Bank bonuses could be diverted to boost lending

BANKS could be forced to divert cash from bonuses and shareholder dividends to boost lending to recession-hit businesses, the government is to announce today.

Business Secretary Vince Cable is expected to unveil plans for compulsory "lending agreements" after expressing frustration with a failure to get cash to hard-pressed firms.

The threat of tough action will be included in a consultation paper on the future of banking being published jointly by Mr Cable's department and the Treasury.

Taxpayer-backed Lloyds and RBS already have lending agreements in place, but they could now be extended to other institutions.

The Green Paper will also look at how to extend finance options for small businesses beyond the traditional high street banks, including the introduction of local stock exchanges.

The banking industry insists lending is rising and most business applying for loans are getting them - despite evidence that many complain at being unable to secure much-needed finance.

And after benefiting from a multi-billion-pound taxpayer bailout designed to ensure lending continued, there is enormous political pressure on the industry to help hard-pressed companies.

"What we would question is whether banks should be paying out dividends and bonuses when that money could be used to… support small business lending," Mr Cable said. "We are very worried about the behaviour of the banks. They are not acting in the national interest. I don't think the banks get it."

City Minister Mark Hoban will also use a speech today to set out more details of the government's plans to reform the regulatory system, including axing the Financial Services Authority.