Britain's beleaguered banks are the "authors of their misfortune", with the bankers themselves having made "an astonishing mess" of the financial system, according to the powerful cross-party Treasury Select Committee of MPs.
The MPs said there was "an unresolved inconsistency between...bankers' assurances that they are increasing their lending and, on the other hand, the widespread complaints of business that credit is difficult to obtain and increasingly expensive".
The authorities are also criticised for failing to anticipate the scale of the crisis, and for their weakness in overseeing the banks now.
"In hindsight, there were clear signs of an impending financial crisis since the summer of 2007. We question whether more analysis should have been instituted by the regulators earlier to clarify the nature and value of assets on which banks were relying," the report states, adding: "This was a failure not only within individual banks but also of the supervisory system designed to protect the public from systemic risk."
The problems arising from the Lloyds (LLOY.L) takeover of HBOS are put down to the banks' executives. "If the merger has had injurious consequences for Lloyds TSB we consider that the responsibility for this lies primarily with the Lloyds board," it says.
Echoing bodies such as the British Chambers of Commerce, the MPs express grave concern about the failure of the Government to effectively monitor and improve the flow of lending to business, especially to smaller enterprises. The chairman of the committee, John McFall, said: "The public must be assured that the banks face a quid pro quo and have not received a cost-free bailout. The Government's priority now must be to ensure that the conditions they have set – in particular those relating to remuneration and lending levels – are adhered to."
The Treasury Committee criticises the Government for a plethora of "piecemeal and disjointed" business support schemes so that "it is difficult to form an overall picture of how effective those efforts are, and how well they are working together".
Bank lending to business has collapsed from £53.5bn in the six months to February 2008 to £8.5bn in the corresponding period this year.
The risks to taxpayers under the Asset Protection Scheme are also raised by the committee. So far £325bn of assets from Royal Bank of Scotland (RBS) and £260bn from Lloyds Banking Group have been at least partially guaranteed by the Treasury, but with little "transparency", say MPs, on the fees charged by the Government for the use of the facility or on the degree of risk faced by the state.
While welcoming the committee's efforts, the Liberal Democrat Treasury spokesman called their report "feeble". Vince Cable said: "The Asset Protection Scheme is a fraud on the taxpayer. Hundreds of billions of pounds worth of risk has been taken on by the Treasury, while there are stories that the banks have dumped bad assets on the taxpayer and then pushed the companies that are linked to those assets into administration."
Mr Cable also criticised the committee for its judgement on the remit of UK Financial Investments – set up by the Treasury to run its stakeholdings in the banks – as "enigmatic". Mr Cable said: "UKFI is dealt with kid gloves. It is not right for a group of financiers with little or no experience of running companies in the real world to be exclusively charged with representing the public interest."
For the future, the Treasury Committee recommends that there be "further debate" on separating retail and investment banking, along the lines of the old US Glass-Steagall Act of 1933, which was repealed in 1999, a move blamed by many for contributing to the severity of the present crisis.