The Government’s is set to crack the whip over banks refusing to lend fairly to homeowners and small businesses after bailing out the banking sector with a £500 billion rescue package. 

New powers for fining banks that breach the banking code are expected as part of today’s Queen’s Speech in Parliament as part of several major financial changes included in a new Banking Reform bill. 

Now the Government has a major stake in the Royal Bank of Scotland, HBoS and Lloyds TSB, there is a new determination to make sure the banks don’t squeeze small businesses and homeowners facing hardships over loan repayments due to the credit crunch. 

The existing code of conduct sets out minimum standards banks must provide. This includes lending responsibly, giving help for customers who hit problems and more transparent bank charges. 

The plans will allow the Financial Services Authority to police the banks and penalise them with unlimited fines for breaking rules or refusing to improve their service.  

Royal Bank of Scotland was told yesterday that its lending policy, boardroom appointments and business strategy were under review as the government took control of 58% of the bank. 

Meanwhile the bank promised to grant a six-month cooling-off period to homeowners struggling to keep up with mortgage payments. The move was welcomed by the Treasury and is expected to become an industry standard. 

HBOS announced new support for businesses this morning. Small and medium-sized firms who are Bank of Scotland customers will be offered funding worth £250m, which will be available at up to 0.8% below standard lending rates, and guarantee pricing on small business customer overdrafts for 12 months from the date of arrangement for new loans and renewals. 

On the markets, the FTSE closed up 58 points at 4123 and the DOW recovered 270 points to 8419. The Pound weakened against the US dollar to $1.47 and against the Euro to 85.74 pence.