1. 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

2. 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

3. 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

4. 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.

5. 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 .

6. 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

7. 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

8. 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