As the Bank of England (BoE) published data showing yet another month when more loans had been repaid than had been granted, Vince Cable admitted the level of anxiety in the government about the flow of funds to smaller companies. He said: "The green paper will acknowledge the scale of the problem and how the recovery could be aborted if we don't get on top of this.
"There is a fundamental policy conflict between efforts to make the banks safer and our wish to get them lending more freely to promote growth," Cable said.
He has been presented with research from the banks – which have given the work by PricewaterhouseCoopers the name "Project Oak" – showing that tougher capital rules and the end of emergency liquidity injections from the BoE could drain the banking system by £1 trillion in the coming years.
Cable believes there is a "very frustrating standoff" between the banks and small businesses: banks argue there is no demand, while businesses say they are not applying for loans because they expect to be rejected or the cost is too high.
"We have to acknowledge there is an issue," said Cable. Even so, he does not appear to be ready to alter the current lending targets for Royal Bank of Scotland and Lloyds Banking Group, which run until next March.
Since the 2008 banking crisis, lending figures from the banks compiled by the BoE have been positive in only three months. The Liberal Democrats calculated that £46bn of loans had been withdrawn in the past year alone.
Howard Archer, economist at IHS Global Insight, agreed with Cable that the BoE data showed "several worrying traits". Archer said: "The survey very much maintains concern that tight credit conditions could hold back the recovery. This is even allowing for the fact that ongoing muted bank lending to companies is being influenced significantly by low demand for credit in addition to restricted supply.
"Lack of access to credit for smaller businesses is still a serious problem despite some reports that it has risen slightly in recent months," said Archer.
The low level of activity in the mortgage market – where June's 48,000 approvals were the lowest since May 2009 – also prompted Archer to forecast that house prices would fall by 3% to 5% over the second half of the year
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