UK pledges $1.6 billion for state-backed business bank By Tim Castle BRIGHTON, England (Reuters) - Britain said on Monday it would allocate 1 billion pounds ($1.6 billion) towards a new state-backed business bank designed to expand lending to smaller firms currently starved of loans from Britain's main lenders. The government hopes its backing will be matched by a similar amount from private capital and could support up to 10 billion pounds of new and additional lending, Business Secretary Vince Cable said. The as yet unnamed institution would operate through the wholesale market and would support the supply of loans and long-term capital to smaller firms through existing banks and other financial providers. "We need a new British business bank with a clean balance sheet and an ability to expand lending rapidly to the manufacturers, exporters and high growth companies that power our economy," said Cable, who is attending his Liberal Democrat party's conference in Brighton, southern England. Many new promising, growing companies simply can't get the loans they need to expand on reasonable terms. We are going to help fix this," he added, in remarks released by his office. Earlier this month Cable said such a bank could be run through a new generation of so-called "challenger" banks, which the government has been encouraging to expand in Britain as a way of increasing competition among lenders. Aides said the scale of the government's commitment was significant compared to the current 50 billion pounds of outstanding loans to smaller companies in Britain and that the new bank could be operating within 12 to 18 months. The move complements other moves by the government and Bank of England to revitalise a stagnant economy struggling to recover from the effects of the 2007-2009 financial crisis. Advisers to Cable said the business bank was designed to fix a "market failure" where banks, under pressure to rebuild their balance sheets, were no longer lending to smaller companies, in many cases because they had lost expertise to assess the risks. Although the Bank of England's 80 billion pound "Funding for Lending" program was now up and running, the cheaper loans it allowed banks to provide were more attractive for people taking out mortgages for property than for business lending, they said. The British Chambers of Commerce business lobby group welcomed the funding for the new bank saying it would allow "new and growing companies to get access to capital in the same way that they do in Germany, South Korea, and the United States." Cable has long pushed for the creation of a state-backed development bank along the lines of Germany's KfW or America's Exim Bank to expand commercial lending, but has had to tread carefully to avoid falling foul of European Union rules on state aid. Reporting by Tim Castle; Editing by David Cowell