Deposits in banks - May 2012 - Your questions
answered
Why does KCC have such large sums of money on deposit?
All organisations have to manage their cashflow to ensure that
there are sufficient funds available to meet payments to staff,
creditors and other payments. KCC’s turnover is £2.3 billion a year
in revenue and about £500 million in capital. At any one time we
have between £150 and £500 million in cash. There are timing
differences between when we receive income such as Government
grants and when we pay the money out. It makes sense to deposit
this money in several banks to avoid the risk of losing everything
if one bank fails.
By law, the council must keep reserves for unforeseen events and
emergencies.
At the time of the financial crisis in September/October 2008
the Pension Fund had unusually high levels of cash because it was
judged that the value of equities would fall. This proved to be a
good financial decision.
Where does KCC place cash?
KCC has a low risk treasury strategy. In 2008 it held cash
deposits with over 30 strongly rated financial institutions,
including 2 Icelandic based banks and 1 Icelandic owned bank based
in the UK.
What happened in September/October 2008?
The world experienced its largest financial crisis for a
century. The world’s banking system was undermined by the exposure
of major financial institutions to the so called sub-prime US
mortgages. For a period banks were no longer prepared to lend to
each other which meant there was insufficient funds for them to
function.
One of the main reasons why UK local authorities had placed
money with the Icelandic banks was because they had no exposure to
the US sub-prime market. What undermined the Icelandic banks was
that the Icelandic Government did not have the funds to step in and
bail out the banks in the same way as the UK Government could.
What is the exposure to Icelandic banks?
Around 120 UK local authorities have £1billion deposited in
Icelandic banks. Many other bodies such as Cambridge and Oxford
Universities, many charities and the Audit Commission itself had
funds in Iceland KCC had £32 million in Icelandic banks, the
Pension Fund £16 million and the Fire Authority £1 million giving a
total of £50 million.
The split of this was:
- Heritable an Icelandic owned but UK based bank - £18
million
- Landsbanki - £17 million
- Glitnir - £15 million
What is the position of the Icelandic banks now?
On 28 October 2011 the Icelandic Supreme Court confirmed the 1
April District Court decision that UK local authority deposits did
count as deposits under Icelandic law and we are therefore priority
creditors. This means we are first in the queue for return of
funds from Iceland.
How much money has been recovered so far?
To date we have received back £33.1 million consisting of:
Has the deposit of cash in Iceland affected KCC’s
services?
No, we are a very large organisation so whilst £33 million,
relating to KCC, is a significant sum of money we have
sufficient financial strength to continue to run our services and
fund the capital programme.
Does KCC have any other cash deposited abroad?
KCC has no cash deposited with overseas banks.