This report builds on the Government’s current thinking for a British Business Bank (BBB) and draws on reports from other think tanks.
It is agreed that such a bank must address a lack of investment in SMEs, but we also ask:
Many publicly owned banks overseas have broader mandates than lending to SMEs, and we argue that the BBB’s mandate should include supporting an industrial strategy to deliver good, sustainable jobs. An industrial strategy is needed because there are too few good jobs in the UK economy, for both graduates and non-graduates. In addition, the transition to a sustainable economy – one with businesses that can survive and thrive in a world where externalities are priced and regulated – is too slow.
The bank should be part of delivering this strategy because it can:
Short and long-term outcome indicators should be used to monitor performance for each region of the bank and the bank as a whole. Short-term indicators should measure the bank’s contribution to increasing employment, median earnings and job quality and reducing carbon emissions.
Long-term indicators should cover how the bank contributes to regional and national industrial strategies and might include measures of employment, skills development and environmental efficiency. Some investment in data collection is required. This must be made by government and not by investee firms: the bank’s processes cannot burden customers.
The bank’s board should set a small number of targets for management based on these indicators, with regional targets based on similar regional indicators.
Regional boards may need limited flexibility to prioritise different aspects of the performance framework.
Management should have discretion over products, processes and the way the bank works with other public agencies, but we offer examples the bank could use to reach targets, including some used by banks overseas.
The bank could also offer or provide access to additional support services and become a source of business advice and expertise.
Our research showed that some state owned banks have a large network of branches and distribute directly to business. Others work through third parties. However the latter operate where there are thriving local banking networks such as the German Sparkassen, with good branch relationships with local businesses. This represents a dilemma for the UK: on the one hand, setting up a network will be expensive and take time; on the other we do not have a network of local banks. Indeed one of the main problems we are trying to solve is precisely the lack of investment by the commercial networks in local capability. Thus there are two options: the bank must establish its own branch network, or the government must stimulate the UK local banking sector. There are three ways it can do this:
These three options are not mutually exclusive, but restructuring RBS is the one that is most likely to transform the local banking infrastructure at speed and scale.
Whichever distribution model the bank adopts, it will need regional offices to ensure it contributes to the development of regional and local industrial strategies. Regional offices would also allow regional boards to set effective targets.
The bank should work with local enterprise partnerships (LEPs) on regional and local industrial strategies (with government stepping in if there is disagreement). It should work with government, other public agencies, business and the trade unions on national industrial strategy. It could also administer government business grant schemes for a fee.
Government should be the sole ordinary shareholder. The bank’s mandate and performance measurement framework should be embedded in its constitution and legislation. Government should exercise control through a ‘Board of Governors’, which would appoint and set targets for management but with limited power to instruct management.
Board members should include representatives of the regional boards, ministers, opposition politicians and independent banking professionals. There should be at least one staff representative, preferably appointed through the trade unions.
Regional boards should agree regional outcome targets with the Board of Governors and local agencies, and be responsible for reviewing their progress. They should include politicians and representatives from LEPs, banking, staff, head office, and other agencies.
Representatives of business, the trade union movement and academia should join an advisory board. Parliament should also set up a select committee with powers to question the bank’s governors and management, and to make recommendations.
National accounting rules may need to be amended in line with international practice to allow the bank to operate effectively. It should not be difficult to conform to EU State Aid rules, but more detailed work is needed.
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