Apparently the Treasury is considering creating a “public funding body” which “could be similar to the Industrial and Commercial Finance Corporation (ICFC) that was created after the Second World War”.

What was the ICFC, and what happened to it? Thread: https://www.ft.com/content/9d1dd8ff-c978-44c0-8e60-f50de8e8e641

The ICFC was created by the 1945 Labour government to increase funding to SMEs. It was owned by a consortium of the ‘big five’ clearing banks and the Bank of England. Initially the clearing banks opposed its creation, but eventually consented out of fear of nationalisation.

Initially the ICFC focused on providing long-term finance to early stage companies through its regional branch network. Its loan officers were renowned for having significant technical expertise, and the bank’s investments were regarded as a hallmark of quality certification.

In 1959 the clearing banks allowed the ICFC to raise external funds by issuing shares. New pressures to deliver shareholder returns meant that managers came under growing pressure to make profits, and the bank gradually shifted towards more profitable short-term activities.

In 1973, the ICFC acquired Finance Corporation for Industry (FCI) — the ICFC’s sister company that was also established in 1945 to finance large companies. The new group was renamed Finance for Industry (FFI), and was given a broad mandate to fund the growth of British industry.

Over time, a combination of shareholder pressure and challenging economic circumstances led FFI to seek out new sources of profit. By the early 1980s, the group had become a specialist in management buyouts, and had largely abandoned its original public mandate.

In 1983 FFI was renamed Investors in Industry, and in 1987 the group was privatised as the 3i Group.

Today 3i is a major private equity and venture capital firm, with a market capitalisation of around £8bn.

What lessons should we learn from the ICFC? First, the mandates of public financial institutions must be protected. As soon as they come under shareholder pressure to maximise profits, they quickly start behaving like private financial institutions.

Second, ownership and governance matters. The ICFC was majority owned by the clearing banks who were antagonistic towards its existence from the very beginning. The Bank of England was never fully supportive either, therefore the ICFC’s core purpose was easily unwound.

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