Cable to announce business bank - but what will it look like?

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Vince Cable is going to make an announcement this afternoon about a new business bank which could support up to £10bn of business lending. This has been widely trailed in the press, though it's still not clear what this “Business Bank” will look like.

One suggestion is that it could be some kind of SME-debt securitisation body, akin to what Fannie Mae and Freddie Mac do for home mortgages in the US.

A little over a year ago Adam Posen argued the case for such a body arguing that – in buying these bundles of loans from banks – it could free up banks' balance sheets and stimulate lending. In addition the Breedon Review recommended investigating whether the UK would benefit from such a move, especially as it would stimulate a market for SME bonds.

It is likely that a securitisation body would have a positive impact on Access to Finance for UK SMEs. However the fundamental problem in the finance sector is the lack of competition: 85% of the SME lending market is controlled by four banks.

Another suggestion is that the government could fund some sort of investment bank – in a similar model to the German KFW. This could then pump funding into smaller “challenger banks”.

This would be positive in that it would support the objective of getting more players into the market, but there are some real questions about how it would work.

  • How would this be additional to the existing Funding for Lending scheme?
  • How would they discriminate between “challenger” banks and main banks? (and how would this comply with state aid rules?
  • How quickly would this increase the supply of lending to SMEs?

Either way, we await more details in the announcement.


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