Banking and RBS update

Report: 10
Date: 22 January 2009
By: MPA Treasurer

Summary

This report provides members with an update on the banking sector and the MPA banker Royal Bank of Scotland (RBS).

A. Recommendations

That Members note this report.

B. Supporting information

1. Turbulence in the global banking system continues. During the last week many banks’ credit ratings have been revised downwards and the UK Government announced further significant support to the UK banking sector as banks reveal further exposure to toxic debt in their balance sheets.

2. In line with the minimum credit rating criteria and the procedures for monitoring banks approved by this Committee on 20 November, Belgium bank KBC has been removed from the counterparty list and German bank Deutsche has been placed on Rating Watch Negative meaning this bank will not receive further deposits while under review. This has reduced investment opportunities by £60m.

3. The Lloyds TSB and HBOS merger on 19 January to form Lloyds Banking Group has reduced investment opportunities further. The new Group is assigned a counterparty limit of £60m whereas prior to the merger each institution had a £60m limit.

4. RBS required further Government support as the bank revealed expected losses of up to £28bn. The Government stake in RBS increased to an estimated 70% as the share price fell drastically as the possibility of full nationalisation became a reality. As a consequence Fitch Ratings downgraded the individual rating of RBS below the minimum required (although there has been no equivalent move by Moodys). The short term and long term ratings continue to meet minimum requirements.

5. The prospect of RBS as the MPA banker falling below the minimum criteria for investments has been considered by the Treasurer. At the meeting of this Committee on 20 November 2008 the Treasurer provided a verbal update, outlining the difficulties encountered in banking in the current climate and the lack of alternative options if the credit rating for RBS was to move in an adverse direction.

6. The MPA has a contract for banking services with RBS. At the award of the contract, which runs until January 2011, no other banks were able to offer the full range of facilities required. The call (deposit) account facility offered by RBS offers the access to liquid funds as required by guidance issued in April 2004 [1] and incorporated into the MPA Treasury Management strategy. This facility was used fully during the purchase in December 2008 of New Scotland Yard because of the easy access to funds and competitive interest rate that the account provides.

7. The GLA and LFEPA also bank with RBS including the call account facility and are continuing with these arrangements as the Government’s stake now at 70% provides confidence in the security of funds with RBS. The RBS Relationship Director has given reassurance to the MPS that the quality of service provided by the bank will not diminish and the retail, commercial and corporate businesses of the bank have additional stability following this week’s announcements. The MPA will continue to make full use of the RBS call account facility (the notional individual limit is £60M, but the Treasury Management Strategy has agreed ‘no limit’ because occasionally very late receipts will be received into the current account and late funds cannot be placed elsewhere).

8. In setting the Treasury Management Strategy for 2009-10, to be considered by this Committee on 19 March, the impact of market conditions on available counterparties and options available will be reviewed.

C. Race and equality impact

Consideration is given to the requirements of the Race Relations (Amendment) Act through the MPA/MPS Environmental Strategy and the developing Ethical Investment Policy whereby best practice standards are promoted.

D. Financial implications

Investment income is restricted with fewer options available. However with the retaining of the RBS call account facility there will be no impact on the currently reported estimated outturn for 2008-09.

E. Background papers

Treasury Management Half Year Review 2008/09 – MPA Finance Committee Report 20 November 2008

F. Contact details

Report author(s): Paul Daly, Director of Exchequer Services, MPS

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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