Banking Crisis - Treasury Contents


Supplementary memorandum from the Local Government Association

  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.

BACKGROUND

  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 Councils238 61
County Councils3415
Unitary/Metropolitan Councils and London Boroughs 11628
Other (eg police, transport etc)80 20


  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 1—Credit 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 economy.

    (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.

FITCH "SPECIAL REPORT" OF 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 at "A".

  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 banks—which 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 bank deposits.

Question 2—The 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 as below.

CHANNEL 4 NEWS SURVEY
Month the last deposit was placed Number of councils
October 20082
September 200827
August 20089
July 20088
June 20082
May 20085
Prior to May 200832[188]


  13.  Moreover:

    (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 3—investigations 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 2008.

  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 public—reflecting the transparent approach in this area.

9 March 2009


APPENDIX

CREDIT RATINGS

CREDIT RATINGS AT FEBRUARY 2008

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.

Icelandic banks

  Fitch and Moody's rated both Glitnir and Landsbanki Islands Bank HF. S&P did not provide either a short or long-term rating on Landbanski.

    —  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 them.

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 of "good").

1 April 2008

  Fitch's announced they were reviewing Icelandic banks and gave a negative rating watch—in 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" to "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 authorities.

  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 F3.

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).







188  
The survey included two authorities that reported placing loans that had been repaid before the banks ceased operating. Back


 
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