Bright Sparks

Patrick Wintour writes

Ed Miliband is to make his firmest commitment to a regional-based economic policy when he proposes a network of banks around the country responsible for providing capital to businesses in their locality.

The proposals, due to be unveiled in a speech to the British chambers of commerce, mark a further attempt to map out a different industrial policy, some of which has echoes of plans for a revival of city regions set out by the coalition adviser Lord Heseltine.

Miliband will say it is time to stop tinkering with the banks and recognise a wholly new system is needed.

He will say: "We do not just need a single investment serving the country. We need a regional banking system serving each and every region of the country. Regional banks with a mission to serve that region and that region alone, not banks that are likely to say no but banks that know your region and your business; not banks that you mistrust, but banks you can come to trust."

The proposal for a network of regional banks follows a recommendation from Labour's Small Business Taskforce, due to be published on Thursday and led by Bill Thomas. It also follows a series of visits by shadow cabinet members to Germany to study the so-called German Sparkassen, a network of local banks that are restricted to lend within a region and which have a civic duty to promote local growth.

Miliband has yet to decide how the British version of regional banks dubbed Sparks will be integrated with the British investment bank. He has been urged to follow the German model put forward by the Labour advisers Lord Glasman and Lord Wood and the shadow business secretary, Chuka Umunna.

Miliband argues that the lack of capital stifles productivity, with more small and medium-sized enterprise applications in the UK than in its main competitor countries leaving many firms that wish to expand to rely on credit cards and overdrafts.

Umunna has sought to draw a distinction between the regional Landesbanken, which have had a chequered record, and their local network of 426 German savings banks – Sparkassen – that see it as their job to support and get credit to their local businesses.

Supporters of the local banks claim that in 2011 total loans by the Sparkassen stood at €322bn (£280bn), whereas the total loan stock of Germany's large commercial banks was only €177bn (£153.5bn). Like Britain's large banks, Germany's large commercial banks cut credit during the financial crisis; lending fell by 10% between 2006 and the middle of 2011. In contrast, the Sparkassen increased lending by 17%.