‘Warning shot’ fired at banks refusing to lend

BANKS facing fury from ministers over their refusal to boost lending were today warned to act before the "lid is blown off".

Labour MP John McFall, chairman of the Commons Treasury select committee, stressed he was "firing a warning shot" on his and other people's behalf.

Mr McFall, who is seen as close to both Prime Minister Gordon Brown and Chancellor Alistair Darling, even floated the idea that all banks could be nationalised, as happened in Sweden in the Nineties, if they refused to increase the flow of loans to firms and mortgages to avoid a deeper and more prolonged recession.

He told BBC Radio 4's Today programme: "I'm firing a warning shot for the Financial Services Authority, banks and others. There is a real frustration building up here. We better get something done before the lid is blown off."

Mr McFall spoke out just hours after it was reported that Mr Darling is considering a "nuclear option" of tougher laws to make banks increase lending.

The Treasury today played down the likelihood of new laws. A source said: "There is no suggestion that legislation is imminent." But ministers are angry that despite a £500 billion rescue plan funded by taxpayers, lenders are still not supplying businesses with loans.

Even firms with "perfectly good track records" are being denied funding, according to a government source. The Chancellor is "increasingly exasperated by the bank's assurances they are helping small businesses, when they obviously are not", the source said.

"We are not at the point of introducing regulations but he is not averse to going down that route. There is a lot of thinking going on in Whitehall about how the banks can be made to live up to what many would say is a moral obligation."

The banks had made a commitment to return lending to 2007 levels as part of the rescue deal and would be expected to honour that pledge.

In the pre-Budget report on Monday, Mr Darling may announce tighter lending rules and moves to rein in profits.

Small business leaders say he could appoint a new "enforcer" for the financial sector to oversee bank lending or introduce a limit on the interest charged on loans to firms.

Shadow chancellor George Osborne has raised the prospect of the Tories backing the state in playing a greater role in banking by supporting direct loans to firms. He favours moves to encourage the Bank of England's monetary policy committee to cut interest rates. But he also signalled that he may back "big, radical, activist steps".

He accused Mr Brown of planning a "tax bombshell" after Britain pulls out of a recession to pay off huge debt, with many forecasters predicting that annual public borrowing will soar towards £120 billion over the next two years.