A new agency to make sure that money flows to parts of the economy where it is needed has been set up by the government. The new bail out agency will be responsible for making sure that the banks live up to their promises to lend again during the credit crunch which saw many of the balance sheets of financial institutions decimated. The urge for banks is to hoard capital and rebuild their finances…but this is a move that the treasury is keen to avoid.

Chancellor Alastair Darling set out the plans for the agency as he and Bank of England Governor Mervyn King got hauled over the coals from the MP over their handling of the financial crisis.

The key aim of the bailout agency is to ensure that small firms and mortgage holders get a fair deal form the under pressure banks’ at a time when many have been accused of profiteering. The agency, which will be “at arm’s length”, will manage the treasury’s stake in HBOS, RBS and Lloyds TSB.

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.

After initially winning plaudits from the world’s financial leaders for their rescue of the banking system, Gordon Brown and Alastair Darling have been met with frustration by the CBI and industry and consumer watch dogs in general that the touted benefits have yet to come to pass of the huge bailout package.

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

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Tags: bail out agency, banks voluntary code