Icelandic
banks issues arises in cases where deposits were due to mature between 8
October and the end of the financial year.
Where deposits were intended on maturity to be deployed to meet
expenditure, councils have had to adjust their plans.
20. Here, it should be noted that the overwhelming
majority of monies local authorities deposited with Icelandic banks were for
fixed, and generally short, periods of time.
Diversity of maturities of deposits, as well as diversity of
institutions with which the deposits were placed, is a feature of councils'
treasury management strategies. And, as
well as having money on term deposits, councils also keep money on deposit that
can be called back immediately.
21. For these reasons, councils have been able to
manage the immediate cash-flow impact of non-return of their deposits with
Icelandic banks by replanning the short-term management of their other investments
or, in some cases, taking out short-term borrowing within the normal prudential
limits.
22. Accordingly, many local authorities have
already publicly stated that any risk is not a threat to frontline
services. As was noted in the joint
statement issued by the LGA and the Government on 15 October, 13 councils had
indicated, in responding to the LGA's request for information, that they might
face short term difficulties. However,
following further assessment of their own positions, in some cases assisted by
external financial experts recruited by the LGA and the Improvement &
Development Agency, it is now clear that all local authorities have been able
to take appropriate action to ensure that current commitments such as the
payment of wages and the delivery of front line services will continue to be
met. The LGA recognizes the interest in
the identity of these authorities that has been expressed in Parliamentary
debate. But the LGA does not intend to
name the authorities concerned, other than to acknowledge that three of them
have already been identified. We know
that most councils have made, and will continue to make, their position clear
locally. We do not think a national focus
would be helpful.
23. Councils have also begun to plan for the
management of medium and longer-term impacts arising from the non-return of
deposits placed with Icelandic banks. In
some cases, maturing deposits would have been held to fund ongoing or planned
future capital programmes. In such
instances, replanning of the capital programme will have been necessary.
24. In other cases the council's financial strategy
has been to retain a relatively high level of invested funds and to deploy
income from those funds as a significant constituent of the annual budget. Here, considerable thought is already being
given to the way in which budgets for 2009-10 and subsequent years will need to
be adjusted to accommodate shortfalls in interest receipts, should monies
deposited with Icelandic banks not be restored in full.
25. It is not currently possible to make any valid
estimate of what proportion of monies deposited with Icelandic banks may
eventually be lost. None of the
receivers or administrators of the four banks has as yet issued any statement
as to the likely amount of monies eventually recoverable for creditors. In the cases of Heritable and KSF, the UK
administrators have agreed with the LGA that they will provide estimated
outcomes which local authorities could use (if they see fit), in planning their
budgets, by mid-November. It has not
been possible to obtain similar assurances from the Icelandic receivers of
Landsbanki and Glitnir. Nor do the
guarantees the Government has provided to retail depositors in the Icelandic
banks apply to local authorities.
26. For these reasons, the medium and longer-term
impact on local authorities of the failure of the Icelandic banks cannot yet be
assessed with any certainty. What is
clear is that local authorities have done all that is possible to ensure that
the immediate short-term consequences have been managed effectively, for the
benefit of local residents and businesses.
27. The LGA is continuing to discuss with
Government what further support should be offered to local authorities in the
light of this wholly exceptional situation.
The LGA believes that a range of measures, including specific forms of
financial support, is appropriate, and will continue to make the case for this
over the coming weeks.
October
2008
[1] Source: CIPFA Finance and General Statistics 2008-09,
page A14
[2] Source: FSBR 2008, Chapter C, Table C6
[3] Source: CIPFA Finance and General Statistics 2008-09,
page A14
[4] Source: CIPFA Local Authority Assets Statistics 2007,
page 5
[5] Source: CIPFA Finance and General Statistics 2008-09,
General Revenue Account line 786
