Labour plans to set up network of regional banks to lend to local business

Move is designed to break logjam in lending that has built up since 2008 credit crisis

A network of regional banks which would lend to local businesses would be created by a Labour government, Ed Miliband will announce today.

The move is intended to break the logjam since the 2008 financial crisis which has seen the banks build up big cash reserves rather than help companies to expand. After net lending to business fell by £4.5bn in the final three months of last year, George Osborne is under pressure to shake up his Funding for Lending Scheme in his Budget next week so it provides more help to small and medium-sized firms.

One option considered by Labour’s small business task force, which reports today, is £200m of government “seed-corn” money to create regional banks that could provide a total of £2bn of capital for firms in their areas. Dubbed “sparks” by Labour, they would be modelled on Germany’s “sparkassen” – local banks allowed to lend only within a region and with a civic duty to promote local growth. Regional banks will be promised in Labour’s manifesto at the 2015 election.

Mr Miliband will tell the British Chambers of Commerce’s annual conference in London today: “We need regional banks with a mission to serve that region alone. Not banks that like to say ‘No’ but banks that know your region and your business. Not banks that you mistrust, but banks that you can come to trust.”

The move would be part of an overhaul of the banking system planned by Labour, which wants greater competition on the high street and a clearer separation between retail and investment banking.

Arguing that big banks are failing small businesses, Mr Miliband will say: “They are carrying on with a bonus-as-usual culture, even for those who fail. It is time to recognise that tinkering will not sort this out. Britain needs a wholly new banking system.”

He will highlight the new banks as an example of the long-term reforms to the economy that a One Nation Labour government would bring in. He will reiterate his call for short-term measures to kick-start recovery in next Wednesday’s Budget.

The Labour leader will say that short-term measures are not enough. “The Budget also needs to raise our sights to the big challenges that our country has faced for decades. We need to confront them head on, because the old ways just won’t do any more,” he will say. “We need to build new institutions out of the rubble of the old with radical new approaches to banking, skills, the British firm and infrastructure.”

He will recall the transformation of Northern Rock from a proud mutual building society serving the North-east to a bank that collapsed amid high-risk gambles. “We have to learn the lessons,” he will say.

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