Comment: Business bank key to Plan B, sorry, Plan A Plus

MINISTERS will never admit it, but the coalition may be conceding the need for a Plan B to kick-start the moribund economy.

The government will claim it is more of a Plan A Plus, but the semantics do not matter. A shift in policy away from relying on deficit reduction is long overdue and we can anticipate a number of measures throughout the autumn aimed not only on stimulating growth but on reviving the coalition’s flagging fortunes.

Among the ideas is a state-supported business bank to fill a perceived gap in providing small firms in particular with the support they need. Some wanted Royal Bank of Scotland, already 82 per cent state-owned, to be remodelled in this way by hiving off its business and corporate banking functions. It was seen as a means of putting the taxpayers’ ownership to good use, particularly as there is no likelihood of it returning into private hands any time soon.

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But the preferred option is a stand-alone bank bringing together the myriad of government schemes and initiatives currently spread around various departments.

As such it will work with the established banks and possibly provide them with liquidity, but it will not compete directly against them. It will operate online and will be modelled on similar institutions operating in Germany, Ireland and the US. Although there will be no new money or ideas injected into it, business groups will welcome it as a means by which the government can provide some control over the flow of capital into companies. Efforts to encourage established banks to increase lending through initiatives such as Project Merlin and credit easing have not had the desired effect, or have been dropped. By establishing its own bank, it is hoped government can fast-track its support directly into companies, and by working with existing banks it can enjoy the best of what the public and private sectors have to offer.

Chancellor George Osborne, of course, is under pressure to rescue his own sagging status and, assuming he survives the Cabinet reshuffle, he will unveil further details about the bank in the coming weeks. But in spite of answering the calls of business to go down this route he will also have to fend off criticism that he has not acted more quickly.

Labour will also remind him that it had demanded the setting up of a business bank a year ago while using his decision to go ahead as an admission that all his other initiatives have failed.

Direct Line team has costs in the firing line

DIRECT Line is determined to stick to its flotation plans – scheduled for next month – and unless equity markets take a turn for the worst it is on course to be the biggest new share issue in London this year.

The management team is certainly getting on with sorting out its structure, keeping costs under control and supplying the markets with raised forecasts on profits and returns on capital that should encourage confidence in its prospects.

This is a highly competitive market, as we all know from the insufferably repetitive television adverts from the various players. But as one of the pioneers in cutting out the middle man, Direct Line is not only well-versed in what works and what doesn’t, it also has one of the more recognisable and highly-regarded names.

RBS, which is being forced to sell the business to comply with European state aid rules, has rejected a sale to private equity companies, but their interest, however tentative, will help to underpin Direct Line’s valuation.

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Stephen Hester, RBS chief executive, didn’t want to sell the division, regarding it as a useful addition to the group’s core operations. But he will be relieved if he can attract a healthy level of institutional interest and get a good price when it comes to market.