LONDON (Reuters) - Britain is considering the use of new entrants in its banking market to operate a state-backed business bank that would offer finance to companies too small to raise money on equity or capital markets, Business Secretary Vince Cable said on Tuesday.
Ministers say the expansion of smaller firms could help revive a struggling economy, but such companies have found it difficult to obtain loans from Britain's largest banks while they rebuild their balance sheets after the financial crisis.
One-third of smaller companies that applied for loans over the past 12 months were refused, showing the issues they face raising finance, Cable said in advance excerpts of a speech released by his office.
Cable has long been keen to create a state-backed development bank similar to Germany's KfW to support British manufacturers but has to tread carefully to avoid running afoul of European Union rules that limit state aid.
Indicating that the creation of such a bank was in its infancy, Cable said ministers were still establishing the "scale and modus operandi of such a body."
However, he suggested that the bank could be run through a new generation of so-called "challenger" banks, which the government has been encouraging to expand in Britain as a way of increasing competition among lenders.
"In the UK such a bank could operate through alternative providers such as the new challenger banks like Handelsbanken, The Co-Op and Aldermore and non-bank lenders boosting their lending capacity, as well as corralling existing provision such as co-investment and guarantees to support business expansion," he said.
Sweden's Handelsbanken entered the British market in 1982 and now has over 100 branches, while the Co-operative Bank is buying more than 600 branches from the Lloyds Banking Group.
Aldermore, established in 2009, operates without branches to offer saving and lending products to small businesses and homeowners.
Britain's largest banks are Barclays, Lloyds, Royal Bank of Scotland, HSBC and Santander.
Cable said the new institution's success would be measured not by its size but by how far it "shakes up the market in business finance and helps ease constraints for high-growth firms."
"It's essential we increase diversity in the supply of finance and institutions which provide a coherent relationship banking service to viable growing businesses," he said.
Finance minister George Osborne said earlier this month that his Treasury department was working on a government sponsored business bank that would bring together the "alphabet soup" of existing state-backed finance schemes for smaller firms.
Editing by Steve Orlofsky