Ministers are examining proposals for a British-led financial institution designed to bolster the military capabilities of northern European partners in response to the threat posed by Vladimir Putin.
The initiative, dubbed the "JEF bank" after the Joint Expeditionary Force alliance, would allow 10 Nato member states from the region to secure funding for security initiatives at reduced borrowing costs.
Officials are considering basing the scheme on a comparable European Union programme worth €150billion, equivalent to approximately £130billion, which provides loans to member countries for weapons procurement.
Discussions remain at an early stage, according to sources familiar with the negotiations.
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The proposed mechanism would enable participating nations to finance multinational defence strategies, increase industrial output, acquire armaments and provide military assistance to Ukraine.
Nato brings together Norway, Finland, Sweden, Estonia, Latvia, Lithuania, Denmark, Iceland and the Netherlands.
Three member states took concrete steps last month when Britain, Finland and the Netherlands committed to establishing the new financial mechanism.
The trio agreed to develop the JEF bank as a vehicle for supporting collective defence planning across the alliance.
Officials are considering basing the scheme on a comparable European Union programme worth €150billion, equivalent to approximately £130billion, which provides loans to member countries for weapons procurement
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Under the proposals, funds raised through the scheme would support efforts to expand weapons manufacturing capacity and channel military equipment to Kyiv.
The arrangement would represent a significant step towards deeper defence cooperation among the northern European partners, moving beyond traditional bilateral agreements.
While formal negotiations have yet to commence, the three founding nations have signalled their intent to create a structure capable of mobilising substantial resources for shared security objectives across the region.
An announcement could come ahead of Nato's annual summit in Ankara, Turkey, scheduled for early July.
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| REUTERSThe gathering is expected to centre on Donald Trump's demands that allies present strategies for increasing defence expenditure to five per cent of GDP over the coming decade.
Whether the US President will attend remains uncertain following his threats to leave the alliance over European reluctance to participate in the US-Israeli conflict in Iran.
Nato's secretary-general Mark Rutte has cautioned member states that they must present concrete proposals for meeting spending commitments agreed at last year's summit in The Hague.
Britain faces a significant challenge in securing the £17.6billion required to fulfil its promise of raising defence spending to three per cent of GDP by 2029-2030.
Britain faces a significant challenge in securing the £17.6billion required to fulfil its promise of raising defence spending to three per cent of GDP by 2029-2030
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Chancellor Rachel Reeves has reportedly been exploring the sale of "war bonds" to the public and financial institutions as one potential solution.
Pooling resources across the JEF membership could secure more favourable borrowing terms by collectively achieving a triple-A credit rating, making the financing arrangement more attractive than individual national efforts.
Revenue generated through the scheme would be directed towards joint initiatives aimed at countering Russian threats in the High North, North Atlantic and Baltic Sea.
The alliance this week agreed to strengthen its naval presence across these waters following increased Russian submarine and surface vessel activity in the region.
Senior military figures, including First Sea Lord Gen Sir Gwyn Jenkins, have emphasised the need to transform from a loose coalition into a permanent combined force ready for combat operations against Moscow
| GETTYSenior military figures, including First Sea Lord Gen Sir Gwyn Jenkins, have emphasised the need to transform from a loose coalition into a permanent combined force ready for combat operations against Moscow.
A Government spokesman stated: "We have committed to a £270billion investment in defence over this parliament to ensure that the UK is prepared to respond to growing threats the largest increase since the Cold War."
Defence spending is already set to rise to 2.6 per cent of GDP by April 2027.
An additional £5.6billion will also be spent during this financial year alone.