• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • John Turnbull elected president of the SLT

    May 12, 2022

  • Pension pool identifies biodiversity as a priority

    May 11, 2022

  • TfL latest to face credit-rating downgrade by Moody’s

    May 10, 2022

  • Government proposes ‘fairer, more accurate’ business rates system

    May 10, 2022

  • Queen’s Speech confirms planning reforms

    May 10, 2022

  • 18,000 affordable houses lost through ‘permitted development’

    May 9, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

Danny Mather: How Warrington council invested in a brand new bank

0
  • by Guest
  • in Blogs · Treasury
  • — 12 Apr, 2017

Photo: Pixabay

Warrington Borough Council has taken a 33% stake in Redwood Bank, a challenger bank that this week received its licence to operate from regulators. Danny Mather describes the rationale for this innovative initiative and the rigorous due diligence and risk mitigation the council has undertaken.

A principle, and very real, outcome of the economic situation since 2008 has been the reduction in the amount of money made available for lending purposes to individuals and to small businesses by the traditional mainstream banks.

This is of significant concern to local authorities, evident by the number of councils who now lend directly to the business sector and, according to a report by the New Local Government Network, over 70% of council leaders are now interested in playing a bigger role in banking for the benefit of local communities and residents.

It is also evident that the proposed development of a bank by the council has anticipated emerging government and opposition party policy, as well as growing recognition of the vital need to re-establish a local banking which understands and responds to local needs, and is accountable locally. This has been a key lesson learned during the recent banking crisis. This view has been given even greater credence following the publication of the final report of the parliamentary commission on banking standards in June 2013 Changing Banking for Good.

The main reason Warrington has invested in this new bank is to increase SME lending in the borough and nationally. This follows a policy directive by members in 2013 and the results of a local business survey carried out in 2013.

Diligence

The council carried out a thorough due diligence exercise before making its investment in the bank. This followed a full appraisal being made of various alternative options to deliver a lending model. The banking option was considered to be the best and was chosen for the following main reasons:

  1. Strong governance structure.
  2. Incorporates strong banking / lending management and board experience as well as expertise the council did not have.
  3. Risk averse secured property lending model.
  4. Commercial approach.
  5. Maximises potential lending available with funding raised from SME deposits.
  6. Attractive investment return for the council that can be used for investing in front line services.

A full due diligence exercise has been carried out by council officers.  The new bank’s regulatory business plan has been stringently reviewed by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA), as part of the process of granting a banking licence.

In addition, the council has had the business plan independently reviewed by a Big Four accountancy firm and the council’s external auditors. Legal advice has also been sought from both a firm of solicitors and a leading QC.

A full risk and sensitivity analysis was carried out and incorporated in the bank’s business plan.  These risks and sensitivities have also been scrutinised in detail by the PRA and the FCA. The key risks and mitigations associated with a bank of this nature are:

  1. Failure of businesses to repay loans: all loans will be fully secured.
  2. Governance: the bank’s governance structure will be approved and then monitored by the PRA on an ongoing basis.
  3. The economy goes into recession: relatively low risk appetite of the bank and this scenario included in the sensitivity analysis within the business plan.
  4. Competition: assessed within the business plan. The bank’s planned volumes will be small. The bank will be flexible and able to react quickly to changing market conditions
  5. IT system failures or cyber attacks: modern systems will be purchased that will incorporate the most modern technology, which do not have the legacy system problems of the current big banks.
  6. Loss of the council’s capital investment due to poor performance: the bank’s performance against its business plan will be closely monitored. The council’s investment is not all upfront, but instead is being staggered over three years to ensure the risk is mitigated.
  7. The council could face a challenge from: a member of the public, auditor, European Union (over state aid) or judicial review. Extensive consultation has taken place in respect of the council’s investment in the bank. Professional accounting advice was obtained and an independent review of the business plan has been carried out by a Big Four accounting firm. Legal advice, covering state aid, has also been obtained from a firm of solicitors and a leading QC. The council’s auditors have been fully briefed on the bank project and have been supplied with all key documentation.
  8. Reputational risk to the council of the bank failing: the bank’s business plan is prudent and has been subject to significant stress testing. The bank is subject to a stringent and transparent governance structure.

