24 October 2008
By Paul Dicken and Tash Shifrin
Public sector investors should look beyond credit ratings and ensure they are in dialogue with banking institutions to minimise the risks around deposits, the Financial Services Authority has said.
Speaking at the CIPFA local government treasury management conference on October 22, David Bailey, manager of the capital markets sector at the FSA, said credit rating agencies provided 'valuable information about investment opportunities'.
However, he added that agencies provided only an 'opinion on credit risk' and the agencies had 'admitted very publicly that their performance in rating certain instruments, mainly structured financing instruments over the past few years, has exposed limitations in their approach'.
Bailey said work was under way with the agencies and other regulators to see what could be done, but international action was needed as credit rating agencies operated globally.
Delegates at the conference raised concerns about confidence in British banks and over the access that small investors had to highly rated institutions.
Bailey said it was important that organisations 'ask their own questions that relate to their own risk management and their own business'. He said the FSA would consider ways to help organisations to diversify deposits.
Neil Parker, an economist at the part-nationalised Royal Bank of Scotland, warned that investors should look beyond credit ratings and at the balance sheet of institutions and capital ratios. 'Ultimately I don't think there is any silver bullet to fully make you confident of all the facts because you are trying to hit a moving target,' he warned.
The three councils where financial experts were sent in to tackle problems caused by the collapse of Iceland's banks have questioned why they were 'singled out' when they had not requested such help.
A total of 123 councils are now understood to have £919.6m locked up in Icelandic banks.
On October 15, local government minister John Healey told Parliament that 13 councils were facing short-term difficulties and announced financial experts would be sent in to help them. But the three authorities – Tamworth, Uttlesford and Wyre Forest district councils – said they had not requested such help.
Wyre Forest leader John Campion told Public Finance his council could pay wages and bills and did not face any short-term problems.
'Local government has been reorganising its budgets from time immemorial. The expertise we need is to help get the money back from Iceland,' he said, describing the move as 'another indication that the government doesn't quite understand what councils want'.
Tamworth council was also taken by surprise by the intervention. 'The council confirms it has no major immediate financial problems and is at a loss to understand why it has been singled out for such “support”,' it said.
The Department for Communities and Local Government said: 'The three councils were identified following self-notification by the councils themselves and following discussion with the LGA. It is not correct to say that they were just picked out by the government.'
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