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Direct Whitehall control over the lending rates of Britain's high-street banks is among the contingency plans being drawn up by Alistair Darling to ensure that the dearth of lending caused by the credit crunch does not force thousands of small businesses to go bust.
Amid growing concern that any further reduction in lending will push the economy into a tailspin, the chancellor warned the banks yesterday that ministers wanted to see some return on the huge taxpayer-funded support they had received.
"The government is ready and willing and it will hold banks to account," Darling said in a debate on the pre-budget report. "We are ready to take further action to make sure that bank lending resumes."
Darling and Lord Mandelson, the business and enterprise secretary, have asked for figures from the banks to back up their claims that lending to the small business sector had risen in recent months.
A Treasury source said the government's next move would depend on what the data showed. "It will be contingent on what we find. It could involve regulation if the code of conduct approach doesn't work, or anything up to full nationalisation."
The options include treating the banks in the same way that the government handles utilities, which are subject to strict price caps through an independent regulator. The Treasury is also looking closely at whether the recommendation in a report from Sir James Crosby - that the government should provide £100bn of guarantees to the mortgage-backed securities that were used to fuel home loans before the credit crunch - could be expanded to cover lending to small businesses. Such a move would be welcomed by the banks, which argue that access to funding has not been solved by the £37bn injection of taxpayer funds into the sector.
The Treasury made it clear last night that it was not yet "actively considering" price controls or nationalisation but that all options were being kept open.
Darling believes that some retrenchment by banks is inevitable after the boom in lending earlier this decade, but is concerned that the banks could all end up pulling the plug at the same time with disastrous consequences for the economy.
The banks, aware that the ministerial mood is becoming more combative, are now racing to complete a new "statement of principles" about how they would deal with customers whose firms are on the brink of collapse. The talks are being conducted by Mandelson and are likely to include a pledge from banks "not to be unreasonable" while at the same time customers will be urged to have "open and honest conversations" with lenders.
Mandelson is also taking credit card issuers to task and threatened to launch an investigation by the Office of Fair Trading if they did not treat their customers fairly during the economic downturn. After a summit yesterday, the credit card companies agreed to draw up a set of "fair principles" for borrowers struggling with debt repayments within the next weeks.
The credit card companies are being criticised for risked-based pricing, which has forced up borrowing costs for those customers deemed to be at more risk of defaulting on payments. Card companies will give 30 days' grace to a customer already in talks about a repayment plan.
In the business sector, banks insist their lending is actually higher to small and medium-sized enterprises than a year ago. Lloyds TSB said its lending was up 18%, while Barclays said it was up 10%.
The Treasury said these claims did not square with the anecdotal evidence from small businesses, which suggested there was a lending squeeze going on. John McFall, the chairman of the Treasury select committee, urged the prime minister in the Commons yesterday to get the banks "into a room and collectively and simultaneously ensure that they resume that lending".
Gordon Brown said he expected all banks to follow the Royal Bank of Scotland's example, which has declared it will not raise overdraft rates. "This is something that has got to happen right across the banking system," Brown said. "We are talking to the banks now; we are hoping that we can make progress with them."
But the government-owned Northern Rock has defied demands to pass the 1.5 percentage point cut in base rates on to mortgage customers. It raised the interest rates on some of its loans yesterday after being swamped by applications.
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