Adam Posen, who is one of the leading doves on the committee, advocates the formation of a taxpayer bank along the lines of Germany's Kreditanstalt für Wiederaufbau (KfW), which loaned Heidelberg £300m at the height of the recession.
In a speech to businessmen at Wotton-under-Edge, Gloucestershire, Posen repeated his call for further Quantitative Easing (QE) - something he has consistently advocated for more than a year - and said that the Bank and government needed to promote investment and credit to SMEs.
"Restructuring the British economy is [being] inhibited by a financing problem," he said. "Tighter credit conditions among fewer banks are not leading to better lending decisions. If anything, the availability of credit remains especially low for SMEs and for new firms.
"Greater competition in high street lending in the UK is essential, both in the short- and the long-run... The Bank and HM Government [must] work together to create, capitalise, and make liquid new institutions for lending to new businesses and SMEs."
Posen called for the formation of "two public institutions" to increase the availability of credit to SMEs and start-ups: a public bank and a separate entity to bundle and securitise the loans made to SMEs.
He argued that the government should set a size limit on businesses that would have access to the lender and that interest rates and loans could be set as a mark-up from LIBOR or other market rates.
"Essentially, SMEs or new businesses which already applied to private-sector banks for loans and were turned down, can dust off their loan applications and collateral and offer them to this new lender," said Posen.
"This should include trade credits and invoices due from larger customers which can be discounted short-term. Not all of these loans will be approved – we can set up incentives for the loan officers such that excessive losses are punished, probity rewarded.
"All that matters is that the new institution does not have the overhang of bad loans and insufficiency of capital that our previously existing large banks do. That will increase competition and drive down spreads, as well as making more credit available."
"Again, this institution would in the first instance be choosing among loan applications already rejected by pre-existing banks, or which were told not to apply."
Posen predicted criticism of his scheme from private banks, which he said would "scream about the unfair cost of capital advantage such an institution would have". However, he countered that this would provide impetus for those banks to write down more of their bad debts and raise more capital.
"Moreover, since the major banks in the UK have benefitted from a too-big-to-fail situation, any disadvantage they have in funding conditions is offset by the funding advantage they have over smaller or newer financial institutions, which they have gladly accepted," he added.
"We should not get too worked up about creating some increased competition for market-dominating private entities. Ultimately, this entity can and should be privatised, perhaps in more than one part depending upon its scale, when the situation improves."
Posen also criticised the behaviour of the UK's main lenders since the recession. "Have banks been more likely to cut off 'bad' borrowers who happen to owe a lot than good low-risk borrowers who can be asked to pay their debts in full?
"Have banks been more willing to look at a company's fundamentals and prospects, underneath any short-term liquidity difficulties? And as the UK banking system has become more concentrated in fewer, larger banks, has banks' willingness to deal with small and new growing businesses gone up?
"Of course not."
