If you think it is hard to borrow money now, just wait. Banks expect further cuts in lending over the next three months, according to the latest survey by the Bank of England. And the banks’ gloomy forecast was made before the turmoil of the past two weeks, which has clouded the outlook even more.

Banks said that they would rein back on mortgage lending because of worries over house prices and the rising cost of their own funding. On both counts, things are getting worse. Businesses can also expect to see credit tighten further with banks saying that they would reduce credit lines, increase collateral requirements and strengthen covenants.

The anecdotal evidence is alarming politicians. One MP told me yesterday that he had been swamped with constituents complaining that their small businesses had suddenly seen their overdrafts withdrawn.

Bankers believe that the US bailout plan could quickly provide some easing in the inter-bank lending markets. But, even if the scheme is agreed by Congress, there is increasing pressure on the British authorities to take further action.

The banks are pressing for an extension and broadening of the Bank of England’s Special Liquidity Scheme, which allows them to exchange hard-to-sell assets for government bonds. The Bank is resisting further moves at the moment, but some concessions look increasingly likely. Government officials are considering a range of other possible initiatives but most would be contemplated only as part of a co-ordinated international effort. This is why the intergovernmental meetings in Paris at the weekend and Washington next week are seen as so important.

The Irish Government’s decision to guarantee all deposits at the country’s leading financial institutions underlined the importance of international co-ordination.

The move brought a furious reaction from British banks worried that they would lose deposits. Now that the Irish have agreed to extend the guarantee to the Irish subsidiaries of RBS and HBOS, the British authorities do not see the threat as too serious. Nevertheless, it has intensified calls for Downing Street to introduce a similar guarantee.

There seems little chance that the British Government would make such a unilateral move, if only because it would not want the British financial system to be classed with Greece, which yesterday appeared to set to follow the Irish lead. But a coordinated move across the EU would be a different matter.

Equally, it is hard to see the UK or any other large EU country taking unilateral action on the vexed issue of fair value accounting. This too will be on the agenda at Saturday’s meeting in Paris.

Investor groups yesterday expressed alarm at the growing calls for a suspension of fair value accounting, which many bankers claim has exacerbated the credit crunch. The investors said that such a move would do nothing to boost confidence in banks’ financial health, which is at the root of the crisis in the credit markets.

But US bank share prices were boosted by a statement from the US Securities and Exchange Commission on Tuesday, which merely reminded banks and auditors that they could use their own judgment when valuing securities in highly illiquid markets. With pressure mounting on politicians to do more, the suspension of accounting rules – which would cost their taxpayers nothing – will remain a tempting option.

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