Memorandum from London Councils (LAI 28)

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 2006/7 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.

 

December 2008