Both Lancaster City and Lancashire County Council had investments in crisis-hit Icelandic banks - along with Lancashire Police. Lancaster Council has moved swiftly to reassure the public that in the short term, the council does not face any financial difficulties from the investments.
Lancaster City Council has £6 million saved with three Icelandic banks - Landsbanki, Glitnir and Kaupthing - and Lancashire County Council has £10 million with Landsbanki.
The Councils are now seeking urgent assurances about the investments after Iceland's Prime Minister closed the stock market, sought a bailout from Russia and said the country is on the verge of "national bankruptcy."
Lancaster and Lancashire Councils are among an estimated 45 local authorities in England and Wales with taxpayers' cash invested in stricken Icelandic-owned banks. The Local Government Association has called on the UK Government to guarantee councils' savings in the same way it has guaranteed those of individuals who have cash with Icesave, an online British arm of Landsbanki.
In a statement, Lancaster City Council Chief Executive Mark Cullinan said £6million of the Council's current portfolio is invested in three banks in Iceland, although he did not expect the Council would suffer financial difficulties.
Mr Cullinan said at the time of making the investments, the banks concerned were reputable institutions with high credit ratings.
Explaining the situation with regards to Lancaster City Council's investments in Icelandic banks, its chief executive, Mark Cullinan, said: "As part of its investment strategy Lancaster City Council currently has a portfolio totalling £24million spread across a number of financial institutions.
"The amount invested can vary daily, given that the Council can reasonably expect between £200 to £250million passing through its bank accounts in any one year. The Council uses the investment income generated to help fund its annual budget in providing services.
"Around £6million of the current portfolio is invested in three Icelandic banks.
"At the time of making these investments, the banks concerned were reputable institutions with high credit ratings.
"These investments are not due to mature until 2009 and so, in the short term, the council does not face any financial difficulties or expect any impact on service delivery.
"We are monitoring the situation very closely and will be working with other councils and the Local Government Association to seek protection for our investments and prevent any loss to council taxpayers.
"Although all the institutions the council has invested in are rigorously scrutinised prior to being chosen, given the current unprecedented crisis in the global banking market, interim measures have now been put into place to give even greater protection to our cash balances.
"These measures include keeping any future investments with highly rated institutions based in the UK or Ireland, where Government has now given guarantees for any such investments made."
Prime Minister Gordon Brown has issued a public threat to Iceland, demanding the return of up to £20 billion belonging to British savers, companies and local councils.
The Prime Minister said Britain would seize the assets of Icelandic companies using anti terrorism legislation to do it, and take “further action against the authorities” over the collapse of the island’s banks.
The Daily Telegraph reports that the diplomatic row, which has echoes of the Cod Wars of the 1970s, erupted after it emerged that more than 100 local authorities have deposits in Iceland. The paper claimed councils stand to lose a total of more than £1 billion.
British companies are said to have as much as £12 billion in the failed banks -- and individual savers more than £6 billion.
This morning, the pound fell to $1.68 before the London stock market opened, the lowest since November 2003, and at present the weekly drop will be the biggest since 1992.
Lancashire Police Authority says they had invested less than £1m via Lancashire County Council for three months with the Landisbanki Islands bank.
"This represents less than two per cent of the Police Authority's total investments," the authority said in a statement. "The investment reflected the high rating given to this bank by an Independent rating agency.
"It is important not be alarmist about this situation. This is an unprecedented event due to the current worldwide circumstances.
"The deposit is not due for repayment until December 2, 2008, and at this stage the bank has not indicated that it will default on the repayment."