Business Secretary Vince Cable has told MPs the Government is prepared to increase taxation on UK banks if they fail to back small businesses.
Mr Cable was asked to address fears that the UK's top five banks are failing to do enough to meet lending targets as set out under the Project Merlin agreement.
Addressing the Business, Innovation and Skills Committee, Mr Cable said: "The Chancellor and Prime Minster have made it clear that if we don't get results, they have said we should take further action with tax on banks."
Mr Cable acknowledged there was a "serious problem" with lending to small and medium sized enterprises (SMEs) but said there was a "mixture of factors" behind this, including low demand for new lending.
The Project Merlin agreement, unveiled in February, followed protracted talks between the top five banks and the Treasury over key issues such as bonuses and lending.