Ownership of Cambridge and Counties Bank, which will provide SMEs with loans secured against commercial property and a "competitive" deposit account, is split equally between Cambridgeshire Local Government Pension Fund and Trinity Hall.
Chief executive Gary Wilkinson said: "Many robust SMEs are finding it difficult to secure finance." He added that the new bank had a "very strong and experienced management team".
"There is also a real need for increased competition in the banking sector," he said.
Research commissioned by the new bank found that over 60,000 loan and overdraft applications from SMEs, worth as much as £3bn, were rejected in the second half of 2011.
Cambridge and Counties Bank will provide loans of between £50,000 and £1m to SMEs with a turnover of less than £25m.
The launch of new bank is one of number of recent initiatives to plug the shortfall in funding to SMEs.
Last week the government announced it will invest up to £100m of funding in alternative lending channels as part of a £500m initiative aimed at supporting SMEs in any sector.
The funding, which will be made available over the next two years, is part of the government’s £1bn Business Finance Partnership initiative, announced in Autumn 2011.
And earlier this year the government launched its National Loan Guarantee Scheme, which provides state guarantees against unsecured loans made by UK banks to businesses with a turnover of less than £50m.
The scheme is intended to pass on the benefit of the government’s low borrowing rate to UK business.
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