When Cable first announced his new ‘business bank’ idea earlier this month, most of the business community breathed a sigh of despair at what looked like yet another piece of political posturing. How could he possibly set up a successful business-lending bank with civil servants at the helm? But today the business secretary is set to announce at the Liberal Democrat conference that the bank will use around £1bn of taxpayers money as a guarantee on long-term private sector lending, eradicating the ‘British curse of short-termism’.
Sounds very grandiose and noble Vince, but how will it work in practice? Apparently, the government support work using state guarantees and equity. The support will not be reclaimed by the Treasury, but instead will go on the balance sheet of the new ‘business bank’ itself.
Cable is hoping that with this guarantee money in place, he can unlock massive private sector investment. The bank will essentially package up its loans to businesses in the form of bonds that it can then sell to private investors such as pension funds and institutions. It is probably reasonable to assume that the government’s £1bn guarantees bit is there to underwrite around 10% of the total loan value from the bank: this means around £10bn of additional lending could be unlocked from bond-buying organisations. That’s a lot of extra cash entering the system.
But in many ways, Vince today leaves us in the dark as much as we were when he first announced it: information about where that cheeky billion quid will come from remains scarce. Not to mention that it will be a hard sell to chancellor George Osborne to free up the cash. Nonetheless, Cable is expected to offer some stirring rhetoric in his speech at the party conference today: ‘We are sop good at so many things in this country – but for too long the mirage of growth based on property speculation and financial gambling has hidden the harder virtues of making things productively.’
There's no doubt more lending is needed. Even today, Funding Circle published research identifying 1.5 million 'caged tiger' companies which want to hire more people but cannot secure funding from banks to get the ball rolling. The study suggests that around 500,000 extra jobs could be created in the private sector if only firms could get their hands on some extra cash.
But, with Cable's plans...£1bn of state guarantees, hoping to match with private money. Privately owned and run. It will lend indirectly, via new start-up banks, and other non-high street lenders. Hmmm. We know Cable has ideas for completely reforming the banking sector. But this looks a bit half-baked…
Plus this new ‘business bank’ isn’t set to begin operation for another 18 months, so we’ve a long wait until we know whether it will have any effect. We could be out of recession by then, anyway…