Councils face higher costs for short-term banking

Local authorities could face higher charges for holding short-term cash deposits, forcing them to seek alternatives, according to the man in charge of the company trying to launch a collective local government bond.

Speaking at the Local Government Conference in Harrogate last week, Local Capital Finance Company chief executive Aidan Brady said councils need to start looking at longer-term investments for cash that is not needed within twelve months.

He said that councils are currently missing out on millions of pounds worth of potential interest by holding a total of £40bn in short term liquid assets earning less than half a per cent in interest.

“The rate for deposits has reduced dramatically,” he said. “It isn’t just that central bank rates are low but because banks don’t want your cash. I don’t think they want deposits.

“UK corporates have about a trillion in cash, and retail and institutional investors have another couple of trillion. There is a lot of cash out there.

“Now banks are facing new leverage capital rules they are in a situation where they  need to think about shrinking their balance sheets and don’t want very low margin business like deposit taking.”

He said that the UK had so far been lucky because, unlike on the continent, depositors have so far not been charged by banks for holding their deposits.

“There is a risk that you might one day find there isn’t a bank that wants to take your money. This has happened in the corporate space in some countries where banks have charged punitive feees to get people to move deposits.”

He said that councils should be buying longer dated assets such as gilts to reduce their reliance on bank deposits.

He said: “What amazes me though is that local authorities which have very predicable cash flows don’t try to match their investments with their cash flow profiles more closely.”

Some authorities, he said, have paid back loans from the Public Works Loan Board with punitive repayment fees
“rather than buying gilts which could have the same effect but been cheaper”.

“When I have asked why, authorities have told me they are cautious investors and want a conservative approach,” Brady said.

“Personally I don’t see this as prudent or conservative. To me, this is the equivalent of burning cash on the street. Why place cash you know you won’t need in the short term in short-term deposits when you have very secure longer term options available like gilts?”