Darling steps up pressure on banks over high cost of business borrowing

Suzy Jagger Politics and Business Correspondent

Alistair Darling has effectively threatened Britain’s biggest banks with a competition inquiry should they fail to increase cheap lending to mortgage borrowers and small businesses.

The Chancellor met the chief executives of seven of the country’s biggest banks in the Treasury yesterday along with Lord Mandelson, the Business Secretary, Baroness Vadera, Minister for Competitiveness, Small Business and Enterprise, Lord Myners, the City Minister, and senior officials from the Bank of England.

Mr Darling presented the bankers with official data showing that they had failed to pass on cheap lending facilities to mortgage borrowers and to small and medium-size businesses. He is concerned that the banks are exploiting historically low base rates in order to beef up their profit margins.

Mr Darling told the financiers that Lord Myners would summon each of the banks to the Treasury over the coming weeks to comb through their lending books to ascertain how much they are charging for borrowing facilities. He warned them that the Treasury would be “looking over their shoulder” to monitor whether they were failing to offer loans at fair rates to businesses and mortgage borrowers.

The Chancellor hinted that the Treasury would take steps to examine competitiveness across the banking industry should their lending practices remain unchanged. He is worried that the banks are taking advantage of cheap lending costs for themselves and not passing them on to businesses desperate for capital.

The veiled threat of a competition inquiry hit a raw nerve across the banking industry. George Osborne, the Shadow Chancellor, has already pledged to open an inquiry into banking competition in the event that the Conservatives are voted into office next year. He is concerned about the effect mega-mergers such as HBOS becoming part of Lloyds Banking Group will have had on borrowers and savers.

In the hour-long meeting Mr Darling presented data drawn from the Bank of England and from the banks’ records which showed that in 2007 about one medium-sized company in 50 was paying more than 9 per cent above the base rate for borrowing facilities. But by this year one in three had been forced to pay more than 9 per cent above the base rate.

As Lord Mandelson went into the meeting he said: “The Chancellor and I are not satisfied that lending is as it should be, even now after this time that we have been operating our policies. We are also concerned about the cost of lending.”

One banking source said that the tone of the meeting was “amicable and constructive”.

While Lloyds Banking Group and RBS, which are part state-owned, have signed up to increase their lending overall, there are no obligations governing the rates they can charge.

The Treasury is trying to tread a fine line. It wants to make sure that businesses get the credit facilities they need but the Government wants the banks to continue to run themselves as commercial entities so that they can be sold back to the private sector at a profit for the taxpayer.

Lord Oakeshott of Seagrove Bay, a Liberal Democrat Treasury spokesman, said: “Britain is still deep in a recession because the banks are not lending to business. Alistair Darling must stop playing Pontius Pilate and abdicating responsibility for the banks when he has the power as a controlling shareholder to compel RBS and Lloyds. If he fails to do so, thousands of sound businesses will go down, and hundreds of thousands of jobs will be needlessly lost.”

Lord Mandelson is to announce a £150 million shot in the arm for high-tech manufacturers today, aimed at safeguarding top-level science jobs and funding expansion. Aerospace, biotech, plastics and silicon specialist companies and low-carbon technology will benefit. The Business Secretary believes that these manufacturing businesses will drive Britain out of recession.

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