British banks under fire for starving firms of credit

British Banks came under fresh fire from MPs today for starving firms of much-needed credit while being propped up by billions of pounds from the taxpayer.

The UK's Treasury Select Committee’s latest report said there was an “unresolved inconsistency” between the assurances of bank bosses and complaints on the ground from struggling businesses over a lack of lending.

MPs said they were “very concerned” about the scarcity of credit for small firms who were also faced with higher charges and arrangement fees.

“We deplore the behaviour of a number of those banks who have received so much public money and behaved in such an insensitive manner particularly to established customers,” the report said.

The select committee called for a probe into such practices and more detailed lending figures from the banks which have received state support.

Royal Bank of Scotland and Lloyds Banking Group have made lending commitments of £25bn and £14bn over the next 12 months in return for insuring hundreds of billions in toxic assets with the taxpayer.

Despite some positive signs in lending trends, MPs were “concerned” about arrangements for monitoring lending levels and said more onerous terms “seem to work against the letter and the spirit” of Treasury agreements.

“There was some doubt, expressed to us during our visits across the country, as to whether these banks were achieving these lending targets,” the report said.

The Government has also announced a plethora of schemes to support businesses in the downturn including a £20bn working capital guarantee scheme, and £1.3bn enterprise finance guarantee scheme.

But the committee heard anecdotal evidence criticising the operation of the enterprise finance scheme and said the Government’s current approach was “piecemeal and disjointed”.

“It is difficult to form an overall picture of how effective those efforts are, and how well they are working together,” the report said.

The MPs welcomed the Government’s move to impose conditions on banks in return for public support but added there were “conflicting pressures” between boosting their finances and lending more.

“There is an inherent conflict between ensuring that the banks maintain high capital ratios, protecting the taxpayer interest and wanting the banks to increase lending levels,” the report said.

MPs also attacked bankers for making “an astonishing mess” of the financial system.

“The culture within parts of British banking has increasingly been one of risk taking leading to the meltdown that we have witnessed,” the report said.

Committee chairman John McFall said the UK had experienced “a comprehensive failure of the banking system at all levels”.

He attacked the inability of banks to govern themselves and manage risks, with inadequate scrutiny from non-executive directors.

He added: “Governments, politicians, regulators and central bankers in the UK and across the world also share a responsibility for sustaining the illusion that banking growth and profitability would continue for the foreseeable future.”

The report called for a “more durable framework” for finance from the Financial Services Authority, while the separation of riskier “casino” banking from retail deposit-taking was also worthy of “further debate”.

The committee also wants the Government to address competition concerns over its interventions in the banking sector within the next two years as well as shaping an exit strategy from its shareholdings.

“The taxpayer must be satisfied that any exit strategy will maximise the direct financial benefits and minimise the risks to them,” the report said.

An RBS spokeswoman responded to the report by saying the bank was “very much open for business”.

She said lending to small businesses was up 10% compared to last year and it recently announced a commitment to make £16bn of additional lending available to viable businesses this year, including £3bn through 12 regionally-managed funds of £250m.

She added: “We are fully supportive of working with the Government on new lending opportunities.

“To date, we have led the field in taking applications for the Enterprise Finance Guarantee scheme and have drawn down half of all loans made by UK banks. We currently have £130m-worth of loans already agreed or in the pipeline.”

Liberal Democrat Treasury spokesman Vince Cable said the MPs’ report was “disappointingly weak”.

“It fails to meet the previous standards of tough criticism advanced by the select committee when interrogating the bankers.

“The committee is largely uncritical of the Asset Protection Scheme which involves massive Government guarantees of bad bank debts with no obligations in return and enormous scope for abuse.

“I continue to believe this scheme is a fraud against the taxpayer,” Mr Cable said.