Councils warned over bank deposits

Councils must avoid assuming that holding cash in bank accounts is a risk-free option, according to speakers at this year’s Local Authority Treasurers’ Investment Forum.
A panel session on councils’ relationship with the banking sector heard that another banking crisis could not be ruled out that could see investors suffer losses on their investments.
Robin Cresswell, managing principal at investment manager Payden & Rygel, said that bail-in regulations being adopted by the Europe made it more likely that council investments would suffer in the event of a future banking crisis.
He told delegates at London Stock Exchange: “The EU is handing new powers to central banks. They look at banks’ balance sheets and determine that depositors will suffer to ensure an orderly resolution.
“The next crisis might not be a systematic failure – individual banks can get into trouble – and you might face haircuts on your deposits.”
Stressing the importance of diversification, he encouraged councils to examine different instruments to hold short-term cash balances.
He said: “The thing that puzzles me is that you can buy today a whole string of (short) high quality corporate bonds. In aggregate and individually these are more highly rated than banks are.
“We know a lot of local authorities understand the issues and are putting money into short duration bonds.”
Corinne Lewis-Reynier, head of product strategy, European cash management at asset manager Blackrock, said: “Diversifying from a single bank exposure is essential. Putting all your eggs in one basket doesn’t make sense.”
In addition, she said, the new bail-in rules would result in further downgrades in the credit ratings given to banks, despite their attempts to build up the amount of capital they hold.
She said: “There will be some offsets and continue to progress in the right direction. But that won’t be enough to stop the slide, or sustain them in the right credit rating categories.”
Cresswell said that many councils which considered themselves in in “cosy relationships” with banks need to examine whether they are actually getting any benefits from these arrangements.
He said that challenger banks could provide a better bet for many because they already use modern technology and do not face costs which established banks might face in updating their outdated IT systems.
Bhupinder Chana, capital & treasury manager at Leeds City Council, said that councils had to assess products and understand not just the risks, but why banks are offering particular rates.
“We are not looking for game changing returns because we are guardians of public money. If we don’t understand a product then we walk away.”
During a separate conference session on money market funds (MMFs), Dom Piper, managing director of global liquidity of JP Morgan Asset Management said that councils need not worry about impending regulation from the European Commission.
The European Parliament’s economic and monetary affairs committee is considering restrictions which could spell an end to constant net asset value MMFs.
In July, the US Security and Exchange Commission ruled that institutions must shift their CNAV investments into variable net asset value standards.
Piper said: “When a decision is made in Europe  – as early as this year – there will be a wide window for that change to be implemented and the market will have time to adjust.”
During a further session at the conference, Richard Enderby from the Department for Communities and Local Government local government finance team said that central government was unlikely to revisit guidance requiring councils to put security before yield and liquidity in choosing investments.
He said: “It would be hard for anyone to get the appetite for a review until there is a problem. There was an issue last year as to whether it should be adapted with the rise of challenger banks. But I don’t think there will be any appetite unless there is an external incident.”