MPs have confirmed they will investigate council treasury management, in the wake of the Icelandic banking crisis.

The inquiry plans, by the Communities and Local Government select committee, as revealed exclusively by localgov.co.uk sister title The MJ last week, will examine what changes may be needed to the scale, spread and risk of government reserves.

It will also ask whether local authority money should be invested in lower risk, but also lower return, government stock and what effect this might have on UK banks and council taxes.

MPs are expected to stage oral evidence sessions in January and February, and will ask whether the Government should protect council investments in the same way that it has acted to safeguard personal assets.

Existing treasury management guidelines will also come under scrutiny, and the select committee has indicated that it will assess whether the formal requirement to produce annual investment strategies has affected council performance.

The Local Government Association is still pressing for the money to be returned to  councils. It has set a deadline of Monday 1 December for written submissions.

LGA leaders have welcomed the select committee and already a number of councils have indicated that they will give evidence.

Westminster City Council has some £17m in Icelandic banks, and Labour group leader, Cllr Paul Dimoldenburg, said:

‘Other councils stopped investing in when the warnings were made – Westminster's failings need to be exposed so that lessons can be learned.'

Cllr Colin Barrow, leader at Westminster said he remained confident their investment strategy was firmly in line with Treasury Management guidelines.

But added, 'We will be holding an independent review into the exact circumstances surrounding the council's decision to invest in Landsbanki and Heritable to reassure councillors and local residents.'

The select committee is chaired by the MP for Milton Keynes South West, Dr Phyllis Starkey, who was a former leader of Oxford City Council.