Bank collapse: tighter controls are called for

8:47am Friday 31st October 2008

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Tighter controls over Barnet Council finances are needed after nearly £30 million was sunk into Icelandic banks, say opposition parties.

Barnet is set to lose £27.4m, or £83 per resident, from fixed-term deposits in Glitnir and Landsbanki banks if the British and Icelandic governments fail to agree a bailout plan.

To prevent a similar situation in the future, the council’s cabinet voted last Thursday to upgrade the minimum credit ratings of the institutions in which it can invest.

But Labour group leader Alison Moore said the council needed to do more to oversee deposits and reduce reliance on credit ratings agencies.

“The council hangs an awful lot on those ratings agencies, but in this instance they were found to be wrong.

“For many months these ratings had been qualified in the financial press, so I feel we need a fundamental change in the way investments are carried out.”

Latest reports show 116 authorities invested in Icelandic banks, most of which were dependent on Fitch and Moody’s ratings.

In April, Fitch reduced Glitnir’s long and short-term ratings by one level, but dropped them significantly only on September 30.

Liberal Democrat leader Jack Cohen said the council needed to change its policy of “building its finances around earning interest” after it emerged the money placed in Icelandic banks had been borrowed in 2006 to fund the 2008 Primary Schools Capital Investment Programme (PSCIP).

Because the funds were in fixed-term deposits, withdrawing them early would have incurred costs of ten to 40 per cent of the capital.

Mr Cohen said: “What has emerged from all of this is how dependent the council finances are on earning interest from deposits.

“It seems to be a deliberate policy to make a profit on the money market, but higher rates mean higher risk and such investments must be looked at more carefully in the future.”

Council leader Mike Freer said earmarking borrowing for capital projects was “not the norm”, but was necessary in this case.

“Normally, councils wouldn’t have such a large capital project such as PSCIP, and most councils get a lot more capital from Government,” he said.

“We have to think carefully about how we finance our projects and there was no risk element to these deposits at the time they were made.

“If Labour and the Liberal Democrats were so concerned about them, why didn’t they say something at the time?”

Mr Freer said the council would continue to make medium-term deposits in the future based on credit agency ratings, but welcomed moves by the US Senate to investigate the agencies’ independence.

The leader also stressed the £30m had not been lost and was confident it would be recovered. But he did not discount putting up council tax if it was not.

He added: “There are too many variables at this stage to say one way or another.”