April 23, 2025
Iain Frame – University of Dundee[i]
In March 2012, four years after the UK government’s rescue of the Royal Bank of Scotland (RBS), the then UK business secretary, Vince Cable, proposed to the rest of the government that it ‘use [RBS’s] time as ward of the state to carve out of it a British business bank with a clean balance sheet and a mandate to expand lending rapidly to sound business’. Cable’s proposal would have built on RBS’s post-crisis ‘public’ character: the government held 84 percent of RBS’s share capital, a level of control that Cable thought it ought to use to restructure RBS with an explicit public policy mandate to support business lending. Yet Cable’s colleagues in government rejected his proposal, instead preferring to manage RBS in anticipation of an equity sale.
Cable’s proposal did, however, find an outlet elsewhere. In 2013 his department established an entirely new bank, the British Business Bank (BBB). The BBB fits neatly into the category of public bank in two respects: it is fully owned by the UK government; and it is an economic development bank which, as such, has a public policy objective to increase the finance available to small and medium sized businesses. The BBB fulfils its public policy objective by operating a venture capital fund and providing loan guarantees, yet unlike other forms of public banking, it does not issue money-like liabilities or accept deposits. Both its story and the story of RBS post-2008 are instructive because they underline the challenges that different forms of public banking must confront after the rise and on-going influence of neoliberalism.
Neoliberalism and its limits
Since its rise as an ideology and political project in the 1970s and 1980s, neoliberalism’s common sense has favoured markets over the state as the preferred means of valuing and distributing resources. In practice neoliberal policy has advocated for the privatization of state assets and functions; invited corporations to maximize shareholder value; tasked the remaining institutions of the state to act as if they are competing in markets; cast doubt on the efficacy of public interventions in response to ‘market failures’, reasoning that the negative consequences of such failures must be weighed against the inefficiencies of the state’s response; and, in the UK specifically, encouraged the growth of the financial services sector and the City of London at the centre of it.[ii] While neoliberalism’s mantra insists that there is no viable alternative to it, in the early twenty-first century its project looks thread-worn, unable to respond to wealth inequality and economic insecurity, environmental degradation and ecological crisis, and a dysfunctional financial system in which too-big-to-fail banks privatize gains and socialize losses.
To both challenge and construct alternatives to neoliberalism’s ‘market fundamentalism’, recent legal scholarship in the US and Europe has turned to the relationship between law and political economy. To challenge neoliberalism’s market fundamentalism, this scholarship draws on the legal realist insight that the allocation of legal entitlements shapes market outcomes. To articulate alternatives to market fundamentalism, it shows that the legal construction of markets implies that they can be reconstructed, or replaced, to further egalitarian and democratic ends.
In the same spirit, related scholarship on money and credit has demonstrated how polities create money through conscious, collective effort. One influential account shows how the modern banking system takes the form of a ‘finance franchise’, in which the state (as franchisor) delegates credit allocation to commercial banks (as franchisees). In this arrangement, the state provides central bank liquidity support, deposit insurance and, if need be, capital injections and asset guarantees to maintain the par exchangeability of commercial bank liabilities into state money. In return, commercial banks determine who gets access to credit and on what terms. Commercial banks hold this privileged position because it is assumed that their commercial interests combined with their expertise in credit risk assessment enable them to make socially optimal allocations of credit. Almost two decades of banking crises and scandal have cast doubt on whether this rationale for the privileged position of commercial banks holds up to scrutiny. Such doubts invite reflection on whether the state should assume direct responsibility for credit allocation. Such reflection in turn invites consideration of how the state might advance that responsibility as a project of institutional design.
Public banks could be that project if they can navigate the challenges that they will face. Three challenges stand out. First, a viable public bank must confront neoliberalism’s common sense, namely that profit-oriented banks allocate credit more efficiently than state actors. This first challenge leads to a second, for neoliberalism’s common sense justifies the structural power of commercial banks – in other words, their position of control over credit allocation, a position for-profit banks will do all in their power to retain.[iii] Combined, these two challenges entail a third: as Saule Omarova points out, a viable public bank may have to confront a tradeoff between normative ambition and institutional viability. To be institutionally viable, must public banks supplement rather than supplant the privileged role of commercial banks in determining credit allocation? With this question in mind, we will turn to the design of the BBB in a moment. Before doing so, we consider next the UK government’s response to the collapse of RBS to illustrate neoliberalism’s post-crisis resilience.
