Vince Cable, the business secretary, has announced that the Government’s new £1bn Business Bank will also include an agency which ‘parcels up’ SME debt then sells it onto investors. According to Mr Cable, the business lending agency is being planned with the sole purpose of packaging up the loans into various kinds of bonds, which are then backed with a state guarantee, and could be useful new source to brig money into the market of SME debt.
The plan will involve a renaissance that has been dubbed ‘securitisation’, a term more associated with the sort of financial engineering that led us into the current economic crisis. The news that there was to be a new business bank was announced by Mr Cable back in September, and is has been designed to provide SMEs with a new and alternative source of financial assistance.
The fund of £1bn of taxpayers money will also be supported by private partners to bring the total up to £10bn worth of lending capacity. It is also expected that the fund will be providing wholesale funding for start up banks such as Aldermore, as well offering online and alternative lenders such as Market Invoice and Funding Circle.
Mr Cable also said that they were establishing an advisory group that would be creating the bank’s detailed business plan at the beginning of 2013. The proposed securitisation scheme has already been the subject of a feasibility study, and this was carried out by the Association for Financial Markets in Europe.
The idea is that existing lenders will give small businesses loans then sell the debt to the agency, thus packaging loans into bonds that can the be sold on the open market. One condition is, however, that banks have to keep a slice of every loan to stop them just passing on the poorest quality debts to the state backed scheme.