Greenwich Political Economy Centre, University of Greenwich A National Investment Bank and Regional Development Banks for Britain based on External Expert Report to the Shadow Chancellor and Shadow Secretary BEIS Özlem Onaran Greenwich Political Economy Centre, University of Greenwich

Overview The existing financial system in the UK has proven inadequate for the economy and society investment disappointing by international comparisons Failed to fund long term productive investment, in particular SMEs Disparities between regions: in particular outside of London worsened sharply since the 2008 crash Existing schemes have not changed lending character e.g. Funding for Lending or Term Funding Scheme National Investment Bank and associated Regional Development Banks to reshape priorities Macroeconomic impact: Crowd in private investment↑ →demand (multiplier effects)↑→productivity↑ → Regional convergence, financial stability not designed to be an alternative to public spending

Aims and mandate of the NIB and RDBs In line with the long-term industrial strategy and social goals a sustainable, regionally-balanced and equitable economy defined in cooperation with stakeholders Addressing the long term funding gap for Businesses, in particular the SMEs, non-profit, third sector organisations both physical and social infrastructure technological progress and innovation high-value local projects, in particular in regions outside of London/the South-East

Funding an on-lending strategy: similar to the German KfW funding the Mittelstand initial equity financing by the Government issue an equity tranche of £20 billion in year 1, purchased by the Government. a low cost strategy given the current low interest rates about1% of the public debt funded via its own bond issuance with the backing of government guarantee in the long run annual bond issues build up a satisfactory credit rating →yields on NIB bonds↓ expand the NIB balance sheet to about £250 billion in 10 years →£250 billion of long-term on-lending to private banks leverage ratio (equity-debt ratio) ↑ 8% in year 10 still relatively high compared to commercial banks.

Relationship with the sector not a competitor to private commercial banks on-lending from low interest rate bond finance work through selected existing banks to deliver loans enable discounted long-term loans to appropriate companies via other smaller private, savings and cooperative banks partners to be chosen for their understanding of NIB aims, performance, and standards of corporate governance. The target markets based on regional investment gap and opportunity rather than maximising net present value that tends to favour the South East. Freeing the banks from constraints of conventional banking preferring lending against a marketable physical asset Creating the conditions to give non-asset backed large long-term business loans .

Regulatory framework The quality and quantity of capital will be high. underpinning of a government guarantee Liquidity requirements will be low. borrowing long term from investors, will not face any significant asset-liability term mismatch interest rate and FX risks will be handled within the overall capital framework. Leverage will be moderate NIB will not be a systemically important institution: c.10% of GDP finally The government is the sole equity holder and under-write the NIB bonds, to be treated in the same manner as the KfW in Germany a separate object for the purposes of public sector accounting, according to the European System of National and Regional Accounts

Regional development banks The regional branches of the NIB The annual resources of regional branches should take advantage of local opportunities and needs to close the extreme disparities in infrastructure investment, employment and productivity significant manufacturing in the Midlands and North of England, Scotland, Wales, and Northern Ireland →implicitly sectoral rebalancing of the UK economy

Alternative Funding 1 make loans directly to borrowers, obtain funding from the Bank of England repo with the BoE as an extension of the Term Funding Scheme 2 make loans directly to borrowers, obtain retail deposits from households and enterprises. lessen the reliance on borrowing from capital markets, lessen the reliance on repo funding from the BoE, and would not rely on existing banks for loan creation. Disadvantages The potential need for a large number of physical branches, and a considerably greater workforce