The bank will now go through “mobilisation” and is due to be open for business during the summer of 2017. This model offers similar opportunities to all councils to introduce and promote SME lending in their own regions.

Over time the bank could be added to councils’ investment counterparty lists, creating a truly integrated local authority / private sector lending model. This would drive both local and national SME growth and economic prosperity. This is a unique public-private partnership that heralds a return to community banking in the UK.

Danny Mather is corporate manager at Warrington Borough Council.

Get the Room151 Newsletter

Share

You may also like...

  • How to be net zero by 2030 23rd Feb, 2022
  • PFI, the end of LIBOR and the arrivel of SONIA 26th Oct, 2021
  • Building back better? 27th Apr, 2021
  • Room151’s 10th Anniversary: A decade has seen systemic change to funding while core values are more important than ever 8th Nov, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 4 hours ago

    ‘Urgent consultation’ issued in response to continuing audit delays: CIPFA and the Local Authority Scotland Accounts Advisory Committee (LASAAC) have announced another “urgent consultation” to consider proposals to address the latest issue that has led… dlvr.it/SQJ0kV pic.twitter.com/s6vw0bnGXO

    Room151 1 day ago

    Bags of capacity – now to housing delivery: HRAs have been freed up and councils are starting to invest, but some remain cautious, writes Steve Partridge. He suggests that a minimum of £10bn of additional borrowing could be[...] dlvr.it/SQDvxk pic.twitter.com/yZmoWzHv6U

    Room151 1 day ago

    Bags of capacity – now to housing delivery room151.co.uk/treasury/bags-…

    Room151 2 days ago

    To Michael Gove: a modest proposal: Conrad Hall has written an open letter to the levelling up secretary suggesting an unusual (and tongue-in-cheek) proposal to help councils predict next year’s government grant. Dear Secretary of State,[...] dlvr.it/SQ9GpX pic.twitter.com/mSX1xgeL8a

    Room151 2 days ago

    Queen’s Speech: an ambitious plan hampered by omissions: Richard Harbord examines the impact of the government’s legislative proposals on councils, and concludes that local authorities expect and need more from central government. However you view the… dlvr.it/SQ8hmP pic.twitter.com/BsnziyNPIO

    Room151 3 days ago

    Insights and inspiration from LGPS leaders past and present: Four current and former LGPS leaders have recently given powerful and insightful interviews as part of the Fiftyfaces podcast, which showcases inspiring investors and their stories. Hosted by… dlvr.it/SQ53lC pic.twitter.com/IRYMFPxdA2

    Room151 4 days ago

    Rate rise represents ‘fastest increase in borrowing costs in 25 years’: Partner Content: CCLA Investment Management’s Robert Evans analyses the rationale for the Bank of England’s latest rise in the Official Bank Rate and assesses the likely outcome of… dlvr.it/SQ33k3 pic.twitter.com/A81yiS1UgN

    Room151 4 days ago

    The Liability Benchmark, very much unloved at the recent Room151 treasury briefing, receives a much more positive assessment from Jackie Shute. There’s ‘no better tool for treasury portfolio management’, she says. #localgov #finance room151.co.uk/treasury/in-pr…

    Room151 4 days ago

    In praise of the Liability Benchmark: Jackie Shute responds to recent criticisms of the framework used to plan the future borrowing requirements of a local authority. I’m not suggesting that this debate will have the same[...] dlvr.it/SQ2cGf pic.twitter.com/4rqXTpHC9A

  • Categories

    • 151 News
    • Agent 151
    • Audit
    • Blogs
    • Business rates
    • Chris Buss
    • Cllr John Clancy
    • Council tax
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Education
    • Forum
    • Funding
    • Governance
    • Graham Liddell
    • Housing
    • Ian O'Donnell
    • Infrastructure
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • Levelling up
    • LGPS
    • Mark Finnegan
    • Net Zero
    • Private markets
    • Recent Posts
    • Regulation
    • Resources
    • Responsible investing
    • Richard Harbord
    • Risk management
    • Social care
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Transport
    • Treasury
    • Uncategorized
    • William Bourne
  • Archives

    • 2022
    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Treasury management strategies now available from Room151
  • Next story Aidan Dunn: Councils become economic drivers in partnership with the private sector

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares