Concentration risk in Scottish treasury investment ‘worrying’

Scottish council investments are dangerously concentrated in two banks, according to a stark warning by treasury advisor, Arlingclose.
Speaking at the CIPFA Scottish Treasury Management Forum in Dunblane last week, senior staff from the firm told delegates that councils north of the border need to diversify more to protect themselves against potential future banking crises and bail-in risk.
Figures collated by the Forum reveal that out of £1.32 billion deposited by Scottish councils with banks in December 2013, £681 million, or 51 per cent, is placed with Royal Bank of Scotland and Bank of Scotland. This is up from 48 per cent in 2012.
Mark Pickering, director at Arlingclose, told delegates: “It is very important that you seek to diversify more. The current concentration is worrying.”
He warned delegates that moves by the UK Government and European Union would prevent taxpayers’ money being used to bail out failing banks in future.
A European “bail-in directive” due to be introduced in January 2016 will ensure taxpayers will be last in line to bail out struggling banks and that creditors, according to a pre-defined hierarchy, will forfeit some or all of their holdings first.
The UK government’s bail-in amendments to the Financial Services (Banking Reform) Bill will implement arrangements for the UK in line with the European directive.
Pickering said: “If you are thinking RBS is too big to fail, then you need to think again. You are really on your own now.”
Fellow Arlingclose director Mark Horsfield told the conference that councils needed to consider other low-risk investment options, such as gilts and money market funds.
He added that covered bonds will be excluded from the new bail-in rules and that, “investing in covered bonds is a pretty sure fire way of getting round the risk of bail-in.”
Figures seen by Room151 show that in December 2013, Scottish councils had £446 million invested with Bank of Scotland and £235 million with RBS. Deposits with the next highest, Clydesdale Bank, were just £52 million.
One Scottish treasury manager at the conference told Room 151: “From our own perspective we try to diversify as much as possible. We have limits on the amount we can put in one bank. It was quite surprising to see that some authorities had investments of up to 80 per cent in these two banks.”