Treasury 'needs new powers' to enforce lending

Published on Monday 8 February 2010 20:36

THE Treasury needs new powers to force the banks to improve the flow of loan finance to businesses, according to a Whitehall report published today.

The committee of public accounts say the banks' poor performance has triggered "widespread dismay".

The MPs say that Royal Bank of Scotland and Lloyds Banking Group agreed to lend an additional 39 billion to homeowners and businesses in the year to February 2010, but the "legally binding" targets on business lending were not being met.

Edward Leigh, the Conservative chairman of the committee, says: "The Treasury does not seem to know why the banks are not lending and has few sanctions available to make them change their minds."

The PAC report, as it is known, says officials need to put in place "effective and enforceable" sanctions before new commitments for the year ahead were drawn up.

"We remain unclear whether the decline in lending growth is a result of reduced demand, a fall in the availability of funds for banks to lend or a combination of these and other factors," the report says.

RBS and Lloyds are 84 per cent and 43 per cent taxpayer-owned respectively.

However, some bankers, including RBS chief executive Stephen Hester, have said that one reason for the low take up is low demand.

It is an argument that will be made by Robert Gibson, the managing partner of Clydesdale Bank's Edinburgh Financial Solutions Centre, in a speech to a public sector conference in Edinburgh today.

Gibson will say: "There is as much of a problem with the demand for credit as there is with supply.

"Faced with much higher borrowing costs and an uncertain outlook, many firms have decided to sit on their hands rather than build that new facility."

The MPs, meanwhile, have criticised the Treasury for paying expensive retainers to investment banks during the crisis as well as "success fees" when no criteria for success had been laid down.

The report also attacks the Treasury's failure to inform the committee of an 18bn indemnity given to the Bank of England over potential losses on emergency support to RBS and HBOS for more than a year after the crisis.

A lid was kept on the information by Chancellor Alistair Darling to prevent the risk of leaks and a Northern Rock-style run, but the PAC called the decision "unacceptable".

A Treasury spokesman said yesterday that the department had "worked to make sure taxpayer money was used wisely – the potential losses we may face as a result of our emergency actions are less than those expected in a number of other countries, including the US".