Bailout agency to make sure banks are lending

Chancellor Alistair Darling set out details of the bank reconstruction body as he and Bank of England Governor Mervyn King faced a grilling from MPs over the financial crisis.

The arms-length agency will manage the Treasury's £37 billion stake in Royal Bank of Scotland, HBOS and LloydsTSB with unprecedented daily monitoring of their lending activities.

Loans to small businesses and fair deals for mortgage holders will be central to its tasks as ministers seek to ensure the banks do not ramp up profits at the taxpayers' expense.

The banks' voluntary code on lending to small business is also set to be tightened this week, under pressure from the Government, to ensure customers are given reasonable notice before loans and overdrafts are axed or rates increased. The new agency's terms were unveiled amid increasing political concerns that the part-nationalisation of the three high street banks is not reaping the promised benefits for small business.

Mr Darling, Mr King and the Financial Services Authority chairman, Lord Turner of Ecchinswell, were giving evidence to the Commons Treasury Committee today as it began its inquiry into the events of recent weeks.

Gordon Brown and Mr Darling initially won plaudits for their bank bail-out, which has provided a blueprint for similar schemes around the world.

But while it was credited with stopping the banking system collapsing, there has been frustration that it has yet to restore the flow of credit to businesses.

There are also questions over how effective the Government's efforts, agreed as part of the bail-out deal, to curb the City bonus culture are proving.

The witnesses also face questions over claims UK authorities knew Iceland's banks were in trouble six months before they collapsed leaving many UK charities, councils and other public bodies with funds frozen and no certainty they will get their money back.

Unusually, the committee has invited members of the public to submit questions which they would like to see put to the authorities about the bail-out.

Chairman John McFall said: "Taxpayers are very concerned about the scale of this investment."