Banks accused of failing to keep pledge on lending

A Government minister today accused the banks of failing to honour commitments that they would maintain the flow of lending to small businesses and homebuyers.

Ian Pearson, the Economic Secretary to the Treasury, said it was unacceptable for bank chiefs to give assurances to senior ministers which were not then reflected in their lending practices.

Giving evidence to the Commons Treasury sub-committee, he said that there appeared to be a "communication issue" within the system and warned that ministers would continue "to hold the banks' feet to the fire".

The latest warning came the day after Bank of England Governor Mervyn King said that the full nationalisation of the banks could not be ruled out if they did not resume normal lending.

He said that the economy faced a "steep recession" unless individuals and firms were able to get access to the credit they needed.

Mr Pearson said that ministers expected the banks - particularly those which took advantage of the Government's £37bn bail-out - to make available "competitively priced lending" to both the mortgage market and small businesses.

"We will continue to want to hold the banks' feet to the fire to make sure that they do the right thing by small businesses and by people who want mortgages for the future," he said.

He said that the banks had so far failed to fulfil the commitments which they had made to ministers.

"I don't think it is acceptable for bank chief executives to be saying one thing to (Business Secretary) Peter Mandelson and to (Chancellor) Alistair Darling, and indeed the Prime Minister, and then the lending practices down the line at regional and local level show no recognition of what those chief executives are saying to us," he said.

"We can't as a Government accept a situation where we are being told one thing and actually something completely different is happening. I think some of this is a communication issue within the banking system at the moment."

Mr Pearson insisted ministers were not seeking to prevent the banks operating in a "normal commercial way", but added: "Clearly we don't want banks to over-react to market conditions, to take blanket decisions that don't take account of individual company positions."