TUESDAY 24 FEBRUARY 2009 AT 10.30 A.M. / Agenda Item No:
9
VARIATION TO LENDING POLICY
Report from the Cabinet 19 January 2009
(Original report of the Director of Finance, Information and Commercial Services
Author: Nicola Webb Tel: 01992 555148)
Executive Member: David Lloyd
1.Purpose of the report
The Cabinethas taken an urgent decision to vary the Council’s lending policy in light of the current financial climate.
Under the terms of the Constitution (Annex 5) the Executive (Cabinet) must report this to the next available meeting of the Council explaining the decision, the reasons for it, and the grounds of urgency.
2.Summary
There is still no indication of the timing or amount of any payment from the administrators of the Icelandic banks. A local authority representative has been voted onto the creditor committees set up by the administrators for each of the banks.
Price Waterhouse Coopers’ first phase report has been circulated to all members and the recommendations have been implemented.
As the deposit market remains so uncertain at present, the Cabinet has agreed that the limit with the government guaranteed Debt Management Account Deposit Facility (DMADF) be increased from £150m to £200m to facilitate the placing of deposits.
3.Recommendation
That the Cabinet decision to vary the Council’s Lending Policy, along with the reasons for it, and the urgency, be noted.
4.Background
The Council’s exposure to Icelandic deposits, totalling £28m across 4 banks. was reported to Cabinet on 20 October and to Council on 25 November 2008. An internal review showed that the deposits placed with Landsbanki in July and August 2008 totalling £10m were not in accordance with the lending policy in that only 6 of the 7 required criteria were met. As a result Cabinet approved the commissioning of an external review (by Price Waterhouse Coopers).
Separately, atits meeting on 25 November 2008 the Council noted that the Cabinet had approved an increase in the lending limit with the government guaranteed DMADF to £150m.
5.Update on the Council’s Icelandic Deposits
Ernst & Young have been appointed administrators for the 2 UK banks with Icelandic parents – Heritable Bank and Kaupthing, Singer & Friedlander. A local authority representative has been elected to the creditor committees for both banks to ensure local authority views are presented. There is still no indication from the administrators of the timing or amount of any payments to depositors.
Local Authority representatives also have places on the creditor committees for the two Icelandic banks, Landsbanki and Glitnir. Whilst attending the creditor meetings, these representatives also took the opportunity to meet with the Icelandic Financial Services Authority in an attempt to confirm that the local authority deposits are in the “old” Icelandic banks, which are subject to a process similar to administration. Confirmation of this is still awaited. There is no indication about payments at this stage, but it is believed it is likely that it will take longer to receive any monies from these banks than those in the UK.
6.Price Waterhouse Coopers review
The report from Price Waterhouse Coopers has been circulated to all members, and the Policy and Resources Panelon 15 January and Cabinet itself on 19 January have considered it. Action has been taken to implement all the recommendations contained in the report.
Price Waterhouse Coopers are now working on their second phase work to review treasury policies andthe results of this were expected by the end of January, so that any recommendations could be reflected in next year’s treasury strategy.
7.Current Deposits
On 7January 2009, the Council had £338.9m of deposits excluding the Icelandic ones. £105.5m is in fixed deals with UK banks, building societies and foreign banks and £81.5m is deposited in instant access accounts with UK banks and AAA rated money market funds. £25.2m was invested with other local authorities and the remaining £126.7m was invested with the DMADF.
The rates payable on the instant access accounts are related to base rate and they are paying approximately 2.2% at the time the original report was written. This however is likely to reduce as the Bank of England is expected to reduce base rate further. Money market funds are paying above market rates at around 4% due to having investments placed when rates were higher. These rates are falling as investments within the funds mature and are replaced with ones with lower rates. The DMADF are paying around 1% for deposits at the time of writing. This is approximately 3% lower than that achieved in money market funds and around 0.75% lower than investing on the market overnight. The difference between market overnight rates and the DMADF amounts to £2,600 a day on the £127m that is currently placed there. The Council is also doing some lending to other local authorities who are paying slightly better rates (around 0.3%) than the DMADF. The lower rates being earned at present have been reflected in the revenue monitor and medium term forecasts.
The credit ratings of banks and building societies are continuing to change on a daily basis and so the list of banks meeting the Council’s policy is continually reducing. Therefore the situation remains very uncertain. As a result Cabinet has agreed that the majority of maturing deposits are placed with the DMADF, which is guaranteed by government. In order to facilitate this for the remainder of the financial year, Cabinet has agreed to increase the limit with the DMADF from £150m to £200m. The Council is invited to note this.
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