Wednesday, 8 October 2008

Cornwall Council loses £5m in Landsbanki

Like a number of authorities, Cornwall Council has invested some money in Landsbanki, the Icelandic Bank that has either gone bust or gone into receivership depending on who you listen to.

It now appears that as 'informed investors' local authorities will not have their deposits guaranteed in the same way that individuals will. So Cornwall is set to possibly lose £5 million and other counciles the same or more.

Should Cornwall and other authorities be putting money into banks like Landsbanki?

Well, they should certainly be putting their money somewhere. They get huge amounts of council tax money and government funding paid to them and it then trickles out through the course of the year. Far better to put it in the bank earning interest than stuff it under the proverbial mattress.

They should also be looking to earn a decent return rather than simply settling for the lowest rate of interest on the high street. But here is the crux. With higher rates of return comes an element of risk. I suppose, at least theoreticlly, they could play with these funds on the money markets. But the risk that they might lose the lot and not be able to pay for services is clearly one that no sensible council could take.

Ironically, it is by spreading the risk through putting the funds into a range of different financial institutions that they opened themselves up to this loss.

But equally, if they had put all their money in one particular high street bank - HBOS - then they could be seen as playing safe and yet still lose the lot.

1 comment:

Jock Coats said...

It's not the first time though - 28 local authorities lost money, I seem to recall some very significant amounts (Highlands & Islands I think was one), in the BCCI collapse.