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The voice of Scotland’s vibrant voluntary sector

Published by Scottish Council for Voluntary Organisations

TFN is published by the Scottish Council for Voluntary Organisations, Mansfield Traquair Centre, 15 Mansfield Place, Edinburgh, EH3 6BB. The Scottish Council for Voluntary Organisations (SCVO) is a Scottish Charitable Incorporated Organisation. Registration number SC003558.

CAF Bank moves to calm fears over significant paper losses

This news post is 7 months old

Market value for bond holdings was £33.4 million lower than book value

A bank used by more than 14,000 charities has moved to reassure customers after substantial paper losses were revealed in its annual report.

It shows the market value for bond holdings was £33.4 million lower than their book value as of 30 April.

In effect these losses amount to around two thirds of its regulatory capital of £51m.

The Charities Aid Foundation, which owns CAF Bank, said that these were “theoretical” loses with the bank having £20m of surplus capital.

CAF also said it will inject an additional £15m which will exceed the deficit.

Accounting rules allow banks to ignore paper losses on bonds they do not intend to sell.

Neil Heslop, chief executive of the Charities Aid Foundation, said: “Everyone in the sector knows the valuable work that CAF Bank does to help charities serve their communities.

“Alongside the positive financial returns and strong capital surplus shown in the bank’s annual report, it has reported some theoretical ‘paper’ losses on bond investments.

“The important fact is that these bonds will always be held until they mature, so the bank will get back everything it invested – an approach endorsed by its independent auditors.

“As an additional reassurance, the Charities Aid Foundation has agreed additional funding that exceeds this theoretical loss when combined with the bank’s already significant surplus regulatory capital.”

However, Sir John Vickers, a former chief economist at the Bank of England who chaired a commission on the UK banking sector after the 2008 financial crisis, told the Financial Times: “Losses on bonds or fixed-rate mortgages when interest rates go up are not just ‘paper losses’.

“Even if the assets are held to maturity, the expected cost of funding that position has risen with interest rates — unless it has been hedged or there are sticky depositors insensitive to interest rates."

PwC, CAF Bank’s auditors, said in the annual report that there were no circumstances that would “cast significant doubt on the company’s ability to continue as a going concern for a period of at least 12 months from when the financial statements are authorised for issue”.