Cable fears banks are still 'structurally dangerous' despite return to profit

Business Secretary also worries that 'risk-averse' lenders are not allowing businesses to grow

Vince Cable has warned that Britain's banking sector is still "structurally dangerous" despite the country's five biggest banks reporting bumper £15.5bn, half-year profits and increased gross lending last week.

The Business Secretary said there were two major issues ahead: "At the moment the great danger is that recovery is choked off by a lack of funds. The other issue is about the structure. The view that some of us take is that the big banks are structurally dangerous."

Mr Cable made the remarks in the same week that Royal Bank of Scotland, HSBC, Lloyds Banking Group, Barclays and Standard Chartered banks reported forecast-beating first-half performances and total gross lending of more than £65bn during the first six months of the year.

RBS and Lloyds between them committed £47.7bn in gross new lending but their net lending figures were down as UK businesses repaid loans faster than new debt could be issued. RBS, which recorded its first pre-tax profit since 2007 on Friday, said businesses repaid £1.4bn of loans during the second quarter.

Both banks, which have been heavily supported by the taxpayer, have lending targets of £50bn and £41bn respectively for the March 2010 to February 2011 period.

Stephen Hester, RBS's chief executive, said the bank was "on plan" to meet its overall target and its £8bn mortgage lending target for the same period. Lloyds reported £24bn of new lending in the first half of which just £5.7bn was to small businesses.

For all five banks, net lending figures were either down or flat which was laregly attributed to businesses' new "risk-averse" culture. The British Banking Association said that banks had "repeatedly undertaken" to lend to viable firms but had to balance such considerations with the need to increase capital reserves as buffers against any future loss.

However, critics said there was unmet borrower demand particularly in the small- and medium-sized (SME) business sector.

Joseph Dickerson, a banking analyst at Execution Noble, said that while there was a "contracting lending market and not much growth there is demand for lending to the SME world and for more exotic forms of financing such as invoice financing".

The Federation of Small Businesses's spokesman, Eric Beech, said SMEs were not getting a good deal on the high street as banks sought "much more severe terms". He said: "Finance for small businesses is their lifeblood to grow and they need access to flexible and affordable lending".

Further pressure was piled on when the Chancellor, George Osborne, said he may impose net lending targets on all UK banks. However, John Varley, the chief executive of Barclays Group, which reported a £3.95bn first-half pre-tax profit, said that such a move would be imprudent. He also joined his banking peers in defending the sector against calls to break up their operations.

A commission on banking is currently assessing whether banks' investment and retail high-street divisions should be split. Mr Cable is known to be a keen advocate of such a move.

However, the chief executive of HSBC, Michael Geoghegan, said the bank's strong global, £7bn, first-half, pre-tax profit showed the strength of the current structure: "The financial system needs banks that are big enough to cope. It is our diversity that allows us to deliver profits to shareholders. A strong bank funds a strong economy."