U.K. to Set Up Business Bank

 
By Nicholas Winning          

BRIGHTON, England—The U.K. government is investing £1 billion ($1.62 billion) to set up a new state-backed business bank that it hopes will eventually support up to £10 billion of new lending for small and medium-size companies, Business Secretary Vince Cable will announce on Monday.

The new wholesale bank, which will operate at arms length from the government, aims to attract more than £1 billion of private-sector capital to help tackle what it sees as the long-standing problem of a lack of credit for smaller companies.

The coalition government of Prime Minister David Cameron is under mounting pressure to do more to fuel growth, after the economy contracted for a third consecutive quarter between April and June. The new business bank is an integral part of the government's industrial strategy.

"The government understands the frustration felt by many small and medium-size businesses around securing credit, especially from the big four retail banks," Mr. Cable said at his Liberal Democrats party's annual conference.

"Many new promising, growing companies simply can't get the loans they need to expand on reasonable terms," he said. "Manufacturers, exporters, start-up companies are struggling to finance growth. We are going to help fix this."

The new bank will facilitate the provision of loans, including long-term capital, to U.K. firms through existing banks and other financial institutions, rather than lending directly itself.

Aides said it would take 12 to 18 months to set up the new institution. It won't have a retail presence and won't displace or subsidize banks, the government said, though it added that the institution aimed to increase competition in the SME lending markets by supporting new banks and other alternatives to banking finance.

Business groups welcomed the announcement.

The British Chamber of Commerce said the plan for the new bank to operate through existing banks may put off some SMEs, but it said the announcement was a step toward an institution that would help firms gain access to capital in the same way that they do in Germany, the U.S. and South Korea.

"Six in 10 Chamber members told us just last week that they would feel more confident in securing finance if Britain had a government-backed business bank," said John Longworth, director general of the BCC. "So many companies will be encouraged by today's news."

Manufacturers' organization EEF urged the government to move quickly to map out how the bank would work and develop a more competitive financial sector so companies could choose between a range of finance providers rather than relying on a small number of big banks.

"The government has chosen the right model in using this new institution to provide a cheaper source of wholesale funding that will support lending to business without exposing the taxpayer to the risk associated with setting up a state bank that would lend directly to it," said Steve Radley, director of policy at EEF.