Curtailing bank bonuses 'could open £50bn lending to firms'

Business Secretary Vince Cable said there was currently a "dialogue of the deaf", with business groups complaining of their frustration at how difficult it was to access finance while banks maintained they were meeting 80 per cent of requests.

Dr Cable said he believed small and medium sized firms were facing a "very serious problem" on raising finance which needed to addressed, given the importance of the sector to job creation.

The Business Department published a joint consultation paper with the Treasury setting out options for improving the flow of cash to businesses.

Regional stock exchanges, more Government loan guarantees and moves to boost banking system liquidity were among suggestions of ways to increase supplies of much-needed finance.

Dr Cable warned banks that he could ask them to sign up to the type of loan guarantees already agreed by part-nationalised banks RBS and Lloyds if they did not act.

"If bonuses and dividend payments are too big, the Government has the option of looking at taxation of their profits," he told a news conference.

"There is a choice between giving out cash in bonuses, or re-investing.

"There are potential sanctions available which we hope are not necessary."

The consultation document, Financing A Private Sector Recovery, said there was scope for banks to build capital while sustaining lending.

Quoting the Bank of England's recent Financial Stability Report (FRS), the document said: "The FRS estimates that if UK banks limited bonus and dividend payouts to pre-crisis and 2009 levels respectively, the major banks could generate around 10bn of additional capital over 2010, which could in turn sustain 50bn new lending."

Dr Cable said there was a basic problem of transparency in bank lending, even by the part-nationalised banks RBS and Lloyds.

He added: "It is very difficult to find out what is going on. We are pushing to improve things.

The British Bankers' Association said: "High street banks lent a net 6.8bn in June to businesses and, despite the recession, lending to smaller firms is stable and borrowing by larger firms has shown some improvement."

Angela Knight, chief executive of the BBA, added: "Banks already provide the vast bulk of business funding in the UK.

"But how much they can lend depends on many factors including new rules dictating how much cash and capital has to set aside before banks can even consider lending to customers."

Ms Knight, a former councillor at Sheffield Council, said: "The greatest help there can be for business is to restart the securitisation market and get wholesale markets moving so there is a steady stream of new funds which banks can convert into loans to business."