Turning bailed-out Royal Bank of Scotland into a dedicated lender for businesses would help tackle the country's lack of finance for small firms, though the idea faces serious obstacles, Business Secretary Vince Cable said in a speech on Wednesday.
Cable, who had floated the idea in an internal government letter, said given these difficulties, the government was now focusing on the credit easing scheme to get cheaper credit flowing to smaller businesses.
The government owns 82 percent of the loss-making RBS after rescuing it along with Lloyds Banking Group during the 2008 financial crisis.
Cable, a Liberal Democrat, is a long-time critic of the banking system for failing to lend enough to business and who had previously pushed for deposit-taking banks to be separated from their investment divisions.
In the speech to top bankers and business leaders, Cable said the lack of finance for many companies imperilled the recovery, voicing concern over the disconnect between the country's global banks and the rest of the economy.
A lot of businesses were supportive of his idea of creating a British Business Bank out of RBS, Cable said according to the text of his speech released in advance by his office.
But this would not be straightforward, he said. It would almost certainly be necessary to lengthen the period in public ownership.
It may well mean state-controlled banks being able to lend at cheaper rates than new commercial banks, thereby affecting the development of more diverse finance. And even if they did these things, we would run into problems with EU state aid clearance, Cable said.
Britain used about 45 billion pounds of taxpayers' money to rescue RBS, and aims to sell it back to the private sector.
A spokesman for Prime Minister David Cameron said on Wednesday the government had no plans to change its approach.
This is a bank that will be operated on a commercial basis at arm's length from government. We think that's the best way of ensuring that we get the taxpayers' money back, he said.
Britain's economy is still limping along after recovering from a steep recession following the banking crisis and the coalition is under pressure to find ways to boost growth without breaking a strict austerity programme.
A lack of lending to smaller and medium-sized businesses remains a political hot topic in Britain after the government's Merlin agreement with the country's large banks failed to funnel enough credit to smaller firms.
Banks have blamed low levels of lending on a lack of demand, but smaller firms frequently complain about tough lending conditions.
Cable said the government was looking into ways to open up new sources of finance to Britain's businesses as the powerful finance industry was not serving the real economy properly.
I would go so far as to say that we have a financial services industry in London that plays in the Champions League, with overseas owners to match, and a British business finance system which struggles in the second division, he said.