Press Story

As Chancellor George Osborne and Business Secretary Vince Cable are locked in negotiations over the "size, scope and scale" of a British Business Bank, a new report from the think tank IPPR argues that such an initiative will only be as successful as it is ambitious.

Last week, Vince Cable announced there would be a new state backed 'bank' that would lend to British businesses but he said he was still discussing with the Chancellor "how big it should be, how it should operate, and what the sectors that it services should be". Cable is expected to announce some of these details next week in his speech to the Liberal Democrat Party conference.

IPPR's new report discusses all these questions on the basis of new analysis, including a study of three overseas state banks. It recommends:

Size: The government should inject an initial £40 billion of capital over four years into the Bank, and the Bank should be allowed to raise funds on capital markets up to a leverage ratio of 2.5:1 (i.e. up to an initial £100 billion)
Operation: The Bank should be 100 per cent state-owned but there must be a clear dividing line between the role of government and the activities of bankers in making lending decisions
Scope: A fully-fledged British Investment Bank should be able to invest in infrastructure projects and to provide long-term financing for small and medium-sized businesses across the whole economy

IPPR's new report argues that what small businesses really want is both an increase in the amount of credit available to them and a reduction in the cost of that credit. IPPR argues that what has been announced so far is not a 'new bank' but a small business lending service.

Tony Dolphin, IPPR Chief Economist, said:

"Because the Chancellor will not spend more government money boosting aggregate demand in the economy, he has been reduced to indirect schemes like funding for lending to support growth. These require shifts in behaviour by the banks and pension schemes if they are to work and consequently are not as effective as more direct approaches. There is a danger that Vince Cable's idea for a new bank will also have less impact on the economy than it could.

"What we need in the UK is a fully-fledged British Investment Bank designed to suit the particular circumstances of our economy. We urgently need infrastructure investment and financing for small and medium-sized businesses. A British Investment Bank could tackle these long-standing weaknesses in our economy.

"Such a Bank would require an initial injection of government capital which - on the existing accounting rules - would make it even less likely that the Chancellor would meet his fiscal targets. A fully-fledged British Investment Bank should not be held back by the vagaries of the UK's accounting practices. Its self-financing activities should be excluded from the government's target fiscal measures and it should be free to raise funds on capital markets."

Notes to editors:

IPPR's new report - Investing for the future: Why we need a British Investment Bank - will will be available to download from http://bit.ly/IPPR9635

IPPR's report - A path back to growth - is available from: http://ippr.org/publication/55/9438/a-path-back-to-growth

Contact:

Richard Darlington, 07525 481 602, r.darlington@ippr.org