An exhibition featuring one million pounds' worth of cancelled bank notes. Photo: Andrew Stuart / PA Archive/Press Association Images. All rights reserved.Jeremy Corbyn's proposal of a 'national investment bank' is nothing new. The record for these sorts of ventures is actually, well... underwhelming. But that doesn’t mean there wouldn’t be an opportunity here for real transformation. The proposal to set up a national investment bank and a network of Regional Investment Banks is fast becoming the centre-piece of his economic policy agenda. This seems a clever move. It sounds innovate, avoids tricky narratives about public spending, and is satisfyingly 'public sector'. It almost sounds radical.
Yet before anyone can shoot it down as some crack-pot leftist idea, it easy to point to Germany’s Kreditanstalt für Wiederaufbau or any number of other promotional banks around the world. In fact, the UK’s utilities, universities and corporate sector have been receiving several billion in financing from the EU’s own Luxembourg-based investment bank every year. If we loose out on that because of Brexit, it would seem only sensible to put something in its place.
It sounds innovate, and avoids tricky narratives about public spending
Having worked in this sector, my fear is not that it's a misguided piece of swivel-eyed utopianism. My fear is that Corbyn’s proposal might not be radical enough. I’m not calling for revolution here (though why not?); just saying that implementing bog-standard public promotional banks might not turn out to be as transformative as hoped. On the other hand, maybe there is an opportunity here for building towards a new kind of economy. It all depends on the details.
Let’s start with what public promotional banks actually are. Basically they’re a clever bit of financial engineering. They are owned by the state and borrow money just like the treasury does, but they are regarded as “off balance sheet” so the borrowing doesn’t show up in normal public borrowing figures. Their debt is counted as a “contingent liability” for the state, however – the explicit or implicit state guarantee means the state could be forced to cough up if the promotional bank goes bust. But this is usually regarded as an exceedingly low risk for the state because a promotional bank’s liabilities are matched by assets – all the outstanding loans for infrastructure projects, etc. – that are usually seen as pretty safe.
Basically, by having an off balance sheet promotional bank to focus on capital expenditure projects, you can have lower public borrowing figures yet still mobilise a lot of cheap finance. This is a good thing. But judging by the experience of other promotional banks, we should also be realistic about what a national investment bank could achieve; we need to be constructively critical.
A national investment bank would still be a bank
Promotional banks are not a magic wand for substituting normal government spending. They are banks that lend money and expect to get repaid – with interest. This means they are limited to financing investment projects where there is a future revenue stream. Multilateral versions like the World Bank (yes, that’s another one) lend to governments against future tax revenues, but a UK national investment bank lending back to the UK government would make little sense. That leaves privatised utilities and other companies as potential clients, and other banks, and some entities like universities and housing associations. But if you wanted the bank to finance building an NHS hospital, for instance, it would probably have to be via a private investor in a PFI-type scheme that had been promised a steady stream of public money for a long time in the future. That certainly makes little sense.
Promotional banks are not a magic wand for substituting normal government spending
Would financed projects have gone ahead anyway? How would we know?
The public relations efforts of promotional banks are consistent in claiming credit for everything they finance. The whole of the new infrastructure other investment activity tends to be claimed as “impact”, regardless of how much or little of the financing they provide. “We mobilized 100 million for X” can mean “We lent 10 million and other people lent 90”. More importantly, it is usually implied that such investments wouldn’t have gone ahead without the critical last drop of finance from the promotional bank.
But how do we know? We simply do not know the counter-factual scenario in which the promotional bank does not borrow on the market and does not issue loans to projects. And I can assure you that very little serious attempt is made to work this out.
