The UK's banks are having their ability to lend squeezed by regulation and the eurozone crisis, which is putting the UK's economic recovery at risk, a powerful group of MPs today warned the Bank of England.
In a letter to Sir Mervyn King, the Bank's Governor, the Treasury Select Committee said that new regulatory requirements had made banks more cautious in their lending as competition for stable funding sources such as retail deposits increases.
UK banks also have to cope with the withdrawal of emergency funding at a time when they need additional liquidity, said committee chairman Andrew Tyrie.
While he said banks should be "weaned off" extraordinary official funding, he added: "Attempting to do it too quickly, in a hostile international economic environment, could risk setting economic recovery back for benefits that are unclear."
If this were to happen, regulators may be seen as having aggravated a second crisis rather than having alleviated it, he added.
"Quantitative easing may be a good policy but it does little to increase the supply of liquid assets to banks" the letter stated. Mr Tyrie also said that new regulatory rules such as Basel 3 had forced the banks to hold more liquid assets, such as those that can easily be turned into cash.
Bank credit contracted by 7% in the year to the end of August, but there is a risk of further contraction if liquidity among the banks dried up further, something that could delay prospects of economic recovery, the committee said.
Meanwhile, the Government was today urged to do more to help the "forgotten army" of medium-sized businesses that can no longer rely on bank lending.
The CBI said firms with a turnover of between £10m and £100m were less than 1% of businesses but generated 22% of economic revenue and 16% of all jobs.
The group said the Government should make bond markets more accessible to medium-sized firms, which could kick-start demand through credit easing.
A Department for Business spokesperson said: "We welcome the CBI's focus on the UK's mid-sized companies, and today's report. This sets out a range of ways in which businesses, representative bodies and the Government can support this important group.
"The Government is already focused on this group as part of the growth review. We will be setting out our proposals alongside the autumn statement in November."