The collapse of the Royal Bank of Scotland
RBS was the UK’s largest commercial bank at the time of its collapse in 2008 and avoided insolvency only because the UK government invested £20 billion of capital and insured assets worth £282 billion.[iv] Such support turned RBS into a type of ‘public’ bank. The government held 84 percent of RBS’s share capital, giving it control over the appointment and removal of RBS’s board of directors. The government could have used that control to direct RBS to pursue public policy goals beyond private profit maximization, goals such as protecting the ‘ordinary savers, depositors, business and borrowers’ which the government had explicitly emphasized to justify its support for RBS. Besides Vince Cable’s proposal noted in the introduction, several other commentators suggested institutional reconfigurations of RBS that would have further embedded such objectives. Some pushed for the conversion of RBS into a green investment bank; others campaigned for it to be broken-up into a network of local community banks and, like Cable, argued that it should be given the objective of prioritizing business lending.[v] The UK government’s preferred strategy, however, prioritized recovering the funds it had deployed to save RBS, a strategy which it could realize only if future investors valued RBS’s shares as an attractive investment, an outcome the UK government tried to encourage by shielding RBS from non-commercial objectives.
The government considered this strategy appealing in part because the only alternative it identified was one it framed as self-evidently unpalatable. In the words of Nicholas MacPherson, Permanent Secretary of the Treasury between 2005 and 2016, the alternative was the ‘classic Stalinist way, a path by which we could seek to plan the economy’. That was not a realistic option, however, because ‘markets do not work that way’. Markets work best, MacPherson believed, when ‘banks lent where it was profitable to do so’. To by-pass the pit falls of the ‘classic Stalinist way’ and let RBS lend when RBS judged doing so profitable, the government adopted a three-pronged strategy: (1) it recapitalized rather than nationalized RBS in the belief that the presence of private shareholders would keep RBS’s board focused on commercial objectives, in particular the bank’s share price; (2) it held its shares in RBS through a holding company set up to act like an institutional investor and which it tasked with selling the government’s stake quickly and at a profit; and (3) to achieve that sale the government instructed the holding company to shield RBS from political pressures to give the bank as much commercial freedom as possible. The UK government’s strategy is a good example of neoliberalism surviving financial meltdown:[vi] on the one hand, it deferred to RBS’s commercially motivated decisions over credit allocation; on the other, when it had to be involved, its arm’s length holding company mimicked market actors.
The government’s strategy failed – emphatically so. A decade after its capital injections saved RBS, it still owned 62.4 percent of RBS’s shares. Its sale in the summer of 2018 of 7.7 percent of its holding amounted to a loss of £2.1 billion. Worst of all, to improve its balance sheet and raise its share price, in the years immediately after 2008 RBS harmed its small business customers systematically, financially exploiting them to add an especially egregious episode to the already lengthy list of bank misconduct. Further discussion of that misconduct and its relationship to the UK government’s RBS strategy can be found here. For immediate purposes, we return to the institutional reconfigurations of RBS which the government rejected but which found an outlet in the BBB.[vii]
The design of the British Business Bank
When the UK government rejected Vince Cable’s proposed reconfiguration of RBS in March 2012, Cable’s department turned its attention to creating a state-controlled business bank from scratch, an outcome it achieved in July 2013 with the incorporation of the BBB.[viii] The BBB’s sole shareholder is the Secretary of State for Business and Trade, on whose behalf a holding company – the same holding company that held the UK government’s shares in RBS – serves as a representative.[ix] Unlike in the case of RBS, the holding company does not have a mandate to sell the government’s stake in the BBB to outside investors. Its responsibilities include providing the BBB with its regular point of contact with the government and overseeing the BBB’s governance arrangements. In addition, and much like it did for RBS, the holding company shields the BBB from political pressures to allow the BBB’s board the freedom to decide how to best promote the BBB’s objectives.[x] Such a governance structure privileges the professional expertise of those running the bank. It does not invite parliamentary scrutiny of the BBB’s activities, nor does it create space for the views of ‘stakeholder’ representatives.[xi]
