Banks face demand to open their books

Business Secretary Peter Mandelson and Chancellor Alistair Darling are drawing up a package of measures aimed at freeing up more cash to firms and individuals.

Among the moves are a new "concordat" that would compel the banks to open their books to allow the Government to monitor their levels of lending.

If they fail to agree to a code of conduct, regulators may impose a legal requirement that companies must be given more notice of withdrawal of credit lines or changes in interest and overdraft rates.

Mr Darling is looking at rules making it clear that newly recapitalised banks must not sit on their new "cushion" of taxpayer cash and that they are expected to lend to business during the recession.

The Chancellor has ordered an inquiry to establish the full facts on lending levels. Lord Mandelson signalled his own intent with a warning of the consequences of inaction.

"It's completely unacceptable to the Government and to business in this country for banks to stop functioning as banks," he said. "We are in very intensive discussions with the banks, believe me."

Bank of England Governor Mervyn King warned yesterday that the banks faced wholesale nationalisation if they continued to fail to release money to businesses, describing the issue as "the single most pressing challenge" to the health of the economy.

Mr Darling expects the Financial Services Authority and Office of Fair Trading to stamp out what he calls the "bad practice" of banks changing terms of loans at short notice. He is also looking at ways of extending government guarantees to bank debt to offer medium-term finance for new loans.

To counter pressure from the money markets for banks to hold onto cash, the FSA could reduce minimum capital requirements so they will release funds.