Agenda item

Report of the Interim Director Finance.

The Interim Director Finance introduced the report, which proposed changes to the Counterparty Policy in response to recent revisions to UK Bank credit ratings while continuing to prudently manage the investment portfolio.  She advised the Committee that the proposed change would allow the Council to earn more investment income without exposing the Council to a materially higher risk.

The Interim Director informed Members that the Council’s short term investments were placed with Banks and Buildings Societies selected in accordance with the Creditworthiness Policy set out in the annual Treasury Strategy.  The rate of interest received on short-term investments was low and it was felt that some of the cash balances of £110m held by the Council could earn a better interest rate, if the proposal was agreed.  It would help meet some of the existing gaps in the Council’s budget.

The Chairman welcomed David Whelan, Managing Director of Sector, a leading and independent provider of capital financing, treasury advisory and strategic consulting services to UK public service organisations, to address the meeting.

David Whelan set out the context for the current financial and economic climate and how the dynamics of risks had altered from pure banking risks to quasi governmental risks.  He was of the view that it was important to manage risks effectively whilst maximising income opportunities.

David Whelan advised that with regard to Banks that had been nationalised, such as the RBS Group and Lloyds Bank, the Council could consider going beyond the specified 1-year investment limit to up to 3-years.  He added that since the report was circulated, the situation had altered but the advice given was based on the market view that the Banks were unlikely to return to private ownership in the immediate future.  However, it was likely that the government would eventually want to dispose of its holdings in the Banks.  In so doing the government would need to consider the possible loss to the tax payer of the price paid for the equity shares purchased including the market share price of the two Banks due to the quantity of the shares it had already purchased.  As a result, he was of the view that the government would give advance notice of its intention to dispose of its holdings and he expected any such disposal to take some 3-5 years.  He explained that the rewards for extending the investment for longer periods were potentially good.

Members enquired about the penalties that could be imposed for early withdrawals, the challenges that the Council would face if the government decided to dispose off its holdings, whether the UK Banks were strong enough to take the pressures of the current volatile period in the UK Banking history.  The Chairman asked whether the Bank of England would step in with support in the event of a liquidity issue provided the banking institutions were solvent.

In response, the Interim Director stated that the Banks were fundamental to the UK Banking System and support of the government was therefore virtually guaranteed.  David Whelan stated that he expected a period of subdued economic growth and even if the Banks’ share prices rose, it was unlikely that the government would instigate disposal unless, and until, the Banks were considered stable.  One of the reasons that Banks were not lending long term was because they were not receiving many long term deposits.

The Divisional Director Risk, Audit and Fraud stated that the philosophy of the Council’s Risk Management Strategy was to become less risk averse and   take advantage of opportunities through managed risks but within the Council’s risk appetite.  The proposal before Members was therefore fully in keeping with the overall Risk Management Strategy.

The Interim Director Finance informed Members that the proposal would also help meet gaps in the Council’s budget and difficult choices may need to be made by Cabinet in December.  The proposal before the Committee could help reduce some of the cuts in services that were currently being mooted.  She assured Members that of the £110m cash balance, only some monies would be invested long term thereby ensuring a balanced portfolio.

David Whelen stated that he envisaged that only those Banks that were important to the UK Banking Industry would be supported by the government.  There were also risks associated with the Euro.

The Interim Director Finance suggested some changes to the recommendations, which were supported by the Committee.

Resolved to RECOMMEND:  (to Council)

That

(1)               the revised Counterparty Policy for non-specific investments set out at below be approved, with the maximum maturity period for Term Deposits for Banks and Building Societies being revised to 36 months;

Non – specified Investments (Revised)

Changes to the current counterparty policy are highlighted in [ ].

(2)               the adjusted maximum maturity recommendation for the current Counterparties, based on the Council's treasury advisor and advice from Sector, be adopted as follows:

36 months - RBS and  Lloyds/HBOS

3 months   -   Barclays, Santander UK, Nationwide and Svenska.

(3)               the limits on investment with RBS and  Lloyds/HBOS be increased to 30% for each of the two Groups;

RESOLVED:  That the report be submitted to Cabinet for comment prior to Council approval.