September 15, 2011

Bank of England policymaker calls for state-owned SME bank

by Jan Harris

Adam Posen a rate setter on the Bank of England’s Monetary Policy Committee (MPC) wants the Government to establish a state-run bank focused on helping small UK businesses.

The bank would resemble the USA’s Small Business Administration (SBA) and would help small businesses secure credit.

America’s SBA was established in 1953 and offers loans and a range of other support services to small businesses including advice and training, as well as reviewing legislation affecting small firms.

Its funding ranges from microlending for the smallest firms to venture capital for larger entities.

The SBA’s current initiative to support new ventures and create jobs, known as ‘Startup America’, has been criticised for failing to deliver results quickly enough.

Mr Posen’s suggestion for a similar institution to be established in the UK stemmed from concern that the private sector is unable to take the risks associated with funding small firms, and this is inhibiting the restructuring and growth of the UK economy.

He is also calling for further quantitative easing on a global scale, in order to prevent another recession.

Quantitative easing is a technique designed to stimulate the economy.

Used only as a last resort, it allows central banks to buy financial assets from other banks and from the private sector.

This investment is made using new electronically created money, thereby injecting money in the economy, increasing banks’ excess reserves and increasing the value of the assets purchased.

There is concern that previous quantitative easing failed to generate the expected improvement in global financial market, but Mr Posen believes that this is not the case.

In an opinion piece for Reuters he wrote: “The evidence is clear that the Bank of England’s and the Federal Reserve’s asset purchases had a positive significant effect on consumption, on the relative prices of riskier assets, on credit availability, and on liquidity in the financial system.”

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