Local authorities have started to cut their exposure to the Co-operative Bank after taking advice from independent advisers amid concerns about the health of the mutual lender.
More than 100 councils have nearly half a billion pounds on deposit at the group, which was downgraded six notches by Moody’s in early May over concerns that the bank’s capital was coming under pressure.
Financial advisers, who work closely with local authorities, have been “steering councils away from the Co-operative” in recent weeks, according to one government official.
The Co-op declined to comment, but a person familiar with the bank said only a handful of councils had cut their exposure. The downgrade, he added, would have automatically triggered some councils to review their position.
The bank’s £460m of council deposits is a small fraction of total customer deposits of £36.9bn at the end of last year. Following the Moody’s downgrade, it said it had high levels of liquidity.
Newcastle city council told the Financial Times it had been advised to cut its investment with the mutual, which is exploring ways to buttress its capital.
It was continuing “normal banking arrangements” in the short term, a council spokesman said. But, he added, they were heeding financial advisers to “minimise the level of our investment with the bank”.
Northumberland county council confirmed it was reducing its exposure “to protect the council’s financial interests”. North Somerset council said it had cut its investments with the Co-op last year after a previous downgrade. While it had kept the group as its core bankers – to avoid a “knee jerk reaction” – it said it would reduce its daily cash balance to close to zero. That “surplus” money would have typically been between £2m to £10m a day in normal conditions.
Under the Financial Services Compensation Scheme (FSCS) councils would only see their first £85,000 of money protected in the event of a bank crash, the same as an individual depositor.
Council leaders were badly stung during the 2008 Icelandic bank crisis, with many large authorities losing their deposits in local banks – which were recovered only after a lengthy political and legal battle.
The Co-operative reported the equivalent pre-tax loss of £599m for the last year.
Many charities that use the bank have also been seeking advice as to whether they should keep their money on deposit there, according to an expert in charity finance.
Tony Assender, director of Astleigh Consulting, a treasury adviser, said some of his university clients were also concerned. “But a lot of them have invested in the Co-op on fixed-term deposits, so there is nothing they can do,” he said. “I don’t predict a stampede but the next few weeks are crucial.”
Kent county council, which had £50m invested with three Icelandic banks in 2008, said it did not bank with the Co-op. “The reality was that their rating was already too low to be on our approved list even before the downgrade,” it said.
Tower Hamlets, the London borough, said it was “actively monitoring” the situation alongside its advisers. However some authorities said they had no plans to change their arrangements, including Manchester city council.
Birmingham said it did not want it to “look like we are panicking”. “When our contract runs out we will re-look at it again, but there is no panic,” it said.
Additional reporting by Aaron Hagstrom