The BBB’s mandate is to increase the provision of finance to small and medium sized businesses in response to a perceived ‘market failure’, namely that many small businesses wish to access finance, but banks will not lend because smaller businesses often lack the collateral, or the type of collateral, banks regard as necessary to secure the loan. In the months leading up to the BBB’s establishment in 2013, the group set up by the government to advise it on the design of the BBB noted the option of having the BBB operate out of regional branches, form direct relationships with customers and make its own credit risk assessments.[xii] But the advisory group rejected that option and instead recommended that the BBB partner with rather than compete against commercial lenders. The government accepted this recommendation. The BBB does not lend or invest directly but rather works through investment funds and commercial banks. It does so via three ‘arms’: its commercial arm, mandated arm, and service arm.[xiii]
The BBB’s commercial arm operates on a purely commercial basis. It acts as a venture capitalist in partnership with private investment funds, taking equity stakes in small business with high growth potential. The mandated arm, in contrast, has the public policy objective of identifying and overcoming market failures concerning access to finance for smaller businesses. Like the commercial arm, the mandated arm partners with private investment funds to support equity investments in smaller businesses. It also administers a modest lending program. Its initiatives differ from those of the commercial arm, however, because it is not expected to make a return on its investment in line with private sector expectations.
Unlike the commercial arm and the mandated arm, both of which have operational independence from government, the BBB’s service arm acts as an agent for the Department of Business and Trade. It administers one of the BBB’s largest programs, the granting of guarantees to incentivize commercial banks to provide loans which commercial banks would reject if left to their own profit maximizing calculations. And it was a version of this program that the UK government established in March 2020 in response to the COVID-19 pandemic when it set up, and tasked the BBB with orchestrating on its behalf, the Coronavirus Business Interruption Loan Scheme (CBILS).[xiv] CBILS provided small businesses with finance of up to £5 million through participating lenders, the government guaranteeing 80 percent of the loan. Since lenders took 20 percent of the risk, CBILS encouraged lenders to make credit risk assessments. Yet it was precisely these credit risk assessments that prevented many small businesses from accessing at speed the credit which they needed. In response, in May 2020 the government varied its approach. Under the Bounce Back Loans Scheme (BBLS) – also administered by the BBB on behalf of the government – the government guaranteed the full amount of loans of up to £50,000. BBLS aimed to get money to borrowers within 24 to 48 hours of applying. Prioritizing speed curtailed the banks’ authority to make credit risk assessments. Post COVID-19 versions of the program have, however, reasserted that authority. The current version, introduced in 2024, delegates to commercial lenders discretion over whether to lend and what interest rate to charge. If the bank agrees to lend, the BBB provides support similar to CBILS, except that it now backs loans to small businesses of up to £2 million by providing commercial lenders with a 70 percent government-backed guarantee.[xv]
The BBB’s initiatives benefit small businesses by increasing the availability of equity and debt, both of which would be less accessible but for this public support. And the BBB’s current design benefits commercial banks too, for two reasons. First, its design ensures that it does not expose commercial banks to a government-backed competitor; to the contrary, the BBB’s absorption of much of the financial risk of supporting small businesses provides commercial banks with a public subsidy. And second, the BBB works through commercial banks, an arrangement which maintains the privileged position of banks to determine the allocation of credit, but at the same time only supports such lending decisions provided they accord with the BBB’s public policy mandate.[xvi] To conclude, we consider this mandate further for it invites us to ask: for whom do public banks function?
For whom do public banks function?
