2 min read

Britain's Marshall Plan? Vince's New Investment Bank

Vince Cable should be congratulated on having secured £1bn for the balance sheet of his new British Business Bank – if only for the fact that he managed to squeeze anything out of the Treasury.

I’m told that up until last week, the Treasury was desperate not to provide any extra cash for the Business Secretary’s new bank, which is designed to funnel money towards small businesses. It had hoped that Dr Cable would instead have been happy with the lumping together of all the existing small business support schemes into one unified “bank” – but it was adamant that there would be no new money.

Now, after the behind-the-scenes intervention of not merely Dr Cable but also Nick Clegg and Danny Alexander, we learn it will get £1bn of capital. Now, this is hardly an enormous amount, but one should bear in mind that the total stock of capital associated with lending to SMEs (small and medium sized enterprises) isn’t that big either: there are £51bn (and falling) of loans to SMEs, propped up on a far smaller amount of capital. The £1bn of the British Business Bank (or British Investment Bank – its name seems to vary depending on who’s talking about it) compares to about £5bn in the biggest private sector bank.

The way the scheme will work isn’t yet entirely clear – there will be a consultation period and the bank won’t be up and running for a year or so – but the gist is relatively simple. The bank won’t lend directly to businesses, but will help stand behind loans that existing British banks make to small businesses. One way this might be done is through its £1bn going towards absorbing the first slug of losses if a loan to an SME turns bad. It might become a loan buyer-of-last-resort.

And while the precise shape of the new institution is yet to be determined, it’s clear that it has been inspired to some degree by institutions such as German state-supported lender KfW – which was also designed partly by the British as part of the Marshall Plan in the late 1940s. The main difference is that unlike KfW, which like the US mortgage giants Fannie Mae and Freddie Mac has a potentially open-ended exposure to the government’s balance sheet. The British Business Bank will have a very specific amount of taxpayer money behind it – that £1bn.

Which brings us to the most vexing question of all. Where is this magical money going to come from? The official word is that it “sits within the Government’s fiscal plan” and won’t add to the deficit. But that means it will have to be fished out from elsewhere – existing investment budgets, for instance. These are already heavily squeezed – which for many helps explain why the economy is so weak at the moment.

Now, it may well be that putting that money towards this new enterprise will ensure more growth in the future. But the fact remains that the money spent on it is money that will have to be saved from cutbacks elsewhere. Which helps explain why the Treasury eventually agreed to it.

This article is also available on the Sky News website.

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