Supplementary memorandum from the Local
1. The LGA welcomes the opportunity to provide
further evidence. Following the oral evidence session, the LGA
undertook to provide a supplementary memorandum responding to
the Committee's questions.
2. Authorities in England had deposits with
Icelandic banks or their UK subsidiaries made up as follows:
| Number of councils
||Number with Icelandic deposits at risk
| District Councils||238
|Unitary/Metropolitan Councils and London Boroughs
|Other (eg police, transport etc)||80
3. The Committee asked for information on three areas:
(a) To clarify the credit advice provided in 2008.
(b) To indicate the term deposits with Icelandic banks at
the time of their collapse.
(c) To summarise what investigations had been carried out
by authorities into late deposits.
Question 1Credit advice in 2008
4. Local authorities receive credit information about
bank ratings from one or more of the three main credit rating
agencies; Fitch, Standard and Poors or Moodys. Most local authorities
get this information forwarded to them by one of the three main
treasury advisors; Butlers, Sector or Arlingclose. It is unusual
for authorities to subscribe directly to credit rating agencies.
5. The credit information passed to authorities is in
the form of alerts of changes or proposed changes to individual
bank credit ratings. The chronology, as the LGA understands it,
of changes to individual bank ratings is attached as an appendix
to this note.
6. However, as the committee noted, the credit rating
agencies can also produce other information. Some of this is available
to individuals or organisations that register on their website,
other information is only available to paid subscribers. Fitch
produced two reports relating to Iceland:
(a) On 22 April 2008 Fitch produced a "sovereign report"
which was only available to paid subscribers. This report noted
that the country's sovereign debt fundamentals remained strong,
but also pointed to the very highly geared nature of the Icelandic
(b) On 22 May 2008 Fitch produced a "special report".
The LGA contacted the Client Services department of Fitch Ratings
who confirmed that "special reports" are available without
charge to organisations or individuals as long as they register
on their website.
22 MAY 2008
7. The special report's introduction explains that after
the onset of the global financial market turmoil in August 2007,
Iceland faced "a much less favourable investor sentiment".
8. The report notes the weaknesses in the Icelandic economy,
as well as pointing to its strengths. The paper confirms that
Fitch downgraded Glitner and Kaupthing bank ratings from "A"
to "A-" on 9 May 2008 whilst leaving Landsbanki uncharged
9. Local authorities' contracts with at least two of
the three treasury agencies said that they would receive information
about changes to bank ratings. However, it appears that councils
would not have seen this special report unless they went direct
to Fitch and they would not have received the earlier sovereign
report unless they had taken out a paid subscription with Fitch.
10. Crucially, Fitch (and the other agencies) did not
change the bank credit ratings of Icelandic bankswhich
remained at investment grade levels until the end of September
2008. Given that these bank credit ratings remained unchanged,
councils that were mainly relying on these ratings could have
reasonably concluded that the pressures on the Icelandic economy
were not such that there was a risk to security of individual
Question 2The term deposits with Icelandic banks
11. The LGA does not have a complete picture of:
(a) When individual local authority deposits were placed.
(b) The size of those deposits.
(c) How long those deposits were placed for.
12. The LGA is aware of other research in this area by
Channel 4 News. That organisation contacted 102 English
councils and their report summarised information on 87 authorities
CHANNEL 4 NEWS
|Month the last deposit was placed
||Number of councils||
| October 2008||2
|Prior to May 2008||32
(a) Some member councils have reported that they did not renew
their deposits as sums became due.
(b) It is not normal practice to have a fixed term deposit
repaid early, and in practice it is extremely difficult to recover
the money ahead of the repayment date.
(c) At least two authorities in the Channel 4 News survey
placed deposits under a "forward agreements".
14. The available evidence is that authorities were placing
deposits in line with their previously agreed treasury strategies.
Where a bank's credit rating was reduced, which meant it fell
below the minimum ratings for inclusion on a counterparty list,
authorities stopped making deposits with that bank.
Question 3investigations by individual authorities
15. The LGA has called for authorities to carry out their
own investigations if they placed deposits with Icelandic banks
after their ratings were put on rating warning on 30 September
16. The LGA is aware that some local authorities have
commissioned independent investigations even though they deposited
funds before this date.
17. A number of local authorities have made these independent
reports publicreflecting the transparent approach in this
9 March 2009
UK subsidiaries of Icelandic banks
Moody's and S&P did not provide ratings to Heritable
bank, but Fitch awarded them a F1 short term rating.
Kaupthing, Singer and Friedlandler was rated by Fitch but
not by either Moody's or S&P. The short term rating was F1
and the bank achieved an A long-term rating.
Fitch and Moody's rated both Glitnir and Landsbanki Islands
Bank HF. S&P did not provide either a short or long-term rating
Fitch and Moody's gave Landsbanki high short-term
ratings. Fitch did not give Landsbanki an extra "+"
on their F1 rating which most of the 60 overseas banks did secure.
Moody's do not provide this extra analysis and gave all 60 banks
a top (F1) rating.
Fitch gave Landsbanki an A (high quality) long-term
rating, around 20 of the 60 overseas banks had a similar rating,
the others receiving the higher AA (very high quality) assessment.
Moody's gave Lansbanki a Aa3 rating. Aa is described
as "excellent" though the 3 notes it is at the bottom
of this range.
Glitnir had ratings from all three agencies:
Fitch and Moody's gave the bank high short-term
ratings, though again Fitch did not award a F1+ extra rating.
S&P gave a short term rating of A2 (satisfactory).
Glitnir was the only overseas bank they rated at this level. This
rating would be sufficiently low to mean some authorities would
not include them on a counterparty list in February 2008.
Fitch and Moody's rated Glitnir's long-term credit
rating as A (strong) and Aa3 (bottom of excellent) respectively.
How credit ratings changed over the subsequent months
30 January 2008
On 30 January Moody's announced that they were reviewing
the Landsbanki's short and long-term ratings with a view to reducing
28 February 2008
Moody's concluded their deliberations. They held Landsbanki's
short-term credit rating at F1 but reduced long-term credit rating
from Aa3 (the bottom of "excellent") to A2 (the middle
1 April 2008
Fitch's announced they were reviewing Icelandic banks and
gave a negative rating watchin effect warning that short
and long-term ratings on Icelandic banks could be reduced.
9 May 2008
Fitch completed their review and concluded that both Heritable
and Landsbanki's ratings should remain as they were in February
2008. Short-term loan ratings for both banks were F1 (the highest
rating) and long-term ratings were held at A (High Quality) whilst
Glitner and Kaupthing bank ratings were downgraded from "A"
21 May 2008
Moody's affirmed that Landsbanki foreign and UK short and
long-term ratings would remain at the revised levels it had set
in late February 2008.
30 September 2008
Fitch's reduced Lansbanki's long-term ratings from A (high
quality) to BBB (good quality). This would have the effect of
meaning that it fell outside lending limits for typical local
The reduction in short-term credit ratings was significantly
more marked. Landsbanki was previously rated as F1 (highest) was
reduced to F3 (fair).
To put this rating into context; in February 2008 no foreign
or UK bank had a F2 short term rating from Fitch, let alone an
30 September 2008 (contd)
Moody's announce they are reviewing Landsbanki's ratings
with a view to reducing them.
8 October 2008
Moody's reduced Lansbanki long-term rating from A2 (Good)
to Caa1 (the top end of extremely poor). The short-term credit
rating was reduced from the top rating of PI (Superior quality)
to the bottom rated NP (not prime).
The survey included two authorities that reported placing loans
that had been repaid before the banks ceased operating. Back