Sir Nicholas is the first clearing bank chief to attack proposals by the Department of Trade and Industry that would weaken banks' positions when companies they have lent to go bust.
The TSB chairman fears that the DTI's plan will discourage banks from making high-risk loans to small companies if the banks are no longer first in the creditors' queue for repayment.
Sir Nicholas Goodison said: 'If banks have to take on more risk, they won't lend or they will price (their loans) more expensively.
'People think banks are public utilities. They are not. Their duty is to the bank's depositors and shareholders.'
Sir Nicholas said that banks had to consider the safety of depositors' funds when making loans.
The DTI brought out a discussion document last year which contains proposals to take away the banks' priority in any payout when a company goes under. The paper also suggests banks should give a seven-day notice period before appointing a receiver to companies that were not able to meet their commitments.
The paper's aim is to promote a 'rescue culture' for companies, but this has been greeted with deep suspicion by the banks, which are co- ordinating their response through the British Bankers Association. The deadline for reactions to the paper is March.
Sir Nicholas is also chairman of the BBA, but he made his comments on the DTI's proposals in his capacity as chairman of TSB.
Under the present system, banks can take a 'floating charge' over all a company's assets, fixed and current. If the company is unable to meet its financial commitments as they fall due, the bank can immediately appoint a receiver, usually an accountant. The receiver's priority is to recover on behalf of the bank the collateral pledged by the company as security. It is this primacy of the bank's security that is under threat.
A senior director of lending at one of the four main clearing banks said: 'The banks are clearly worried about this. Secured lenders could find their security removed, their priority taken away. This is horrendous.
''One way to help industry is to lend aggressively (high-risk lending) against security. If it's not secured, why lend aggressively? The proposals could have far-reaching affects, including far less willingness to lend to all sorts of companies.'
Tim Hayward, senior insolvency partner with KPMG, said: 'There is a significant degree of unhappiness at the banks over the rights of security holders being affected.
'The most important effects would be on small companies, where rescue schemes like administration are too expensive. Assets can disappear unless the bank can act quickly. There is a danger the banks would be more reluctant to lend to small companies.'
British banks rely on taking a floating charge that puts them in a strong position for recovering their money if the company goes bust. These lead the banks sometimes to neglect the underlying performance of their clients, says Mr Hayward.
This is a criticism commonly made by overseas bankers working in Britain, he said. But it does mean UK banks will go on lending if they are given enough collateral, although how much so is impossible to quantify, he said.Reuse content