- Cable believes the BoE has held back lending by demanding banks hold onerous levels of capital
- The Treasury confirmed it passed on concerns expressed by banks about the new capital requirements
- King criticised bankers last month for trying to lobby ministers to relax their requirements to bring leverage ratios down
Vince Cable, business secretary, has lifted the lid on tensions between the government and the Bank of England criticising its "capital Taliban" whom he accuses of holding back the recovery by imposing excessive financial burdens on the banks.
Cable believes the BoE has held back small business lending by demanding banks hold onerous levels of capital as a cushion against further shocks, a view shared by George Osborne, chancellor.
Osborne has warned of the dangers of creating the "stability of the graveyard" and hopes Mark Carney, the new BoE governor, will rein in what one Treasury official described as a "jihadist" tendency in Threadneedle St against the banks.
The tensions were stoked last month when Osborne's hopes of a revival in the housing market were threatened by prospective capital demands on Nationwide, Britain's biggest building society and one of the UK's fastest growing mortgage lenders.
Nationwide fell short of new requirements which compelled lenders to hold top tier capital equal to 3 per cent of their total loan book, prompting Graham Beale, the group's chief executive, to warn that the "crude" measure would constrain its ability to lend.
The Treasury confirmed it passed on concerns expressed by banks about the new capital requirements. A few weeks later -- after Mr Carney's arrival -- Nationwide was told by the regulator that it could have until 2015 to meet the new leverage ratio, a much softer stance than it initially expected.
King, who stepped down as governor of the BoE at the start of the month, criticised bankers only last month for trying to lobby ministers to relax their requirements to bring leverage ratios down.
King said two financial institutions -- Nationwide and Barclays -- still had to agree plans to reduce leverage. He gave no indication the leverage ratio target had to be hit within a year but said the plans would be agreed "by the end of July".
The Treasury denies it lobbied on behalf of the mutual, although ministers were said by banking industry figures to have been "furious" about the potential constraint on Nationwide's ability to lend.
Nationwide is in favour with the government as it has aggressively increased its mortgage lending in the past year, while big banks such as Lloyds Banking Group and Santander UK have been deliberately shrinking their books.
"Nationwide is one of the financial institutions that the chancellor listens to," said one industry observer.
Cable, who has warned of the dangers of the government stoking a pre-election housing boom, nevertheless had sympathy in this case with Nationwide in its battle with the Prudential Regulation Authority, the regulator that sits within the BoE
The business secretary told the Financial Times: "One of the anxieties in the business community is that the so called 'capital Taliban' in the Bank of England are imposing restrictions which at this delicate stage of recovery actually make it more difficult for companies to operate and expand."
He said his main concern was small business lending: "It is clear that the main banks are failing to support good British companies in key areas like exporting and innovation."
There is a growing hope in the City, however, that Mr Carney will be more focused on striking a balance between the safety of financial institutions and stimulating growth in the economy than his predecessor, Lord King.
Osborne's allies argue that in cases like Nationwide, the trade off between financial stability and growth is internalised in the BoE. The Financial Policy Committee -- chaired by Mr Carney -- has a duty to promote stability as well as a secondary objective of supporting the government's economic policy.