Chancellor of the Exchequer George Osborne has revealed that the government is working with the Big Lottery Fund on arrangements for initial market testing and capacity building investments prior to the capitalisation of the Big Society Bank.

Osborne announced the arrangement in a letter to Sir Stephen Bubb, chief executive of Acevo, in which he responded to requests from Sir Stephen last year for a tax on bank bonuses to capitalise the Big Society Bank.

Osborne said a tax on bank bonuses was not "sustainable" but the government was committed to deliver the Big Society Bank through other means.

He told Sir Stephen that he wanted the Big Society Bank to be properly capitalised and flexible for the long term, but also thought it was important to start funding civil society organisations as soon as possible:

“That is why government is working with the Big Lottery Fund on arrangements for initial market testing and capacity building investments prior to the capitalisation of the Big Society Bank,” he said. “We expect the arrangements to be in place by April and investments to be made from mid-2011 when the first tranche of dormant accounts money is released.”

The government is still waiting for approval from the European Commission (EC) on whether it can use dormant accounts to capitalise the Big Society Bank. The EC must rule that the Bank does not contravene state aid rules which say that a  government must not give undue advantage to a particular business sector. The approval process could take six months.

The dormant accounts legislation names the Big Lottery Fund as the distributor.

Osborne also said Sir Ronald Cohen, a pioneer of venture capital and social investment and Nick O’Donohoe, formerly Global Head of Research at J.P. Morgan and responsible for J.P. Morgan’s social investments, have volunteered to work, in an independent capacity, with government and other leading experts in the social investment market and private sector to develop a proposal to establish the Big Society Bank.