In 2015, following lobbying by Arlingclose and others, the Bank of England extended the protections of the Financial Services Compensation Scheme to include small local authorities. These are described as an authority with an annual budget of less than €500,000 (approximately £431,000 on current exchange rates). This means that authorities considered as small are granted the same protections as individuals, whereby deposits of up to £85,000 per UK bank or building society are fully protected. It is important for authorities with an annual budget very close to the limit to be cautious of potential fluctuations in the £/€ exchange rate.
Although this scheme protects the smallest authorities, parish and town councils with larger budgets are still left exposed to bank failures. In January 2015, the bail-in regime was adopted via the Bank Recovery and Resolution Directive, and then amended further in July 2015 by the Deposit Guarantee Schemes Directive.
Previously, failed banks were in theory placed into administration with creditors paid out in order of security ranking. After equity and junior bonds, losses would be shared widely between all depositors and bondholders, while the FSCS compensated small retail depositors. In practice, this was neither politically acceptable nor administratively feasible within a reasonable time frame, which is why the government bailed out the banks in 2008.
However, the new regime outlines that failing banks will be bailed in with creditors wiped out in reverse order of their security ranking. Although the first £85,000 of deposits made by individuals, non-financial corporate deposits and small local authorities hold preference, deposits made by other local authorities remain near the lower end of the hierarchy and therefore among the first to be bailed in.
The creditor structure also varies widely between different banks and building societies, meaning the impact of a local authority from any bail-in also differs.
As a result, it is crucial to understand your authority’s exposure to bail-in and how this could affect your investments if a bank gets into serious financial trouble. For more information on how to protect your investment portfolio, contact the Arlingclose team at info@arlingclose.com