By Laura Miller

Charities should be compensated for cash lost in the collapse of Icelandic banks, the Treasury committee said today.

In its first report on the banking crisis, examining the consequences of the collapse of the Icelandic banks in October 2008, the Treasury committee has recommended all charities that loss money should be compensated.

John McFall, chairman of the committee, said: “The work undertaken by the charitable sector often provides the most vulnerable elements of society with invaluable support.

“At a time when more people than ever are faced with difficult economic circumstances, we believe that it is imperative that charities have access to the funds that were provided to them by the public.”

The committee considered three sets of depositors: local authorities, charities and UK citizens who deposited in the Isle of Man and Guernsey subsidiaries of the Icelandic banks.

But while charities were the big winners of today’s recommendations, local governments will be told not to expect the same help.

‘The committee does not accept that there is a need to provide assistance to the local authorities,’ the report read.

A spokesperson for the Local Government Association (LGA), told politics.co.uk he was disappointed by an “unfair decision”.

“Councils essentially do all the same things as charities, and we don’t quite understand the basis for compensating charities but not councils who provide support services for the homeless, and other vulnerable groups,” he said.

The report’s authors said they realised some local authorities will ‘feel hard done by’ as a result of their decision, but criticised them for failing in their duty to the taxpayer ‘to diligently protect the money they are investing on their behalf.’

“Some authorities have shown themselves to be better than others in this regard,” it read.

“Under these circumstances”, the report concluded, “it would seem perverse to reward those authorities who failed to protect their investment with yet more money from the taxpayer.”

Acknowledging the “severe distress” of those UK citizens suffering as a result of the Icelandic banking failure, the committee recommended only that local authorities work with the Isle of Man and Guernsey authorities to get their money back.