Vince Cable’s plans for a British investment bank are a joke but Chuka’s aren’t much better

by Paul Crowe

Oh dear. Yesterday was Vince Cable’s big day: the launch of his industrial strategy with a new state backed business investment bank at its heart. This bank is meant to plug the lending gap for small businesses and help drive economic growth. Pretty important stuff. News of the bank was the mainstay of the briefing to the media and had top billing in his speech.

Except that Vince didn’t actually announce the establishment of a new bank.

Instead he talked about how he would quite like one. Much as my four year old son tells me how he would quite like a light sabre.

The nearest we got to a commitment was Cable’s explanation that he was working with George Osborne on “how big it should be, how it should operate, and what the sectors it services should be.”

Over two years in government as secretary of state for business and Vince Cable has managed to confirm not a single detail of his flagship policy. Well done.

Chuka Umunna was justifiably scathing.

“Ministers need to come clean on whether they are proposing a proper British Investment Bank, which Ed Miliband has led calls for since last year, or merely a rebranding exercise of schemes which already exist and are not doing enough to help business.”

It is almost beyond belief that after so long in office there is no clear plan to deliver what is meant to be the centre-piece of the government’s industrial strategy.

But Labour cannot afford to be smug. If Vince Cable’s plans are a joke, then Labour’s alternative raises a smile in anyone who has worked in finance.

A few weeks ago Labour published, “The Case for a British Investment Bank”. It was written by Nicholas Tott, a former partner in corporate law firm, Herbert Smith.

Tott is a PFI expert and understands banking. He is a serious man, but his report is part of a political process and reads as such.

The critical passage is in the conclusion,

“The key principle for any British Investment Bank is that it must operate in a commercial manner to ensure that investments and interventions are made on a rational basis, only to support viable businesses with a proper analysis and pricing of risk.”

At the moment we have a banking sector that is palpably failing to provide small business with the finance it needs. It is a sector that is working in a commercial manner, making judgements on the riskiness of investments and viability of proposals in line with market norms.

Yet Labour’s report is calling for a British investment bank to operate exactly in the commercial manner that has consistently failed business.

The problem is political.

No party, government or opposition, can propose banking policy that explicitly calls for non-commercial lending; that relaxes market risk analysis and specifically makes a point of backing businesses that commercial lenders won’t touch.

Going down this road would open the party to charges of wasting public money and returning to the bad old days of big government picking winners, or rather, losers.

So it’s catch-22. The market is failing. But to not operate by market rules is politically unacceptable.

This paradox is why Gordon Brown’s forays into social investment as chancellor were ultimately a waste of time.

In 2002 he used government funds to back something called Bridges Ventures. This is an investment fund tasked with addressing the so called “equity gap”: finance of between £500,000 and £2m that bridges the gap between where angel investors stop and venture capitalists start.

Bridges was mandated to concentrate on helping businesses in deprived areas and support green industries. In theory it was a great idea, but as with all these whizz bang schemes, it has had to operate by market rules.

The net result? In 10 years of operation, with £275m of funds under its control, it has made a grand total of 35 investments. Nice if you happen to be one of the three or four businesses that get funded each year, but hardly recasting the market.

Vince Cable embarrassed himself yesterday with the launch of his non-existent bank. But as ridiculous as the government’s industrial strategy is, Labour run the risk of creating a massive new financial institution that is set up to fail, at the heart of their industrial policy.

Unless Labour’s shadow secretary of state for business can clearly articulate how a British investment bank will operate differently to the current market, those same journalists and financiers, presently laughing at Cable will be chuckling at Chuka if and when he gets a chance to set up his version of a British investment bank.

Paul Crowe is an entrepreneur and Labour Uncut’s business columnist.

He is a director of a business that was recently placed amongst the top 40 fastest growing British private companies in the Sunday Times Fast Track 100 and has worked across the finance industry

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5 Responses to “Vince Cable’s plans for a British investment bank are a joke but Chuka’s aren’t much better”

  1. aragon says:

    Current universal banks just don’t lend to industry, they are much more into property speculation – commercial and retail. Investment banks are also into speculation using derivatives etc.

    The Macmillian gap is not created by lack of opportunity but greater perceived risk and more effort required to generate a return.

    So if you limit the scope of an Industrial Bank to industry and/or SME’s, it will not be able to speculate in the more lucrative property and derivative markets, like Universal banks do.

    It is also possible to require the investment of funds, while still requiring an acceptable default rate.

    This dual mandate imposed on the bank to make investments (over time) and not sit on funds but also ensure that the losses are contained, would determine the banks activities.

    Loans could be smaller and staged, with funds released as progress in achieved as monitored by business advisers.

    However given the social benefits in terms of employment etc, loans may be for a longer duration, more flexible and more effort and expertise (advice to business is another government service) and continuous contact used to mitigate the risks.

    By limiting the scope to get higher short term returns elsewhere and becoming more involved with the business the focus of the bank is maintained, and the societal benefits captured.

    This is just off the top of my head and does not represent an industrial strategy which is beyond the scope of the bank.

    The bank would be a general regional industrial bank, Infrastructure and larger, more speculative projects would be subject to different rules and/or organisations e.g A Regional Development Agency, or National Industrial policy, like the EU industrial policy.

    Banking reform etc. would be central to ‘Economic’ policy not just Industry policy or just an industrial bank.

  2. Robert says:

    Paul, you are probably right. Should a state bank be more long-term, expect less return on its loans and accept that it will occasionally waste public money to be blunt?

  3. aragon says:

    The EU is likely to insist on commercial returns.

  4. Bunty says:

    “At the moment we have a banking sector that is palpably failing to provide small business with the finance it needs. It is a sector that is working in a commercial manner, making judgements on the riskiness of investments and viability of proposals in line with market norms.”

    So small businesses in the UK are now all more risky than they used to be? There are many other factors at play here, including the raising of banks’ capital ratios, which mean the financial sector is disinclined to lend right now.

    In addition, I don’t understand the relevance of the reference to the “equity gap” (or “valley of death” if you like drama): this is typically an issue for new startups, in high-tech areas of the economy, although not always. Such a mechanism is really unsuitable for small businesses which are well established but which are struggling for operating credit in the current economic climate. You’re conflating two separate issues.

    New startups frequently find it hard to get cash – addressing this is great and it will probably have an acceptable economic impact.

    However, I seriously doubt a new investment bank could possibly be capitalised by the Government to the extent it would be able to properly support the UK SME community as it stands, especially in the current political climate.

    (There are plenty of other possibilities for established SMEs, like the loan-underwriting Enterprise Finance Guarantee Scheme, for example. But such schemes aren’t well-liked by banks and appear previously not to have been successful overall…not an easy problem to solve!)

  5. anne says:

    I feel that a national bank is a good idea. I know this has been tried in the past, although on a much small scale than is being proposed – national savings certificates.

    I know that finance is a complex subject, and economists can have different ideas as to what works.

    In my opinion – in most cases banks are not providing a good service for their customers. It just seems totally out of all proportion as to what bankers are paying themselves – for what is not a very good job. Would a national bank be a better way? Providing a better service to its customers – value for money – better returns for savers. It is not only small businesses who are suffering, because they can not get loans, but savers, pensioners who depend on their savings are also having a difficult time. No one seems to have a workable answer to these problems – certainly the banks are not providing the answers – still very self interested. Certainly, if a national bank were to be set up – with simplier rules for borrowing, and better returns for savers I think the general public would leave their current banking systems in their droves.

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