Local Authority Finances (Icelandic Bank Failures)

Communities and Local Government written statement – made on 14th October 2008.

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Photo of Hazel Blears Hazel Blears The Secretary of State for Communities and Local Government, Member, Labour Party National Executive Committee

A number of Icelandic banks went into administration in the middle of last week. It quickly became clear that many local authorities were among those who had deposits in those banks. The Government's first priority has been to do everything we can to help local authorities, along with other creditors, get back the money which they had deposited in the banks. In parallel, my Department has been working closely with the Local Government Association to ensure that individual authorities who are experiencing severe short-term difficulty get assistance to help them through this period. We are doing this to protect individuals, communities and the local services on whom the most vulnerable people in our society depend.

We have put in place a five point plan:

my right hon. Friend the Chancellor of the Exchequer froze the UK assets of Landsbanki last Wednesday, to ensure that local authorities and other creditors are treated fairly; and an HM Treasury delegation was sent to Iceland on Friday to discuss ways in which deposits could be protected; in relation to the banks in administration in the UK—Kaupthing Singer and Friedlander and Heritable—we are working to ensure that deposits are recovered as quickly as possible; and the Local Government Association has opened discussions with the administrators, Ernst and Young; the Local Government Association agreed with the Government last week that it would undertake an urgent analysis of the effects of the situation on individual local authorities, to provide a full picture of the impact on local government. As part of that exercise, which is nearing completion, the LGA have asked any local authority which is facing severe short-term difficulties to let them know as a matter of urgency. My right hon. Friend, the Minister for Local Government and my hon. Friend the Economic Secretary to the Treasury met the Local Government Association last Thursday; and we will be meeting again this week. My hon. Friend the Minister for policing met the Association of Police Authorities on the same day; we have established a joint rapid response unit with the LGA and Improvement and Development Agency - which is already operational—to provide sector-led support to authorities facing severe short-term difficulties. The Government and the LGA will agree an appropriate set of ways to assist authorities in that position; and have agreed that we will look at the issues facing each authority on a case-by-case basis; and the rapid response unit now has a team of experts in local authority financial management and treasury management in place, ready to go immediately into any authorities who need that assistance. Her Majesty's Inspectorate of Constabulary is similarly ready to provide support for police authorities.

Our guidance to local government on investments makes clear that "the general policy objective is that local authorities should invest prudently the surplus funds held on behalf of their communities". It emphasises that "priority should be given to security and liquidity" and goes on to say that "it will be appropriate to seek the highest rate of return consistent with the proper levels of security and liquidity". This guidance appears to have been adhered to.

Many authorities have already publicly stated that any risk is not a threat to frontline services—but a small number of authorities may have specific problems, which is why we have put in place support and expertise which is immediately available. No local authority has told the LGA that it is in such short-term difficulty that it cannot pay the wages of its staff.

The Government and international partners have already acted to support stability of the banking system. The LGA and the Government encourage all councils to continue managing their finances prudently and sensibly in difficult times. My hon. Friend the Minister for policing met the Association of Police Authorities last week and my right hon. Friend the Home Secretary is keeping in close touch with the situation to ensure that the steps we are taking are applied as necessary to police authorities.

We will continue to monitor the situation closely and to take appropriate action.

This set of actions should be seen in the context of the wider action taken last week by my right hon. Friend, the Chancellor of the Exchequer. Acting on the advice of the Bank and the Financial Services Authority, my right hon. Friend the Chancellor of the Exchequer last week took action to protect the retail depositors banking subsidiary of Landsbanki and Kaupthing Singer and Friedlander, a UK-based banking subsidiary of Kaupthing Bank. Using powers under the Banking (Special Provisions) Act 2008, retail deposits in Heritable and Kaupthing, Singer and Friedlander have been transferred to ING Direct. Savers' money is safe and secure. The Chancellor has also guaranteed retail deposits in Icesave in full. The Treasury and the Financial Services Compensation Scheme are working with the Icelandic authorities and their Deposit Insurance Scheme to ensure that depositors in Icesave are paid back as quickly as possible. The Bank of England has also provided a short-term secured loan of up to £100 million to the London branch of Landsbanki, to help ensure an orderly wind-down and maximize the returns to UK creditors. The Government have also frozen the funds and financial assets held by Landsbanki. This is a precautionary measure to protect UK economic interests and we are continuing to work closely with the Icelandic authorities to ensure a fair process for UK creditors.