'Lending for Small and Medium-Sized Enterprises (SMEs)' is a particularly egregious example. All the promotional banks I can think of are big, centralised, capital city-based institutions that can’t handle direct applications for finance from small and medium sized enterprises. When a promotional bank says, “We supported 100,000 jobs in SMEs”, what they mean is “We lent money to another bank that told us they had lent the money to some SMEs who happen to employ 100,000 people”. The problem is that money is fungible. Lending to another bank is like pouring money into a big pot. Out of that pot, the latter bank lends to a number of SMEs. But money from the same pot gets invested in large corporate or government bonds, or used to pay dividends and bonuses. We simply do not know to what extent the intermediary bank would have lent less to SMEs without the big loan from the promotional bank. This kind of lending is just providing slightly cheaper finance to commercial banks.
In fact, the 'big pot' fungibility of money problem applies to all promotional bank lending. The big pot is the economy and a promotional bank simply borrows from one part of the pot and lends to another. And we don’t really know what would have happened had it not. The macroeconomic impact (and I believe there is some) just comes from being able to provide finance slightly cheaper than commercial banks. Theoretically, this should improve the efficiency of the economy and stimulate a degree of extra investment. But try modeling this!
How cheap is promotional bank lending?
Let’s also not pretend that the activities of existing promotional banks represent a huge subsidy to investment. Partly this is the fault of neo-liberalism. Promotional banks have been told that they mustn’t 'distort the market' by undercutting and 'crowding out' the private sector. But surely the whole point is to undercut the private sector and change market outcomes?
Except that the self-interest of a promotional bank is not to be as cheap as possible but to be as profitable as possible, thus retaining a robust balance sheet that allows them to keep on borrowing cheaply (and maintain attractive pay and conditions). So what these banks do is to make their finance products just attractive enough that they can meet annual lending targets, but no more.
This means that people don’t, in fact, queue up for promotional bank funding. Promotional bankers don’t spend their days selecting the most socially beneficial projects from among a sea of applications. It’s rather the opposite; there’s a lot of pressure to meet targets which means they might not always be as selective as they might be.
Would there be enough projects to lend to?
This may seem like a silly question. But we are not talking about giving away free money. We are talking about loans that have to be repaid and that are probably just slightly cheaper than the market. There are in fact a few reasons to be pessimistic. One is economic demand. Recent monetary policy experience should be enough to tell us that it is not always easy to stimulate investment just with a small cut in interest rates. If there is lots of uncertainty and business outlook is poor, it can take a lot to persuade businesses to invest. This is particularly a problem for plans to support SMEs. A promotional bank may find itself pushing on the proverbial piece of string.
it can take a lot to persuade businesses to invest
Another problem is know-how. If you want to fund say, local renewable energy and energy efficiency projects, or municipal redevelopment programmes, it may not be enough to sit back and wait for the applications to come in. There is a big lack of expertise in developing fundable proposals and a well-acknowledged need for technical support to accompany finance. Many promotional banks are trying to address this, but they are not always best placed to do so. And then there is planning permission. And the political decision-making needed to move forward with projects, both large and small. This, rather than finance, is what holds back a lot of investment.
The need for a wider mission
In fact, we shouldn’t see promotional banks as a drivers of transformation, but rather as a tool to support a wider program of change driven by the state or, still better, by citizens. If cheap money alone was going to solve climate change and social exclusion and the housing crisis, we would be there by now. The political will has to be in place to pull all the different levers.
One issue is the basic research that is behind all technological breakthroughs, but which requires patient funding with no guarantee of a return. Another is the chicken and egg problem of basic infrastructure. You are unlikely to want to invest in renewable energy generation, for instance, without the grid infrastructure necessary to support it, and vice versa. And you are doubly unlikely to invest if people can’t make up their minds about the future direction of energy policy. There is a need for a mission-oriented approach that sets the direction of change. Promotional banks are then just one tool for supporting such a mission.
What kind of institution do we want?
