Mandelson alarmed at banks treatment of small business

And he said he was drawing up a code of conduct and a monitoring panel to regulate their behaviour.

The business secretary said that he hoped other banks would follow RBS’s example but he said he was hearing worrying reports about the actions of some local bank managers.

While playing down the prospect of full-scale nationalisation, he said it was vital to change "the behaviour of the managers of the banks, not just at the national level, but at area level and the local level".

‘Tested and judged’

He added: "The stories I’m hearing I must say are alarming. I know the banks say they are not representative and actually bank lending is being maintained.

"But if it is the case that banks locally are unilaterally rearranging overdraft and lending facilities, sending this information out by email without even a face-to-face meeting with those who are taking on the loans, ordering those they are lending to to comply with their requirements within 48 hours, that is not the sort of constructive relationship that is sustainable between banks and businesses."

He threatened further meetings – "as many as necessary I might say" – between the banks, businesses and the government to ensure that a new code of behaviour is adhered to.

"I don’t think we need to take bigger holdings, what I do think we need to see is the banks responding to what is being done to help them out in this situation," Lord Mandelson added.

"I want a constructive relationship with them, of course, but they have to know that they are going to be tested and judged by what they do and what role they play to help Britain and British business get through this economic storm."

‘Loss of confidence’

Lord Mandelson said he was setting up a monitoring panel which would "gather data about banks lending from around the country so that we know exactly what is going on".

"Then we are going to have continued meetings – as many as necessary … between the government, the banks and the small businesses to make sure that the code of conduct is properly adhered to by the banks."

Prime Minister Gordon Brown supported Lord Mandelson’s concern about the "alarming" behaviour of some local banks.

"I think that’s true, there is a loss of confidence in the banking system and they are increasing that loss of confidence by not acting in the way that banks usually do."

He also expressed confidence that other banks would follow RBS’s lead on interest rates.

But Lib Dem treasury spokesman Vince Cable said the government is not doing enough to regulate the banking industry.

‘Further steps’

He called on ministers to put government representatives on the boards of banks.

"You know the government really does have to exercise effective control over the banks. I don’t mean controlling every individual loan. It’s not the job of ministers to decide whether Bob the Builder gets a loan.

"But they must get there on the boards, setting the strategy for the banks and making sure the economy moves forward"

Conservative leader David Cameron said "radical further steps" may be necessary to get banks lending again and added that "interest rates need to come down".

He said: "We may need to take action which would include government insurance for new loans to be made because we have got to get the money out of the banks and into the small businesses."

The row comes a day before the pre-Budget report, which is seen as Labour’s most important test to date.

There are expectations that the government will reduce VAT by up to 2.5% to 15% as a way to boost the economy as it faces a recession.

RBS, Britain’s second biggest bank, is the first bank to promise not to withdraw its lending facilities in an attempt to help its 1.1 million business customers as they face the economic downturn.

A spokeswoman for the British Banking Association (BBA) said: "Against a general trend of other costs going up it does help small businesses in terms of cash flow to know that some of their charges are fixed".