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BRIGHTON, England (Reuters) - Britain said on Monday it would allocate 1 billion pounds ($1.6 billion) towards a new state-backed business bank designed to expand lending to smaller firms currently starved of loans from Britain's main lenders.
The government hopes its backing will be matched by a similar amount from private capital and could support up to 10 billion pounds of new and additional lending, Business Secretary Vince Cable said.
The as-yet-unnamed institution would operate through the wholesale market and would support the supply of loans and long-term capital to smaller firms through existing banks and other financial providers.
"We need a new British business bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high-growth companies that power our economy," Cable told a Liberal Democrat party conference in Brighton, southern England.
Cable has repeatedly complained that small and growing companies are unable to obtain the loans they need on reasonable terms, hindering a business-led recovery.
Vicky Redwood, chief UK economist at Capital Economics, said the new bank could help small companies and the wider economy but would take time to have any effect.
"It is not going to get off the ground immediately. It is something that might help more in the medium term than the short term," she said.
"There has been concern for some time that small businesses in the UK are particularly dependent on bank finance to a greater extent than in other countries and that it would be good to develop some other forms of finance for small firms. There is a problem there, and this should help to solve it," Redwood added.
"But I don't think it would do a lot to improve the overall economy's prospects in the next 12 months."
The scheme adds to other moves by the government and Bank of England to revitalise a stagnant economy still struggling from the effects of the 2007-2009 financial crisis.
Aides said the scale of the government's commitment was significant compared with the current 50 billion pounds of outstanding loans to smaller companies in Britain and that the new bank could be operating within 12 to 18 months.
Cable's left-leaning party has seen its opinion poll ratings slump since joining the larger centre-right Conservatives in a cost-cutting coalition and faces heavy losses at the next election due in 2015 if the economy fails to turn around.
"The country must not get stuck on a downward escalator where slow or no growth means bigger deficits leading to more cuts and even slower growth," Cable said.
"That is the way to economic disaster and political oblivion. We will not let that happen."
Aides said the business bank was a political success for Cable after he persuaded Conservative finance minister George Osborne to back the plan with government funding.
But the Conservatives remain opposed to another key Lib Dem proposal for a wealth tax - or "mansion tax" - on the properties of the rich.
"It horrifies the Tory (Conservative) backwoodsmen, but it is popular and right. The super-rich can't move their chateaux to Monaco or Switzerland, so let's get on with it and tax them here," Cable said to applause.
Advisers to Cable said the business bank was designed to fix what they called a "market failure" that banks, under pressure to rebuild their balance sheets, have no longer been lending to small companies, in many cases because they have lost the expertise to assess the risks involved.
Although the Bank of England's 80 billion pound "Funding for Lending" program is now up and running, the cheaper loans it allows banks to provide are more attractive for people taking out mortgages for property than for business lending, they said.
The Federation of Small Businesses (FSB) said companies needed finance to grow but were starved of funds.
"In each quarter this year, around 40 per cent of firms that have tried to access finance have been refused," said FSB Chairman John Walker.
The British Chambers of Commerce business lobby group said the new bank would allow "new and growing companies to get access to capital in the same way that they do in Germany, South Korea, and the United States".
Cable has long pushed for the creation of a state-backed development bank along the lines of Germany's KfW or America's Exim Bank, but he has had to tread carefully to avoid falling foul of European Union rules on state aid.
Editing by David Cowell and Jane Baird