Treasury is failing to force banks to lend, warn MPs

Britain's bailed-out banks are still not lending to cash-strapped businesses and there is little the Treasury can do to improve the situation, a group of MPs will warn this morning.

Having stepped in with £850bn of support for the teetering financial system last year, the Government succeeded in maintaining stability and securing retail deposits, a report by the House of Commons Public Accounts Committee (PAC) will say. But the ultimate cost to the taxpayer is still uncertain and attempts to use public ownership of large amounts of a bank's equity to force it to increase lending are not proving successful, according to Edward Leigh, the Tory MP who chairs the all-party committee.

"The poor performance of the bailed-out banks, most notably Royal Bank of Scotland (RBS) and Lloyds Banking Group, in meeting commitments to lend to struggling businesses has occasioned widespread dismay," Mr Leigh said. "The Treasury does not seem to know why the banks are not lending, and has few sanctions available to make them change their minds."

When further lending commitments are put in place for the next financial year, the Treasury should use a better understanding of changes in borrowing patterns to devise "effective and enforceable sanctions if the banks continue to fall short of their commitments", the committee says.

Government bailouts last year left taxpayers owning 84 per cent of RBS and 43 per cent of Lloyds. According to targets fixed last March under the terms of the Asset Protection Scheme (APS), which offers insurance against losses on potentially toxic assets, RBS was expected to raise its net lending by £9bn in mortgages and £16bn in business lending this year; Lloyds's target is £3bn for mortgages and £11bn to business. But it emerged before Christmas that neither of the two banks are on track to fully meet their lending commitments. Both institutions claim their mortgage targets will be met, helped in part by the retrenchment of some international banks, but business lending is sluggish.

The banks maintain they are a victim of circumstances – they insist that they have massively increased lending as directed, but any net gains have been swallowed up by a rush of businesses paying back their loans, which is usual in a recession.

"That the targets are not being met is more about the way the targets have been set up than about us not lending," one banking insider said yesterday.

But owners of small businesses have often complained they are still finding it hard to obtain support from banks. In August, the Federation of Small Businesses warned that a quarter of its members were still struggling to access affordable finance, two years after the credit crunch started and six months after the APS was introduced.

The Treasury denies the accounts committee's suggestion that it does not know the true picture and has little control in any case. In an effort to bridge the gap between banks' claims and those of the business community, it has forced lenders to publish a "consumer charter" proving that the terms and conditions on offer are not artificially depressing demand.

But the outcome of the measure is still being evaluated and further data will not be available until the banks report results for the current quarter.

The PAC report also notes that the Treasury has been "extremely stretched" in dealing with the responsibilities of the credit crunch, and that the department should now examine whether its own expertise is sufficient without it continuing to rely on external advice.

It also criticises the Chancellor's failure to notify Parliament for 13 months of an £18bn indemnity to the Bank of England against potential losses from the emergency support to RBS and HBOS. Mr Leigh described the issue as "of significant constitutional importance".