Page last updated at 10:23 GMT, Friday, 21 November 2008

Banks 'must kick-start lending'

John McFall
Banks' pessimism is to blame for slow lending, Mr Fall says

Banks must start lending again to households and businesses, or face being named and shamed, according to the Treasury Select Committee chairman.

Demand for full-scale nationalisation of more banks could also grow if loans were not made, John McFall said.

The government announced a 37bn recapitalisation for three banks last month - but lending has not picked up.

"Banks have a responsibility to society which they must fulfil," Mr McFall wrote in the Daily Telegraph.

"They should acknowledge that responsibility and start lending - now".


But the British Bankers' Association (BBA) said that banks were yet to receive the government capital, and that some of it was needed to absorb their losses.

Complaint website

Small and medium-sized businesses are finding it increasingly difficult and expensive to get access to loans following the global credit crisis.

Next week's pre-Budget report is expected to include a scheme that will allow the government to underwrite small business loans made by banks.

Part of the conditions of the government recapitalisation was that money be made available for lending but Mr McFall said that "pessimism" meant this was not happening.

"If the banks believe that more businesses are going to go bust, and they believe that more people will become unemployed and default on their debts, then they will lend less to those businesses and individuals," he said.


"As a result, many of these businesses will go bust and people will be rendered unemployed. We need to find ways to make banks loosen the purse strings."

Mr McFall suggested that if the refusal to lend continues, a website should be established where firms can report if they have been refused a loan and record how they were treated.

He added there was also a "nuclear option" - where "the demand for full-scale nationalisation may well grow".

Northern Rock and Bradford and Bingley have already been fully nationalised while several other High Street banks are being propped up by government cash.

Viability test

BBA chief executive Angela Knight said that it was a difficult time for banks, but that businesses were "not being stone walled" and that lending was continuing.

But she said banks needed to to decide if it made good financial sense to lend money to firms.

BBC business editor Robert Peston

The imperative of paying back government loans is a massive drag on banks' ability to lend and is therefore also a ball-and-chain on economic growth

Robert Peston
BBC Business Editor

"There's no desire for banks to lend to companies that are not viable," Ms Knight added.

Interest rates on loans had risen because banks' borrowing costs had also climbed sharply, the BBA said.

BBC business editor Robert Peston said that because the bail-out had been described as temporary, the need to pay it back was a "massive drag on banks' ability to lend and is therefore also a ball-and-chain on economic growth".

"But if we don't demand our money back, we'd be formalising that there's been a semi-permanent nationalisation of the entire banking system," he added.

"And that would massively encroach on the ability of our banks to operate as independent commercial entities."

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