COUNTY COUNCIL
TUESDAY 21 JULY 2009 AT 10.30 a.m. / Agenda Item No:
5 I(iii)(a)
LENDING POLICY UPDATE
Report of the Chief Finance Officer
Author: Nicola Webb (Tel: 01992 555148)
Executive Member: David Lloyd
1. Purpose of the report
1.1 To provide members with the latest monthly update on lending policy and the Council’s deposits as agreed at the October meeting of Cabinet.
1.2 To propose that the lending policy is extended to include certain UK banks and building societies covered by HM Treasury’s credit guarantee scheme.
2. Summary
2.1 The majority of the Council’s deposits are being placed with the government backed Debt Management Account Deposit Facility, earning approximately 0.35%.
2.2 The expected recovery percentage for Landsbanki has been reduced from the range 90-100% to 83%. This percentage is still dependent on achieving preferential creditor status.
2.3 The proposed change to the lending policy to include certain UK banks and building societies, who are part of the government’s credit guarantee scheme, is expected to earn an additional £250k per annum at current interest rates.
2.4 Cabinet is to consider this report on 13 July and the Executive Member will refer to the Cabinet recommendation in his report to this meeting.
3. Recommendations
That the proposed revised lending policy for 2009/10 set out in Appendix B to the report be approved.
4. Background
4.1 At their meeting on 31 March 2009, the County Council approved the treasury management strategy for 2009/10. This is an even more stringent policy than previous years and incorporates the recommendations of Price Waterhouse Coopers and the Audit Commission.
4.2 The £28m previously invested in Icelandic banks remains at risk. Claims have been submitted to the administrators now responsible for these institutions.
5. Current Deposits
5.1 On 23 June 2009, the Council had £211.1m of deposits excluding the Icelandic ones. £165.8m is invested with the DMADF and the remaining £45.3m is with banks and building societies. £35m is with banks or building societies who no longer meet the Council’s counterparty requirements, of which £18m is due to mature by the end of December 2009.
5.2 The Council is earning around 0.35% on new deposits placed at present, as the majority of deposits are being placed with the government backed DMADF. There are currently 15 banks on the lending list and only one UK bank – HSBC. These banks are being used where possible, but many are not willing to accept the size of deposits the Council is able to make.
5.3 In common with the majority of financial institutions, the credit ratings of the Council’s bank, Nat West, are not sufficient for them to be on the list of banks the Council can lend to. However a limit of £1m with them is included in the 2009/10 policy to invest small balances it is uneconomic to invest elsewhere. During June this limit was breached on 3 occasions, due to monies not expected being received too late in the day to be invested elsewhere.
6. Icelandic Deposits & Resultant reviews
6.1 The lawyers acting for local authorities are still pursuing the possibility of local authorities being preferential creditors and it is now expected to be 6-7 months before the outcome is known, as they are anticipating that any decision in authorities’ favour will be appealed against by other creditors.
6.2 The Council had been informed that the expected recovery percentage for Landsbanki would be in the range of 90-100%. 95% was therefore applied to the accounting for these deposits. The latest information is that only 83% is expected to be received if preferential creditor status is achieved. This reduces the expected amount to be recovered from Landsbanki by £1.2m from £9.5m to £8.3m. It is still anticipated that the first repayment instalments will be received from KSF and Heritable in July or August.
6.3 On 11 June, the report of the Select Committee on local authority investments was published. Most of the recommendations were in line with those of the Price Waterhouse Coopers’ report and the Audit Commission’s report. In particular member training and the scrutiny role of Audit Committees in treasury management were highlighted. Appendix A details the recommendations for local authorities, the actions already taken and those that need to be taken to implement them.
7. Lending Policy
7.1 The lending policy was approved by County Council on 31 March 2009 as part of the treasury management strategy. The policy in operation is more stringent in the past and currently allows only 15 banks to be used. As discussed in 5.2 most of the banks on the list are not interested in the size of deposit the Council is able to make.
7.2 The UK government introduced a credit guarantee scheme in October 2008 for UK banks and building societies with substantial business in the UK and who have raised capital in the amount and form the Government considers appropriate.
7.3 This scheme allows institutions in the scheme to access funding outside their normal sources, however it does not guarantee any wholesale deposits, such as the ones the Council would place. The accessibility of these other sources of funding however clearly reduces the risk of depositing with these institutions.
7.4 It is proposed to revise the lending policy to include institutions, which are part of the scheme to the lending list providing their short term, long term and support credit ratings meet the existing policy’s minimum levels. This proposal would ignore the Fitch Individual rating and the Moody’s Financial Strength ratings, as these ratings reflect institutions on a completely standalone basis only, ignoring the benefits of the scheme.
7.5 At the present time, this would add the following banks to the lending list:
Bank of Scotland plcLloyds TSB Bank
Royal Bank of Scotland
Nat West Bank
Barclays Bank
Nationwide Building Society
It is proposed to limit lending to these banks to 3 months at the present time.
7.6 These banks are taking deposits from other local authorities at the levels the Council is likely to be able to place and therefore it is expected they could be used regularly. Access to these banks will enable the Council to earn approximately 0.4% more on bank deposits than it is possible to earn with the DMADF. It is anticipated that bank deposits would be around 30-40% of all deposits and so the additional interest which could be earned in a year would be approximately £250,000.