Deference to bank determined credit allocation and suspicion of public authorities as market actors reflect the on-going influence of the neoliberal project. So too does a further point of continuity connecting the story of RBS after 2008 to the present-day work of the BBB: both banks are examples of state-led derisking of private investment.[xvii] The state’s objective regarding RBS has been to counter political risk to improve investor confidence and entice investors to buy RBS’s shares; regarding the BBB, the state’s goal has been to absorb much of the risk of lending to small businesses to encourage commercial banks to increase the scale of such lending. But also notice that these derisking strategies differ on account of the BBB’s public policy mandate. RBS’s priority after 2008 was its share price: those who ran the bank were embedded deeply in the world of finance, and they ran it to satisfy the expectations of prospective investors. The BBB too is run by seasoned bankers and financiers,[xviii] yet its public-interest objective is to support the very constituency harmed by RBS’s post-2008 misconduct, the small and medium sized business community. In other words, different configurations of public banking will serve different interests because, as Thomas Marois observes, “Public banks’ functions are [] subject to the pull of public and private interests in a class-divided society, each struggling to shape for whom the bank predominately functions”.[xix] RBS’s time as a ward of the state gave rentier investors and asset managers an opportunity to shape the bank in ways favourable to their interests. In contrast, the establishment of the BBB has created an opportunity for the small business community, a community which has the capacity for collective action through organizations like the Federation of Small Businesses and which has proved apt at rallying Members of Parliament to its cause, a cause MPs from across the political spectrum support enthusiastically.
Mythical but influential images of small businesses may help to augment that support: the romanticized small business, immersed in the detail of daily life, tying together highly personalized relationships between the owner-manager and their local community; the de-personalized, functional small business, competing globally and generating employment, heralding tomorrow’s innovations as it drives GDP growth; the oppressed small business owner, squeezed between Big Government and Big Business, surviving as the ‘spirit of enterprise’, as Adam Smith’s ‘invisible hand’.[xx] However, these widely held images of the small business are at best partial truths. Research by Dannreuther and Perren shows that, until the early 1970s, the small business in the UK was largely absent from policy debates; and that, when the small business did enter these debates – debates shaped by and contributing to neoliberalism’s ascendency as an ideology and political project – commentators associated it with values like individualism, self-sufficiency, and personal responsibility. Yet as Mazzucato and Penna point out, ‘[t]here is no systematic evidence of a uniform relationship between firm size and growth’ and, moreover, ‘small firms appear as less productive than larger ones’. So, are small businesses really the ‘backbone of our economy’, or are we too quick to idealize the small business, to use it as a means of promoting individualized risk at the expense of collective and public goods?
If we are too quick to idealize the small business, our doing so is in a sense surprising considering Colin Crouch’s observation, that neoliberalism’s ‘positive achievement’ was to get policy makers to ‘think seriously about the opportunity costs of trying to preserve the neoclassical ideal of an economy dominated by masses of small and medium-sized enterprises’.[xxi] As Crouch shows, neoliberal suspicion of small businesses complemented its confidence in ‘the dominance of public life by the giant corporation’,[xxii] including giant banking corporations now infamously associated with ‘too big to fail’. Today’s common sense both idealizes small businesses and defers to the credit allocations of these giant commercial banks. The BBB’s institutional design reinforces this common sense. Could it and public banks like it be reimagined to challenge and construct alternatives to this common sense?
[i] The author would like to thank Ignacio Orellana Garcia and Nadav Orian Peer for their helpful comments.
[ii] This overview of neoliberalism draws on Colin Crouch, The Strange Non-Death of Neoliberalism (Polity, 2011). See also David Harvey, A Brief History of Neoliberalism (Oxford, 2007). For discussion of the influence of the financial services sector and the City of London on UK policy making, see Scott Lavery, British Capitalism After the Crisis (Palgrave Macmillan, 2019); Aeron Davis and Catherine Walsh, “The Role of the State in the Financialisation of the UK Economy,” Political Studies 64, no. 3 (2016): 666-682; and Tony Norfield, The City: London and the Global Power of Finance (Verso, 2016).
[iii] Michael A. McCarthy, “Three Modes of Democratic Participation in Finance,” in Democratizing Finance: Restructuring Credit to Transform Society, ed. Fred Block and Robert Hockett (Verso, 2022), 159.
[iv] This overview of the UK government’s response to the collapse of RBS draws on Iain Frame, “The ends and means of banking: the Royal Bank of Scotland after the 2008 crisis,” Journal of Corporate Law Studies 22, no. 2 (2023): 931-970.
