Outlining Labour's economic response to the Brexit vote, McDonnell said that the Conservatives had left a legacy of failure due to unnecessary austerity, and pledged to uphold workers' rights, improve productivity and rebalance the economy.
"For a stimulus, government can and should mobilise its own resources to deliver shovel-ready projects. But the patient, long-term investment required for future growth needs something new," he said.
"So today I am making a firm pledge: on coming to power, Labour will set up a National Investment Bank, and a network of regional banks whose aim is to help mobilise £500bn into the economy and transform Britain.
"A National Investment Bank, managed independently of government, can raise the financing needed to deliver infrastructure on this scale.
"By mitigating the risks and giving a firm, government-backed commitment to funding, it will draw in the private financing that has otherwise been wary of financing infrastructure in the UK.
"There are examples across the world of similar, successful banks. The model of KfW Banks in Germany is one of the most compelling."
McDonnell added that a network of regional banks, publicly accountable and locally managed, with specialist local knowledge, would be set up, and break the "logjam in the British financial system".
The hope is that by delivering capital more effectively there will be a jump in job creation and productivity.
However, the speech did not oultine how the National Investment Bank would be funded. Last year Labour said it would be funded by cutting "reliefs and subsidies on offer to the corporate sector", as well as ending tax evasion and avoidance.
The move by McDonnell, a close ally of leader Jeremy Corbyn, comes after leadership contender Owen Smith yesterday announced a £200bn "British New Deal" pledge, with the aim to invest into the country's infrastructure.