My last critical point is about governance. Actually existing promotional banks are very top-down institutions. They are typically run by political appointees, often themselves ex-politicians, who are well networked in the political and business establishment. They like to present themselves as neutral and technocratic, but it is not hard to imagine that the advice of the actual technical staff might sometimes come into tension with agendas of upper management. It is easy to imagine a national investment bank ending-up funding something like Hinkley Point C, just because the government of the day demands it. Is this the public service model we want for a new network of publicly-owned institutions?
Some tentative proposals:
Despite all this, I support Corbyn’s proposals for a new national investment bank and a network of Regional Investment Banks. At worst, it would fill a gap in our economic policy mix, and might help to stimulate a little bit more investment. As John Weeks has pointed out, in the long-term it might help to shield capital investment from opportunistic government cuts every time there is a recession. But if that is all we achieve then we have missed an opportunity.
it might help to shield capital investment from opportunistic government cuts
Not only regional but local: One of the most promising things about Corbyn’s proposal is that it calls for regional banks as well as a national one. This is good; the last thing we want is another 2000 bankers sitting in the City of London. Let the national investment bank do the fundraising from the money markets, but devolve the operational side to the regions where the new banks can be closer to the devolved authorities and municipalities that actually make the key decisions.
But let’s go further. Let’s make this a decentralised network with branches at the municipal level. That way, these Regional Investment Banks could really become oriented to public service; embedded in local communities; working closely with municipalities and county councils, local companies and local initiatives; helping to identify and develop investment opportunities; and finally bringing finance into the community.
Support small businesses directly: Lending to other banks “for SMEs” is just a cheap way to hit targets. It is worth investing in municipal-level branches and local client relationships that allow you to support small businesses directly. Someone has to do this work anyway if these businesses are to be funded, so why shouldn’t it be done properly as a public service.
Package funding with technical support: Large corporates like privatised utilities have the know-how they need, but local municipalities, businesses and social enterprises often don’t. Regional development banks, through their branches, should be there to provide support from the earliest days and right through the process. This also costs money, but it is a service worth paying for, given the gravity of the problems we face. A model with lower lending volumes but more value-added in complementary services may also actually have a larger macroeconomic impact than just trying to lower costs and maximise volumes.
Support the cooperative economy: Corbyn’s Digital Democracy Manifesto proposes that the national investment bank will be used to support platform cooperatives. This is spot on. In fact, all kinds of cooperatives as well as social enterprises such as housing associations should be prioritised. We go on endlessly about how SMEs are at a funding disadvantage and need support, but coops face even greater barriers. Coops also represent a step towards the kind of dynamic, democratic economy that we should be trying to create.
The current time is actually one of amazing innovation in the cooperative sector, driven both by a growing belief in employee control and ownership, and by new digital technologies. Loads of new ways of cooperating and new ways of bring people together to fund cooperation are being developed. The National and Regional Banks would be able to play an important role, both directly helping to bridge the funding gap for coops and providing backing such as guarantees for cooperative P2P financing mechanism for the cooperative economy.
We need to explore and develop new public service models
Radically democratic: We are talking here about setting up a brand new public institution. Why should we design it like a throwback to the 1950s? We need to explore and develop new public service models that move away from top-down command management and foster accountability to workers and the communities they serve.
In all this, it is worth remembering that a national investment bank would never be a quick fix. Even the most standard corporate model would take years to set up and grow. As a policy, it is all about long-term transformation. So why don’t we approach the idea with some principles and ambition?My modest proposal would be this: (1) Run the local branches like co-ops, so that managers are selected and accountable to the whole workforce and not the other way round. This already helps to reflect the public interest and keep managers honest. (2) Vest branch ownership in local authorities and make then accountable to those authorities, if not directly to citizens. Branch workers should decide operational matters (e.g. which projects are worth funding) and local communities should set the policy priorities (coops or housing or renewables...?). (3) Confederate these branches to create each Regional Investment Bank, like a coop of coops, with a regional HQ to provide services to the network and support pan-regional operations. (4) Confederate again to create the national investment bank. This way the whole system becomes radically democratically accountable, and very hard for the national elite to capture.