Council run 'banks' set to begin

By Bob Howard BBC Radio 4's Money Box

Lord Hanningfield of Essex County Council says loans would be vetted

Two English local authorities say they are close to launching their own "banks" to help local small businesses.

Essex County Council and Birmingham City Council want to provide credit to local firms struggling to get loans from High Street banks.

Both councils say there would be strict checks to ensure any companies receiving cash were financially viable.

Critics of the schemes claim such loans would be inappropriate and could put council finances at risk.

Council responsibility

Neither council is proposing to set up a branch network or take deposits, but work with an existing bank or building society to offer loans.

If we don't solve problems around economic prosperity, we will have increasing social problems Stephen Hughes, Birmingham City Council

The leader of Essex County Council, Lord Hanningfield, told BBC Radio's 4's Money Box programme any loans would be carefully vetted:

"We intend to do a thorough risk assessment, we're not just using local government officers, we're using banking people."

Whilst Essex is looking to lend about �50m, Birmingham City Council, with a turnover of �3.5bn, is looking to lend between �100m and �200m.

Like other towns and cities in the UK, it used to have its own municipal bank until the 1970s, when it became part of the Trustee Savings Bank, now part of Lloyds.

Stephen Hughes, the chief executive of Birmingham City Council , says councils have a responsibility to help local firms:

"The role of local government is to be the leaders of their communities.

"If we don't solve problems around economic prosperity, we will have increasing social problems."

Council caution

Experts in this field believe these schemes are feasible, if correctly carried out.

Councils should be looking for a safe investment Mark Wallace, the Tax Payers Alliance

"If local government were to go down this route, they'd have to be very cautious.

"They'd have to be absolutely certain they weren't stepping in to subsidise businesses that couldn't survive otherwise."

Critics of the initiatives feel it is wrong for councils to even consider going down the path of lending sums to small businesses.

Mark Wallace, from the pressure group the Tax Payers Alliance, says local authorities lack the necessary expertise:

"Councils aren't set up to act like investment banks.

"I think having had their fingers burnt so badly in the Icelandic banks disaster, councils should be looking for a safe investment."

BBC Radio 4's Money Box was broadcast on Saturday,
24 January 2009 at 1204 GMT.

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