The Government would need to borrow an extra £40bn to fund the initial costs of setting up a state-backed business bank, a thinktank claims.
In its report, Why We Need a British Investment Bank, the Institute for Public Policy Research argues a Government-backed lender should be used to fund infrastructure projects and small and medium-sized business lending.
Earlier this month, business secretary Vince Cable pledged to set up a state-backed lender to boost lending for SMEs. Chancellor George Osborne has also backed the plans, which have the support of the Confederation of British Industry.
The IPPR report says the £40bn needed could be raised from a variety of sources such as targeted quantitative easing, a one-off levy on commercial banks, selling Government stakes in the Royal Bank of Scotland and Lloyds Banking Group, national savings or Government spending.
However, it believes central Government spending is the most effective method. The report states: “If the bank is to be capitalised from general Government spending, the Government would have to borrow more. This would, in any case, seem a more appropriate way than spending cuts and tax increases of financing a one-off spending item.”
It also argues a British investment bank should be allowed to raise funds on capital markets by issuing bonds and creating a balance sheet of £140bn over four years.
If they were AAA rated the report says it would make BIB bonds attractive to UK pension and insurance funds and to overseas investors in the UK bond market.
The IPPR estimates that a maximum annual Government investment of £10bn, equivalent to 0.7 per cent of gross domestic product, would allow the bank, using a 2.5 leverage ratio, to lend up to 2 per cent of GDP a year, having a “material impact” on the economy.
It also believes the cost of any bank should be off the Government’s balance sheet as it will be a self-financing future investment.
While fully owned by the Government, the report says there must be a “clear dividing line” between the role of Government and the activities of its bankers.