Memorandum by London Councils (LAI 28)
POSITION ON
CASH DEPOSITS
London Councils is the representative body for
all 33 London local authorities. We have been working with the
LGA to help support councils and other public bodies affected
by the recent failure of Icelandic banks. London Councils has
established an agreed position on cash deposits which reflects
the views of all 33 authorities in the London region. This position
addresses issues arising from the Icelandic bank failures, and
considers the safeguards necessary to ensure that councils can
continue to invest prudently in the post October financial environment.
(1) London Councils believes that the Government
needs to work with local authorities to find solutions which support
the best outcomes for local communities
Given the extraordinary nature of recent events
in the banking world which have resulted in deposits from the
public sector being "at risk", London Councils believes
the Government needs to provide a commitment to support councils
and other parts of the public sector in recovering public funds.
This would help promote greater confidence in the public sector
as a whole, particularly as the Government has failed to provide
little tangible support to councils with deposits in Icelandic
banks.
Government departments need to (i) demonstrate
a willingness to understand that they have a role in helping councils
and other public bodies recover funds and mitigate cash flow problems;
and (ii) work collaboratively with councils to find solutions
which help ensure vital initiatives for local communities are
not compromised by the financial uncertainties which the recent
banking failures have created.
Investment has a recognised role to play in
generating additional income to help cover service costs and to
keep council tax levels within acceptable parameters. The uncertainties
created by the current turbulent financial climate could result
in a significant movement of local authority cash deposits away
from banks and building societies into government securities.
This may have a detrimental impact on both the banking system
and councils' revenue budgets.
HM Treasury needs to consider whether this a
consequence it is willing to accept, both in terms of the volatility
it may create in the banking/building society sectors, and the
knock on effect on council budgets which will need to be addressed
as part of the forthcoming spending review.
The changing nature of banking has forced authorities
to revise and develop new investment strategies. London Councils
is committed to exploring a range of options which will provide
authorities with the scope and flexibility they need to continue
to manage investment portfolios prudently. As part of this work,
London Councils will explore the feasibility and legality of groups
of authorities pooling deposits.
(2) London Councils believes the Government should
safeguard local authority deposits with building societies in
the UK
The changing financial outlook has meant that
many local authorities have reported less scope to spread their
investments. A large number of councils have deposits with smaller
building societies.
While London Councils recognises that local
authority deposits with banks are not guaranteed, the future for
many banks is more secure following the financial support provided
by the Government in recent weeks. The future for many small building
societies is significantly less secure and presents a greater
risk to depositors.
The Government needs to acknowledge that local
authority deposits are a key source of liquidity and a lifeline
for many small building societies, yet there are no safeguards
for councils using these institutions. We believe that the Government
has a duty to safeguard all local authority deposits with building
societies in the UK.
In 2006-07 local authorities in England deposited
£6.360 billion with building societies. London authorities
deposited £1.545 billion (Capital expenditure and treasury
management statistics 2006-07 CIPFA).
(3) London Councils asks the Government to work
with other parts of the public sector to consider the "best"
way forward for Heritable
Our understanding is that over 90% of the liabilities
of Heritable Bank are now with the public sector (as a consequence
of the number of deposits held by local authorities, public bodies
and charities and the move by HM Treasury to take over retail
deposits). The Treasury is therefore in a strong position to steer
the most appropriate way forward to help protect public funds.
Given the large number of public bodies with
retail deposits in Heritable, HMT should consider whether it would
be more expedient for it to take over and refund all deposits,
or transfer all of the banks assets and liabilities to the control
of another UK bank rather than seeking a heavily discounted sale
of the assets on the open market. As and when deposits then mature,
councils and other public bodies would be free to reinvest the
cash into the wholesale interbank market to further improve its
liquidity and reduce the risk of additional problems.
(4) London Councils believes the Government should
provide a general commitment to capitalisation where councils
feel this is appropriate for "at risk" deposits
On 27 October, John Healey announced that he
would look at the prospect of capitalisation on a case by case
basis. London Councils feels this does not go far enough. We believe
that the Government should be doing more by providing a general
commitment to capitalisation against both capital receipts and/or
other assets for councils with deposits "at risk". This
would provide much needed flexibility to finance local initiatives
and local improvements.
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