Councils play safe over savings after Icelandic bank crash
Stoke-on-Trent City Council has tightened its investment regulations in the wake of last year's Icelandic bank collapse.
The city lost £5 million it had invested with Landsbanki, although most of the money is now expected to be repaid.
The council, which has about £70 million to invest at any one time, has ruled out overseas banking and will only trust UK finance firms which have a spotless triple-A credit score.
Other curbs include limiting the amount of cash which can be deposited with banks belonging to the same finance group.
But the cautious approach means the council's income from investments will be hit even harder than expected this year, leading to a shortfall of millions of pounds.
Councils routinely invest money that they do not immediately need to spend on services or projects in order to boost their income.
Funding such as Government grants can often earn thousands of pounds in extra income if they are invested for a few days or weeks instead of left in the council's bank account.
The dwindling number of safe banking opportunities has prompted the council's director of central services, Paul Simpson, to raise the limit for investments in the Debt Management Office, which manages the Government's borrowing and lending activities.
The council's DMO investment limit, which was recently raised from £15 million to £25 million, has now been removed completely.
Cabinet member for resources, Councillor Kieran Clarke, pictured below, admitted that the safeguards will have a serious impact on the council's income.
But he said that it could not afford to risk public money on higher-interest investments.
He said: "We are basically lending our money to the Government because that is the safest place at the moment.
"The interest we get is terrible, but we are guaranteed to get our money back.
"If we have £50 million pounds hanging around for a few weeks then it makes sense to invest it somewhere, but some of the banks and building societies are not seen as safe opportunities at the moment."
He added: "Because we are being cautious, our income from investments is probably going to be even worse than the £2 million shortfall we were expecting this year."
A report published this week shows that the authority now has almost half of all its investment funds, £34.2 million, invested with the DMO.
But the cash is earning just 0.3 per cent in interest, compared to up to 1.5 per cent being offered by some banks and building societies.
A report to next week's audit committee meeting on the investment situation said: "Members should be aware that investment returns will be lower; with lower risk comes lower interest rates."
Local Government Association vice-chairman Richard Kemp said: "It is in everyone's interests that councils continue to invest and do so prudently."
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