RBS and Lloyds fall short on lending pledges

State-backed banks the Royal Bank of Scotland and Lloyds Banking Group are failing to meet legally binding commitments to lend to businesses that were agreed as part of government support for the two banks.

Under the terms of the Asset Protection Scheme Lloyds pledged to lend an additional £14bn in the year to February 2010 while RBS committed to an extra £25bn in lending over the same period.

These lending pledges were agreed by the banks and the government in return for a government indemnity on up to 90% of losses on the banks’ bad debts.

But the MP Committee of Public Accounts says that although the banks were on track to meet their mortgage lending pledges as at the end of September, business lending to small and medium-sized firms is likely to fall short of legally binding targets.

The Treasury was unable to tell MPs why business lending commitments are not being met, and the Committee says it was unable to judge whether this was down to a lack of demand, a fall in the availability of funds for banks to lend, or a combination of these and other factors.

MPs noted that the Treasury has limited sanctions in forcing banks to lend and that these should be developed further to stop banks from continuing to meet their pledges.

MPs have also attacked the Treasury for failing to notify the Committee of an £18bn indemnity provided by the Bank of England to cover RBS and HBOS loans.

The Committee dubbed this omission as “unacceptable.”

It added that it was also unacceptable that the National Audit Office had not yet been able to scrutinise the actions of the Financial Services Authority and the Bank of England to check how effectively taxpayer money was spent during the financial crisis.

The Committee says that it welcomes the recent announcement that the National Audit Office will be appointed as auditor of the FSA, and urges the Treasury to force the Bank to do the same “by direct legislation if necessary.”