Lack of funds threatens social investment bank’s risk-taking

A social investment wholesale bank set up with the money currently on the table will not be able to take the investment risks needed to make a difference to social enterprises.

This is one of the common concerns raised in response to the government's consultation on the design and function of the proposed Social Investment Wholesale Bank (SIWB) which closed last week.

The Social Enterprise Coalition in its response said that the SIWB could make riskier investments than other institutions, but to do so it would need to be of sufficient size to 'price out the risk'.

Similar concerns were raised by Charity Bank. Although Charity Bank does not support the idea of a SIWB at present, its response stated: 'If government persists with its proposals then we would argue that a long-term wholesaling institution must be capitalised adequately.'

It points out that if the SIWB were to see the light of day it must be risk-tasking. It warned that an 'undercapitalised SIWB will have to prioritise income generation at the expense of risk taking, innovation and market making.'

It is proposed that the SIWB will be funded by the unclaimed money in dormant bank accounts, which banks are supposed to voluntarily give to the government. Initially, it was envisaged by the Commission on Unclaimed Assets that this amount would be £250m but recent reports have put the amount likely to go to the SIWB as low as £40m.

Many respondents to the consultation raised concerns about this. Speaking to Social Enterprise, SEC CEO Jonathan Bland said: 'Our response questions whether the banks will be prepared to give up the assets required, given this is a voluntary scheme in the present economic conditions and, if so, how much?'

He added: 'While we would like to see the amount outlined in the Commission on Unclaimed Assets report released to the wholesaler, we envisage there will be issues in the release of the capital. For this reason it is possible that the wholesaler will get only a fraction of this amount.'

Charity Bank CEO Malcolm Hayday said: 'Particularly if we are getting money from the dormant accounts we will be lucky to get £100m. The wholesaler needs to be at a scale to do what it needs to do and our concern if it's not then there would then be mission drift which means it starts moving into the retail field.'

Charity Bank's response argues that the limited money likely to come from dormant accounts could be better spent by distributing it among current social investment organisations and the Community Development Finance Association which could take on a bigger role as a champion of social investment.

The CDFA response refers to the need for an additional grant fund from government to work in tandem with any investments the SIWB makes in community development finance institutions because of the risky nature of those investments.

CEO of the Social Investment Business Jonathan Lewis highlighted the need for more money as a key concern. He said: 'If we are serious about developing the third sector and building an effective social investment market, we believe that new money needs to be identified in addition to current available funds.'

Venturesome's response said the SIWB must have a key role in innovating social finance mechanisms and taking risks. It proposed that the SIWB would offer underwriting and guarantees of loans and offer to take on the first loss in group investments to encourage others into the social investment space.

Unity Trust said that the financing would have a 'direct influence' over the design and function of the SIWB. Its response included interviews with 12 key stakeholders and found mixed views on whether the £250m from unclaimed assets would be sufficient.

Hayday said the SIWB consultation was 'a distraction' given everything else happening in the world of finance but not waste of time.

'It may be that it actually gives government pause to think about its approach to social investment and what is the most effective way of using some or all of that money,' said Hayday.

A spokesperson for the Cabinet Office said that there had been 80 responses to the consultation and that they were happy with the number and range of responses which included third sector organisations, charitable foundations, grant makers and the mainstream commercial sector.

She said the Office of the Third Sector will be reporting on the results of the consultation before the end of the year.