David Prosser: A lending scandal of the Chancellor's own making

Outlook: Have you ever tried controlling a gang of naughty toddlers intent on going their own way whatever the threatened punishment? Then you probably have some inkling of how Alistair Darling feels about Britain's biggest banks right now. They've had some delicious lollipops in the form of a massive state bailout, but that wasn't enough to get them lending again.

Now, if politicians such as John McFall, the Treasury Select Committee chairman, get their way, they'll be sent to bed with no tea – or at least face the threat of nationalisation, but that doesn't seem to be producing the desired result either.

The Chancellor has a nasty problem on his hands, having backed himself into a corner by promising the public that banks would return to 2007 levels of lending in return for that huge great bailout. If Mr Darling can't force them to make good on the promise, it will look as if he handed all that taxpayers' cash over for no good reason.

So just how might the banks be forced to behave themselves? The problem for the Chancellor is that there are no easy answers. Nationalising any lender that doesn't do what it's told – the stick Mr McFall suggested brandishing yesterday – is, of course, a theoretical option. Take control of a bank and the Government can decide for itself how much it then lends.

Still, while Number 10 was at pains to rule nothing out yesterday, this is surely the realms of fantasy. Does the Chancellor really want to take control of any more mortgage lenders, let alone start deciding which small businesses are worthy of credit? The distressed takeovers of Northern Rock and Bradford & Bingley were bad enough, but the idea of Number 10 sending in its henchmen to change the locks at a bank not in meltdown is crazy talk.

If not nationalisation, then what? One option would be to guarantee all mortgage and small-business loans made by the banks – to offer to underwrite them if the customer defaults. Sounds a bit tricky that one, for a government already watching the national debt spiral out of control, but it's theoretically possible.

A more palatable idea might be for the Government's representatives at the banks where it is taking stakes to do more to encourage more flexible lending. Still, these operations are meant to be handled on a commercial basis at arm's length.

Ministers could, of course, simply pass laws that require the banks to lend more. But it would be pretty odd legislation. Would it say, for example, that anyone seeking to borrow less than three times their annual salary should automatically be offered a mortgage at a maximum rate? It's just not workable in practice.

Indeed, the answer, however unpalatable it might be, to the question of how you force banks to lend more is that you simply cannot. What did the Chancellor expect? The really intractable problem for Mr Darling is that he has actually given the banking sector two contradictory instructions. At the same time as telling them to lend more, he also wants them to improve balance sheet strength and capital reserves. Banks achieve the latter objective in a variety of ways, but one of the most important is to be more selective about lending. You can't improve capital ratios while simultaneously reducing profit margins through less restrictive lending policies.

There's an interesting comparison the Chancellor might like to consider. The reflationary package he is expected to announce in Monday's pre-Budget report is based on the theory that in a difficult economic period being less prudent with the public finances is justifiable. His policy is to borrow more to get us through the recession, with the money to be repaid when the good times return. The banks, on the other hand, have been told to take the opposite approach. In this unprecedented period of turmoil in the global financial system, bankers have been ordered to be more prudent.

That's not to say, by the way, that such an instruction is wrong. Governments have greater recourse to debt markets, and usually on better terms. They are also less vulnerable to market perceptions of financial weakness than banks (though not immune, as George Osborne pointed out last weekend before being accused of unpatriotic behaviour).

The point is more that Mr Darling is stuck on a hook of his own making. His two objectives for the banking sector are mutually exclusive, yet he has staked a great deal of political capital on them both being achieved.

Richard Lambert, CBI boss, told The Independent this week that the 2007 lending pledge was an act of political posturing on the part of the Government. He was exactly right. Now Mr Darling has to work out how to step back from the posturing without losing face.