Government could control lending rates

28 November 2008

The government may decide to set the rates at which high street banks lend if the banks themselves prove reluctant to increase the amount of affordable credit available to small businesses.

The measure forms part of plans being drawn up by the Chancellor, Alistair Darling to combat worries that the continuing shortfall in small business lending will force the economy into deeper recession.

Mr Darling said: “The government is ready and willing, and it will hold banks to account. We are ready to take further action to make sure that bank lending resumes.”

The banks have been asked by the government to produce data supporting their insistence that small business lending has increased in the past few months. Anecdotal evidence from small firms, however, has suggested the banks are exercising a tight credit squeeze.

Depending on the figures the banks come up with, the Treasury may choose to impose lending regulations.

One possibility is that the banks will come under the same sort of rules that govern the utility companies, with an independent regulator imposing price caps on credit and loans.

Another is that the government could provide guarantees to cover lending to small businesses.