BUSINESS Secretary Vince Cable's plans for a Government-backed bank to increase lending to businesses will need £40bn of funding to make it work, according to new research.

The bank must also be free to raise up to £100bn on the capital markets to top up the taxpayer-funded investment, the IPPR think tank urged.

It also called on the Government to allow the institution to plough money into infrastructure projects to help rejuvenate the economy.

Mr Cable announced plans last week for a government-backed bank to increase lending to small businesses.

The Liberal Democrat admitted the details were still in gestation but may involve some state lending, something the Treasury is understood to be against.

Tony Dolphin, IPPR chief economist, said: ''Because the Chancellor will not spend more government money boosting aggregate demand in the economy, he has been reduced to indirect schemes like funding for lending to support growth.

''These require shifts in behaviour by the banks and pension schemes if they are to work and consequently are not as effective as more direct approaches. There is a danger that Vince Cable's idea for a new bank will also have less impact on the economy than it could.

"A fully-fledged British investment bank should not be held back by the vagaries of the UK's accounting practices. Its self-financing activities should be excluded from the Government's target fiscal measures and it should be free to raise funds on capital markets."