Extending Lending: The Case for a State-Backed Investment Bank

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Loans are hard to get, and small and medium-sized enterprises (SMEs) are the hardest hit. Without finance to expand or invest, economic growth for SMEs will be slow or non-existent, with serious effects on the wider economy. There are 4.5 million SMEs, accounting for 60 per cent of private sector employment and 50 per cent of private sector turnover, but while the number of SMEs applying for loans has risen, so has the number of rejections. The recession has, understandably, weakened lending all round, but perfectly sound businesses and whole sectors are being turned down for no reason. In this report, David Merlin-Jones argues that the only way to revive lending permanently is to go beyond restructuring commercial banks. Britain needs a new state-backed investment bank, described here as the 'Enterprise Bank' (EB). This would be able to raise cheap credit in the financial markets by using the UK's AAA credit rating and could pass this on to borrowers. It would lend to any economically viable and creditworthy SME rejected by commercial lenders. The report draws on three precedents: KfW from Germany, the SBA from the US and Britain's own post-war state investment corporation, the ICFC. Despite working in different ways, all three show how successful such organisations can be. Merlin-Jones argues that the EB would be most effective if it worked with the commercial banks as agents whilst being guided by its own criteria, based on an expert knowledge of the requirements of industry. If funded through quantitative easing measures already set to happen, the EB could be established with billions in funds at no immediate cost to the taxpayer. If such an institution were created, Britain would be better placed to survive the current economic downturn and cope with future crises.

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