Banks may be forced to increase the amount they lend after Alistair Darling said he was "extremely concerned" about the cost of business loans.
The chancellor said over the weekend that banks may be charging too much for lending to smaller businesses. He is due to grill banking bosses at the Treasury this afternoon (27 July) about their lending levels and borrowing charges.
"What companies are being charged does seem to have gone up relative to what banks are actually having to pay because of the fact that we have very low interest rates," he said on the BBC’s Andrew Marr show on Sunday.
Lending to small businesses rose by £366 million in June, according to figures from the British Bankers’ Association (BBA) – up from £133 million in May. However, the government wants the banks to restore lending levels in a bid to get the economy back on its feet.
"That is why we recapitalised them to do that. That means they have got to live up to the promises they made," Darling said. "That is why we will be going through with each individual bank asking them why is it that at a time when the cost of borrowing is coming down, it would appear that the cost to small business appears to have gone up."
However, the BBA has urged a more cautious view, claiming that the cost of borrowing reflects more than just the Bank of England’s base rate.
In a statement, the organisation said: “Banks’ costs have gone up and there is less left to lend. They are paying relatively more for their money as a result of both competition for savings and scarce - and expensive - wholesale funding."
The BBA adds that government-imposed capital requirements for banks mean many do not have enough free funds to increase their lending. Plus, it claims banks are taking a more relaxed stance towards people who have missed loan or mortgage payments, which means they have to wait longer for the money owed to them.
David Buik, markets analyst at BGC Partners, says: “Against a background of a dole queue that is likely to reach three million plus the possibility of further foreclosures in the mortgage market and thousands of businesses likely to go to the wall, how can banks in all conscience be irresponsible over their lending policies?”