We must champion the decline of the investment bank

In Germany, banking is harnessed and put to work pulling the community forward instead of taking it for a ride. Doing the same at here at home means we must accept, or champion even, the decline of the old model of investment banking. The German, government-owned development bank KfW offers a potential alternative.

Formed in 1948 as part of the Marshall Plan as a central loan corporation. By the 1970s KfW was making frequent use of the capital market. It was able to use the revenues generated from loans to support its rapidly growing domestic promotion programmes and still does.

However, KfW has no branches and does not deal directly with the ultimate borrower. In order to receive funding, customers apply to their own, private bank and this application is forwarded to KfW which assesses the project against its key strategic targets to promote small and medium sized businesses, clean technology, nationally important infrastructure projects, and international project finance.

Kf W is a signatory to the UN’s Principles for Responsible Investments, and acts as an Socially Responsible Investor. Accordingly, it invests almost exclusively in bonds from issuers who comply with high environmental, social and governance standards. It is, for want of a better phrase, an ethical bank.

Despite the onset of the financial crisis, the KfW Special Programme managed to secure sufficient credit for SMEs – nearly 5000 applications for €13.3 billion were approved by the end of 2009. The programme also had a positive impact on employment, securing over 1.2 million jobs.

KfW’s capital comes from the German government. It issues bonds that are unconditionally guaranteed by the government and finances 90% of its borrowing, it has lent €495 billion. Total new lending in 2011 was €70.4 billion.

Because its borrowings are guaranteed by the German state, it enjoys the same credit rating and so has similarly low borrowing costs. These low costs, combined with tax and regulatory incentives means it is able to channel lending at a lower interest rate and over a longer time period than would be obtainable on the private market. The structure is a good example of how a government’s credit rating and financial capacity can be harnessed to lever substantial amounts of lending, and support government-defined policy objectives, from a very small direct commitment of funds. And yet we seem to have taken no notice.

In the UK, companies can in fact access lending – this is not the key problem. The real issue is the cost of lending which is much higher to businesses in the UK than in competing economies. Instead of

talking about the Bank of England base rate, we should be quoting the real cost of lending – just like with Libor, we seem to favour nonexistent indicators. Low confidence and the high cost of money are the issues stifling economic recovery and a new national investment bank could lend money at affordable rates.

In order to create a banking system England can rely on and be proud of, we must be ambitious, innovative, willing to learn from our neighbours, and unafraid of making enemies. My vision of what

British banking could be involves a system with a reputation for reliability, not risk; for care, not corruption; and for moderation, not manipulation. But to get there, we must accept – or rather champion – the decline of the investment bank.

John Mann is the Labour MP for Bassetlaw. This is an extract from Banking 2020: a vision for the future, published by the new economics foundation and includes chapters from John Mann, Chris Leslie and Andy Love