Council chief executives have attacked the role of credit ratings agencies in the Icelandic banking debacle, claiming they had inadequate information for crucial investment assessments. A submission by SOLACE, which represents town hall chiefs, to a House of Commons inquiry into the banking scandal, questions the close relationship between banks and credit ratings firms. It also calls on ministers to protect public bodies from banking losses in the same way they have guaranteed consumer deposits. Councils have almost £900m frozen in defunct Icelandic accounts. Amid criticism of town hall investment strategies, however, SOLACE has joined the LGA for a review of the role played by credit ratings firms, which continued to judge Iceland's banks as strong investments, days before they collapsed. Drafted by Mike Bennett, assistant director general, it acknowledges councils relied heavily on ratings agencies, such as Standard & Poor's and Fitch, to provide risk assessments. He said: ‘The real problem is that neither the banks nor credit rating agencies had adequate information on the liabilities, explicit or implicit, in derivative instruments such as collateral debt obligations or credit default swaps.' Mr Bennett told The MJ: ‘Credit ratings agencies are partially funded by the banks they assess. There is a question mark against whether there is a conflict of interest there – and whether they are fit for purpose.' Some MPs have criticised councils for retaining large reserves in Icelandic deposit accounts prior to the collapse. But Mr Bennett warns Parliament against a ‘knee-jerk' reaction, and instead calls for a fundamental review of financial regulation.
