Progress | Centre-left Labour politics

Making a British investment bank work

Within Ed Miliband’s speech arguing for more bank reform last week was a little-noticed reference to the need for a British investment bank. He stated that since Labour does not believe ‘the banks we already have will be equal to the task of lending enough to small businesses … there is a case for a British Investment bank’. The Labour leader announced the publication of a report by Nick Tott, a former partner of the law firm Herbert Smith. Tott’s report, commissioned last year, argues that there is a ‘strong case for a British investment bank’ operated along commercial lines. He is right, but it is strange that this idea has not been enthusiastically embraced in the past. It is time for Labour to make some detailed plans for an investment bank which can start soon after the next general election.

Arguments for some sort of national investment bank have been made for years. Labour considered the case for it before the 1997 election, for example. For some reason it has never happened, despite the existence of apparently successful examples elsewhere. The Tott report mentions the German example, KfW, which is a second-tier bank providing funding for commercial bank loans to lower the cost and accessibility of borrowing. It also provides advice to businesses. It can raise money in the bond markets relatively cheaply because it has a triple AAA rating, with the German government (ie taxpayer) standing behind it. Tott also highlights the role of the US Small Business Administration, which provides a state-backed guarantee to lending to small businesses. We should also examine  the experience of the Scottish Investment Bank.

While it may be a mystery why our policymakers have lacked the boldness to advance plans for a national investment bank, we can identify some reasons for hesitation.

First of all, it might seem a good idea but why do we actually want a national investment bank? This debate is a bit like the arguments for a ‘Robin Hood’ financial transactions tax; there is insufficient agreement about what the tax would be for (to reduce speculation, channel money to anti-poverty or pro-environment projects, or reduce national debt levels). Tott’s report is itself divided. We might want such an institution to promote investment by small- and medium-sized businesses. However, a national investment bank is often seen as the answer to our infrastructure investment needs. If a British investment bank is the answer, we need to be clear we know what the question is.

There is a deeper question which is to do with British society and the way we do our politics. Could a national investment bank actually survive intact? There needs to be a great deal of consensus about how the bank would operate. It would need a clear mandate. It would have to be run by people who could avoid a short-term trading outlook, who were free of civil service mentality, who were immune to short-term politics, and who possessed a spirit of national endeavour. Imagine a car plant meets hard times and faces closure with the loss of thousands of jobs. Could the national investment bank board resist the subsequent clamour that it should inject hundreds of millions of pounds, irrespective of its scepticism about the investment merits? Could it resist pressure from the Treasury and could chancellors of the Exchequer avoid changing the rules for the sake of political expediency? It is, unfortunately, hard to imagine at present. This is why we need to cultivate a consensus around what sort of institution we want.

While we do need to raise and maintain investment in infrastructure, this should be separate from efforts to raise investment levels in the business sector. If we are to encourage longer-term thinking we need to reform the way business is financed. That is what a British investment bank could do, along the lines of the German KfW, as I argued in The Credibility Deficit. It would have to be established with a clear mandate that recognises it is operating on behalf of the nation and will therefore be a wise steward of the money it invests on our behalf. Such an institution will take some years to become fully established but could become a foundation stone of a new responsible capitalism. And a Labour government will need to be committed to setting up a proper institution and not some halfway compromise that will be underfunded or unduly restricted by Treasury rules. It will need to be separate from government and therefore removed from ministerial control. Perhaps the best way would be to establish it along the lines of the National Audit Office, accountable to, and in effect owned by, parliament on behalf of the country.

In one sense, it was odd that Labour should commission a paper examining the case for a British investment bank, given the years the party has already spent discussing the idea. The report could have concentrated more on the needs of business and the various options for helping them. In particular, the focus should have been on how to make the market work better, channelling investment to where it is needed and where it will produce decent, long-run and sustainable returns. One solution for business would be a national investment bank as described above. This should be Labour policy and we should focus on how it can be implemented as part of an active, market-friendly industrial policy.


Stephen Beer is a City investment manager and author of The Credibility Deficit – how to rebuild Labour’s economic reputation. This article represents his personal opinion.


Photo: William Warby

Progressive centre-ground Labour politics does not come for free.

It takes time, commitment and money to build a fight against the forces of conservatism. If you value the work Progress does, please support us by becoming a member, subscriber or donating.

Our work depends on you.

Print Friendly, PDF & Email

Stephen Beer

is an economist and works as a senior fund manager at the Central Finance Board of the Methodist Church and author of the Fabian pamphlet, The Credibility Deficit – how to rebuild Labour’s economic reputation.


  • The argument is only half about what a Labour Government might do in 2015. It is equally about what the current Government is failing to do now in stimulating investment.
    I’m all in favour of a debate by the Labour Party about the precise nature of a British Investment Bank. However, this should not be so introspective that it fails to put forward clearer ideas about how to secure public and private investment that could lift the UK economy out of double dip recession.
    The somewhat timid track record of Labour’s previous discussions/policies on investment banks is not entirely encouraging at a time when some grounded radicalism is needed in economic and industrial policy.

  • Stephen makes some good points, particularly about political interference that could occur. The idea of a bank is sound though I think, but the issues are with the governance and management of such a bank. The car plant example issue is a good case in point as the bank could end up being used to prop up a failing industry instead of using its resources to help growing small firms.

    In the past the BOE made what is now known as 3i (though not a bank), it provided growth capital for smaller firms and so helped to invest in huge number of british success stories. Unfortunately it was such a success that the Tories sold it off and now its focus is international.

Sign up to our daily roundup email