Scottish councils have successfully diluted their “worrying” concentration of investments in banks and building societies, cutting sums held in the institutions by a half in five years.
In 2014, Mark Pickering, director at treasury adviser Arlingclose, warned delegates at the CIPFA Scottish Treasury Management Forum to diversify more to protect themselves against potential future banking crises and bail-in risk.
According to government investment figures compiled recently by fund manager, CCLA, bank and building society deposits made up just 29% of Scottish local authority investments at the end of 2017–18, down from 61% in 2012–13.
John Kelly, director of client investments with CCLA, said: “The move away from bank deposits has been driven by prudence.
“The wisdom of relying on a small number of counterparties was dramatically brought into question by the financial crisis.
“The changes have reduced risk but, in a low interest environment, haven’t supported returns.”
As bank and building society deposits shrank, Scottish councils poured millions of pounds into local authority loans, which now make up a quarter of all investments, compared to just 5% five years ago.
Money market funds now account for 16% of investments north of the border, compared to 9% in 2012–13.
Mark Horsfield, director at Arlingclose, said that the figures reflect a positive trend of diversification and a belief that bank and building society interest rates are bad value considering the risk they present.
“I suspect that the move into local authority lending reflects an avoidance of bail-in issues, but also from the rates and durations available since some unsecured bank lending rates do not reflect the enhanced risk associated with regulatory changes that include bail-in,” Horsefield said.
Kelly speculated that the sector could see continued diversification, “not of supplier this time, but of asset — adding to portfolios modest allocations to other types of investment which stay within sensible risk budgets but which also make a contribution to income.”
