The bank, which was first suggested by the chancellor George Osborne earlier this month, will rationalise existing lending programmes, such as the £80bn Funding for Lending initiative, as well as providing £1bn in new government funding for business.

Unlike previous business lending schemes, which have worked by offering state guarantees to high street banks to promote new lending to SMEs, it is understood that the new bank would be backed by £1bn in "real money" - raised from savings elsewhere in government.

This would be matched by just over £1bn raised from the sale of shares in the bank to private investors. The bank, which would be privately owned and run, would then borrow an additional £8bn to allow it to generate up to £10bn in new business lending.

According to reports, the bank will lend to other start-up banks, supply chain financiers and other non-high-street lenders, who will lend the money in turn to SMEs. Loans will only be made at commercial terms and will not undermine the markets.

While further details of the state-owned bank are being kept under wraps until the chancellor give his Autumn Statement (at 12:30pm on 5 December), the department for Business, Innovation and Skills (BIS) has confirmed that the government would proceed with the plan.

A BIS statement issued this morning said that the bank will "bring together in one place all of the government's finance support for SMEs as well as controlling the government's interests in a new wholesale funding mechanism which will be developed to unlock institutional investment to benefit small businesses".

It added that the bank will operate at arms-length from the government, be professionally run and commercially focussed, and will facilitate the provision of loans, including long-term capital, to UK firms through banks and other financial institutions.

In a press release, business secretary Vince Cable said: "For decades British industry has lacked the sort of diverse, long-term finance that is quite normal elsewhere. We need a British business bank with a clean balance sheet and a mandate to expand lending rapidly and we are now going to get it.

"Alongside the private sector, the bank will get the market lending to manufacturers, exporters and growth companies that so desperately need support.  It will be a lasting monument to our determination to reshape finance so it can finally serve industry the way it should. Its success will not be the scale of its own direct interventions but how far it shakes up the market in business finance and helps to ease constraints for high-growth firms.

"Having a functioning, diverse supply of finance is an integral part of the Government’s industrial strategy. It is all about making the right decisions now to secure our long-term industrial success."

The proposed bank is the latest in a string of government schemes intended to boost lending to businesses, including: the Project Merlin agreement; the £1.3bn Enterprise Finance Guarantee; the £1.4bn Regional Growth Fund; the £1bn Business Finance Partnership; and the Funding For Lending scheme, which replaced the short-lived £20bn National Loan Guarantee Scheme.