[v] See Frame, “Ends of Means of Banking”, 943, note 93.
[vi] Philip Mirowski, Never Let a Serious Crisis Go to Waste (Verso, 2014).
[vii] A further such outlet was the establishment in 2012 of the Green Investment Bank (GIB). The government tasked the GIB with furthering the UK’s transition to a low-carbon economy. However, the GIB operated less like a bank and more like a venture capital fund and, only five years after establishing it, the government sold it to Macquarie Group, the Australian investment bank, which renamed it the Green Investment Group. Note, however, that prior to privatizing the GIB, the UK government issued a green ‘special share’ to be held by the Green Purpose Company Ltd, and which gives five independent trustees the power to accept or reject changes to the Green Investment Group’s ‘Green Objective’ as set out in its Articles of Association.
[viii] The BBB was incorporated under the Companies Act 2006 rather than as a statutory corporation: see its Certificate of Incorporation and Articles of Association.
[ix] This holding company is now called UK Government Investments. It is wholly owned by HM Treasury: https://www.ukgi.org.uk/. At the time of writing, it still holds the UK government’s remaining shares in RBS – or, more accurately, NatWest, for in 2020 RBS Group formally changed its name, replacing RBS with its NatWest brand. It also wholly or partially owns shares on behalf of the UK government in around 15 other public sector enterprises.
[x] British Business Bank plc, Shareholder Relationship Framework Document, December 2022, 2.1 and Annex 1.
[xi] For ideas on how to make financial institutions more democratically accountable, see William H. Simon, “Economic Democracy and Enterprise Form in Finance” in Fred Block and Robert Hockett (eds) Democratizing Finance: Restructuring Credit to Transform Society (Verso: 2022), 119.
[xii] See the Business Bank Advisory Group, ‘Overview paper’, June 2013, 25, available at Business Bank – strategy overview by Business Bank Advisory Group (executive summary). For a summary of this advisory group’s recommendations, see its letter to the government: Business Bank Advisory Group Recommendations to Vince Cable
[xiii] British Business Bank plc, Shareholder Relationship Framework Document, December 2022, 3.1-3.9, Shareholder Framework Document Dec 22.
[xiv] See Frame, “Ends of Means of Banking”, 963-966.
[xv] This program is currently called the Growth Guarantee Scheme: Growth Guarantee Scheme (GGS) | British Business Bank
[xvi] In the summer of 2021, the BBB was joined by a second UK government owned bank, the UK Infrastructure Bank. In autumn 2024, it was renamed the National Wealth Fund and given a broader industrial policy mandate in addition to financing infrastructure projects. The UK has two further development banks: the Welsh Development Bank (established in 2001) and the Scottish National Development Bank (established in 2020). As their names indicate, the investment mandate of these banks is confined to Wales and Scotland respectively.
[xvii] On derisking, see Daniela Gabor, “The Wall Street Consensus,” Development and Change 52, no. 3 (2021): 429-459. See also Brett Christophers, Our Lives in Their Portfolios: Why Asset Managers Own the World (Verso: 2024), which discusses derisking strategies by governments to entice investment by asset managers in housing and public infrastructure. Christophers discusses the UK Infrastructure Bank (now renamed the National Wealth Fund) as an example of derisking at page 100.
[xviii] See the British Business Bank, Annual Report and Accounts 2024, 106-111, Annual Report and Accounts 2024 – Supporting UK growth and innovation, for the background of the current directors.
[xix] Thomas Marois, “A Dynamic Theory of Public Banks (and Why it Matters),” Review of Political Economy 34, no. 2 (2022): 365. Emphasis in original. See also Thomas Marois, Public Banks: Decarbonisation, Definancialisation and Democratisation (Cambridge University Press: 2021).
[xx] See Charlie Dannreuther and Lew Perren, The Political Economy of the Small Firm (Routledge, 2013).
[xxi] Colin Crouch, The Strange Non-Death of Neoliberalism (Polity, 2011), 70.
[xxii] Ibid., viii.