Deposits in Icelandic banks - April 2011 -
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.

Governments provided huge financial support to the banks. In the UK alone support to banks totals £547bn and the Government also took major share holdings in Royal Bank of Scotland and Lloyds Group.

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?

Heritable is in administration in the UK with Ernst & Young the appointed administrator.

Heritable was a viable bank which was forced to cease trading by the Financial Services Authority when its parent Landsbanki became insolvent. The forecast recovery is 79-85%. Landsbanki and Glitnir are being managed through processes in Iceland under Icelandic law.

UK local authorities are represented on the Informal Creditor Committees which monitor the activities of the Resolution Committees who now run the banks. Both Landsbanki and Glitnir have very substantial assets, mainly outside Iceland and they are increasing in value so there is a good prospect of recovery. Under Icelandic law depositors are preferred creditors and they should receive a full payout before any other creditors are paid. If preferred creditor status holds in Iceland we are forecast to make a 86% recovery on Landsbanki and 100% on Glitnir.

Other creditors challenged the preferred creditor status and we were involved in litigation in Iceland. The Icelandic courts ruled in our favour on 1 April 2011 but this may be subject to appeal.

The legal procedures should all be resolved in 2011.

Won’t all the money be eaten up in lawyer’s fees?

The UK’s local authorities have joined together to share and minimise the legal costs of recovering our deposits. These costs are tightly controlled.

How much money has been recovered so far?

We have had 7 dividend payments from Heritable totalling £10.28m. We expect to continue to receive dividend payments quarterly throughout 2011 when the recovery process will be substantially complete.

Will all the money be recovered?

This is unlikely but we do expect to recover over 90% with preferred creditor status.

Has the deposit of cash in Iceland affected KCC’s services?

No, we are a very large organisation so whilst £32 million 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?

Yes, we have 1 pre September 2008 deposit in Belgium in a government backed bank but we have stopped using banks in Ireland. New cash is placed with UK banks or the Government Debt Management Office as recommended by our treasury advisers and agreed by KCC members.