7.7 The lending policy updated with this proposed revision is attached at Appendix B.
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Appendix A : Select Committee recommendations on Local Authority Investments published 11th June 2009
Recommendation / Actions1 / We conclude that it would be inappropriate to seek to restrict local authorities’ investment options. Although interest rates are now at historically low levels, returns on investments are usually an important source of local authorities’ revenues and investment by local authorities an element in the health of the UK financial sector. The primary consideration of local authority investment, as emphasised by CIPFA, should remain security and liquidity; but yield should not be neglected. The risk involved in seeking yield should be mitigated by robust and responsive Codes, guidelines and best practice. / The Annual Investment Strategy set out the risks involved in investment and that security and liquidity are the primary drivers.
2 / It is obvious from our written evidence, and from the research carried out by the Audit Commission, that there are some local authorities with excellent treasury management services, but there are also local authorities with a less effective service. One of the objectives of the CIPFA Codes and Codes of Practice should be to ensure that all local authorities are aware of the level of expertise which is necessary to run a successful treasury management operation, and have all the checks and balances in place to ensure adequate monitoring, on an ongoing basis, of both the framework within which its treasury management team operates and the individual decisions which are made on a day-to-day basis. / The Price Waterhouse Coopers report recommended changes to procedures in treasury management, the majority of which have been implemented, as reported to Audit Committee in June.
Recommendation / Actions
3 / We recommend that the Government, CIPFA and the LGA study ways in which local authorities, particularly smaller ones, could join together to share expertise and pool treasury management resources. The sharing of information and
expertise, such as identifying banks that are in the same financial group, might have lessened the failures that occurred during the Icelandic crisis. / This will be looked at with the District Councils in Hertfordshire and any other prospective partner organisations.
4 / We endorse the Minister’s suggestion and recommendations by CIPFA and the Audit Commission that all local authorities should have an Audit Committee with specific responsibility for the scrutiny of the treasury management function. Guidance to local authorities to that effect should be given through appropriate amendment to the CIPFA Codes. / The Audit Committee already receives the annual review of treasury activity in June every year. The 2009/10 treasury strategy was reviewed by the Audit Committee before it was agreed by the County Council.
5 / Members of audit committees need to take their responsibilities for that scrutiny seriously and need to ensure that they are properly trained. The CIPFA Treasury Management Code of Practice should make explicit the need for specific training in treasury management to be undertaken by those councillors with responsibility for overseeing treasury management arrangements, and the Audit Committee should be charged with ensuring that it is available and with monitoring its adequacy. / Specific treasury management training is being planned for members involved in the setting of policy as well as scrutiny in this area.
Recommendation / Actions
6 / Guidance from CIPFA notes that it is open to an authority to appoint someone other than an elected member and from outside the authority either to serve on or to chair the audit committee. The co-option of external members to audit
committees in this manner offers an additional opportunity to local authorities to enhance the expertise available to the authority in the scrutiny of its treasury management function, and we encourage all local authorities to consider taking
advantage of it. / This is to be considered by members.
7 / Whether a local authority has an Audit Committee or not, elected members should ensure that they pay proper attention to scrutiny of the Annual Investment Strategy (AIS), and of the decisions which are taken under it. We recommend that CIPFA, in reviewing its Codes, consider what further guidance is necessary to local authorities to ensure that elected members are given—and take—appropriate opportunities to scrutinise their AIS. We also recommend that
CIPFA develop and include in its revised Codes more rigorous requirements for reporting to elected members on decisions taken by officials under the AIS. / The 2009/10 strategy was reviewed by Policy & Resources Cabinet Panel, Cabinet and the Audit Committee before being approved by County Council.
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APPENDIX B : PROPOSED REVISED LENDING POLICY 2009/10
1. Policy for determining which institutions should be on the lending list
The Council will lend to the following types of institutions:
· Debt Management Account Deposit Facility
· Local Authorities defined in section 2 below
· UK Banks & UK Building Societies meeting the credit rating criteria set out below.
· UK Banks & UK Building Societies, who are “Eligible Institutions” in HM Treasury’s Credit Guarantee Scheme and their subsidiaries, who also meet the long term, short term and support credit rating criteria set out below.
· Banks domiciled in other countries or their subsidiaries domiciled in the UK, providing the country has a sovereign rating of at least AAA from each of the three credit rating agencies and the bank meets the credit rating criteria set out below.
· AAA rated Money Market Funds
· The Council’s bank if it does not meet the descriptions of institutions above. To be used for small balances up to £1m which it is uneconomic to invest elsewhere.
No non-specified investments will be made and therefore no non-rated institutions will be on the lending list.
Minimum credit rating criteria for banks and building societies
Fitch / Moody’s / Standard & Poor’sShort term / F1 / P-1 / A-1
Long term / A / A2 / A
Individual/Financial Strength / C / C / N/A
Support / 1 / N/A / N/A
When determining whether the Council should lend to a bank or building society, it must have at least the minimum credit rating shown above from each of the agencies which provides a rating on it. If an agency removes one of the set of ratings it issues for a bank or building society, the institution will be removed from the list.
The only exception is the UK Banks, UK Building Societies and their subsidiaries who are “Eligible Institutions” in the HM Treasury Credit Guarantee Scheme, where this policy specifies that they are not required to meet the minimum shown above for the individual and financial strength ratings. These institutions would not be removed in the event of the individual or financial strength ratings being withdrawn.