Fears over government loan targets

THERE were growing fears over government plans to boost bank lending last night, after Santander said it might not participate in any deal as critics warned overly-ambitious targets could backfire.

The government is locked in talks with Britain’s five biggest banks over plans to impose business lending targets for this year, as part of a peace deal that will see the coalition resist calls to crack down on bonuses.

Sources close to the talks say the Treasury wants banks to lend around 10 per cent more to firms than in 2010, when £180bn of loans were granted.

But last night, a spokesman for Santander told City A.M. the bank had “yet to decide on the nature of [its] participation in any collective initiative”.

The compromise deal is less attractive to Santander, which is predominantly a retail bank and therefore pays very few large bonuses to its UK-based staff.

Meanwhile, critics said that if the targets were set too high they could cause another credit bubble that would derail the economic recovery.

Barclays boss Bob Diamond warned against forcing banks to lend to firms that could fall into financial difficulties.

“No bank should ever make a specific commitment to how much they are going to lend without looking at the creditworthiness of the borrower. That’s how the UK banks, the Bank of Scotland and others, got into trouble.”

A source close to Barclays yesterday said the bank was willing to make more money available to lend this year but that it would not hit government targets unless there was enough demand from high-quality borrowers.

Another senior banker told City A.M. “Our lending policies might be a little cautious at the moment, but that doesn’t mean we should be lending money on any other basis than that there is a good business case for it. If we go down the road of lending targets we risk taking decisions that will come back to haunt us.”

Alistair Milne of Cass Business school said: “No one in Whitehall can say ‘there are X billion profitable business loans to be made.’ And it might even create repayment problems.”