Ministers kept quiet about Iceland banks

Oct 30 2008 by William Green, The Journal

MINISTERS failed to warn anyone about failing Icelandic banks despite their own financial watchdog “intensively” monitoring them for months, it was said last night.

The allegation came as councils nationally insisted they had followed Government advice in investing nearly £920m – including £40m from the North East – in Icelandic banks that collapsed.

Ministers have blamed councils for the fiasco, saying they were not old ladies with money under the bed and that investment advice given in 2004 was sound.

The guidance said councils should prioritise the security of money, but also consider interest – and Icelandic banks offered some of the highest rates.

But Treasury Minister Ian Pearson has admitted the Financial Services Authority has been closely monitoring Icelandic banks since the start of the year. He said information would have been shared with the Government and the Bank of England, which complete the tripartite regulatory system established by Gordon Brown – prompting the question why ministers had not given early warnings.

Mr Pearson said: “The Financial Services Authority intensified its supervision of all retail deposit taking by Icelandic banks, including through increased contact with firms, more frequent visits and enhanced reporting requirements from the beginning of 2008.”

He said the action had been taken before Moody’s credit rating agency downgraded Icelandic banks on February 28, with the FSA stepping up its work with the firms concerned after September.

“The FSA monitors firms and that information is shared formally through meetings of the Tripartite Standing Committee,” Mr Pearson told a Commons committee looking at the Government decision to freeze assets of Iceland’s stricken Landsbanki.

Conservative leader of Castle Morpeth council Peter Jackson said: “I am absolutely shocked to hear that and I can just smell some form of cover-up. The Government is trying to absolve itself of responsibility.” He said: “When the Government’s own Financial Services Authority has these banks under intensive supervision, it is quite extraordinary that they allowed local authorities to continue pouring tens of millions of pounds into these insecure institutions.”

And it showed the regulatory system was flawed, with the FSA already admitting serious mistakes in monitoring Northern Rock, Mr Jackson said.

Tory local government spokesman Bob Neill said: “If Government was aware of it at that point, it was incomprehensible why they didn’t revise the advice to local authorities.”

He is now writing to Chancellor Alistair Darling and Communities and Local Government Secretary Hazel Blears for answers to “serious questions”.

An FSA spokeswoman said it had been intensively supervising banks across the board because of market conditions, but had not singled out individual companies.

It had shared some information with the other tripartite authorities, but she said it was legally prevented from releasing a large amount of material. So, councils would not have been informed.

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