Sanctions backed to boost loans

A woman walks past the offices of the Royal Bank of Scotland (RBS) in the City of London, December 3, 2009.

LONDON (Reuters) - The Treasury should impose "effective and enforceable" sanctions to encourage the country's bailed-out lenders to meet loan promises made as a condition of receiving taxpayer support, MPs said in a report.

Both part-nationalised Royal Bank of Scotland and rival Lloyds Banking Group, 43 percent state-owned, have indicated in recent months they have not met lending commitments made to businesses, blaming reduced demand as many small and medium-sized firms repay debt and borrow less.

In its report on financial stability in the banking sector published on Tuesday, the influential parliamentary Committee of Public Accounts said the Treasury had been unable to explain the banks' failure to fulfil promises, and was also largely powerless to force them to increase their lending.

"The Treasury has only limited sanctions available to it to encourage RBS and Lloyds Banking Group to meet what are described as legally binding lending commitments," the committee said in its conclusions and recommendations.

"Further lending commitments are likely to be put in place from early 2010 and the Treasury... should use the time available to devise effective and enforceable sanctions if the banks continue to fall short of their commitments."

The committee also criticised the Treasury for paying expensive retainers and success fees to investment banks "in a situation where no success criteria could be specified," largely because it was too stretched to deal with its responsibilities and too reliant on external advice.

The Treasury expects to spend 107 million pounds on advisers, though all but 7 million is likely to be charged back to the banks. The two investment banks working alongside it, Credit Suisse and Deutsche Bank, were initially appointed on retainers of 200,000 pounds a month for a year, with success fees of up to 5.8 million pounds, the report said.

"For the future, the Treasury should examine whether its own expertise and capacity is sufficient for the tasks it faces and ensure these skills are properly focussed on core areas of responsibility carrying greatest risk," the committee said.

It said the Treasury should not lose sight of "its own responsibilities to ensure good value for money," not least when it begins to sell down its holdings in the sector.

(Reporting by Clara Ferreira-Marques)