Lend or face nationalisation, UK government tells banks

The British government, led by prime minister, Gordon Brown and the chancellor, Alistair Darling, has threatened to nationalise banks if they refuse to lend to small firms and continue to levy high interest rates to homeowners and increasing the pace of repossessions at a time when the country is in recession.

Downing Street is furious at high street banks as they have consistently refused to extend credit to small firms, households and mortgage owners forcing the government to threaten to use the ''nuclear option'' of nationalisation, as the banks themselves have been rescued by the government by injecting £37 billion of taxpayer's money.

Ministers are also angry at the banks such as HBOS, Lloyds TSB and Royal Bank of Scotland that have availed £37 billion of tax payer's money and had promised to start lending to previous year levels.

Labour MP John McFall, chairman of the 'Commons Treasury select committee', who is close to the prime minister and the chancellor, said in a 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.''

"There are 4.7 million small and medium size businesses in the UK, employing 13.5 million people – almost 60 per cent of the private-sector workforce. These are very large numbers. They need loans to help them sustain these important jobs,"
he said.

"Governments on both sides of the Atlantic have called on them to resume lending, and criticism has been directed to the banks that they are not shaping up to the task at hand," he said. "If the banks do not play ball, and will not resume lending, then the demand for full-scale nationalisation may well grow."

McFall said the banks could be nationalised as it was done in Norway, Sweden and Finland during the nineties if they adamantly refuse to lend to firms and mortgages in order to steer clear of a deeper and more prolonged recession.

The prime minister's spokesman said that the government will not rule out nationalisation, as under the present conditions one has to look at all the options. But, he said, the the banks should undertake to complete the commitments they had given when accepting government bailout.

Between July and September, about 4,000 companies collapsed and went into liquidation, which is up 26 per cent from last year and the business community in Britain wants the government to appoint an ''enforcer'' to oversee that banks tightened their lending norms, take away some of their cheapest loans from the market.

They also want the government to put a ceiling on the limit of interest charges on loans to firms as some banks that do lend, levy a hefty interest rate.

Chancellor Alistair Darling is all set to force lenders to do what they are supposed to do – lend, by bringing in array of new legislations such as putting a ceiling on loan interest rates, limit profits on lending, reducing the spiraling numbers of repossessions and having more supervision on their activities.

In the third quarter there has been a 12 per cent increase of repossessions according to figures released by the council of Mortgage Lenders and according to them, Northern Rock, which was nationalised by the government last month was one of the worst offender.

Prime Minister, Gordon Brown said he was aware of that Northern Rock had increased repossessions and added that help was on the way for people who were at risk of losing their homes.

He also said that the government was in talks with Northern Rock about this and very soon the public will see changes in the concerned banks attitude.

Shadow Chancellor, George Osborne is also backing the government in bringing new legislation to force banks to lend and live up to its moral obligation of returning to bring lending to 2007 levels which was a part of the rescue deal.

The banking industry however is disputing the government claims and says that lending is close to pre-recession levels with the British Banking Association announcing that the bank lending in the third quarter of 2008 grew by £1 billion which was slightly lower than the same period last year.

According to them, the total lending was up by 10 per cent to £44.8 billion over the 12 months to September, while overdraft borrowing was up 4 per cent over the year at £9.3 billion.