The banking industry did not amass what is still huge wealth, even after billions of pounds in losses, by making promises for the greater good at its own expense.

On October 13 the Government injected £37 billion into Royal Bank of Scotland, Lloyds TSB and HBOS. In return, the Treasury announced triumphantly that the banks had promised to continue to lend to small businesses at the same level as they did in 2007, at competitive prices.

The undertaking may have allowed Alistair Darling to feel that he had extracted a vote-winning concession from the humbled high-street banks. In truth, the promise holds them to very little.

The banks agreed merely to put up for grabs for the next three years the same amount of cash that they lent last year. They did not agree to lower their prices until all of the available cash is put to use as loans.

What is considered a competitive price is relative. If every bank’s loan price is high, and one is slightly less high, it does not make that bank’s loans cheap. The words “competitive prices” are meaningless if small businesses simply cannot afford them. Before banks can lend to customers, they must borrow the money from the wholesale market in which banks lend to each other. The cost of these wholesale loans has hit historic highs over the past year and the banks have passed on these higher costs to customers.

There is a glimmer of hope. Wholesale borrowing rates have fallen in the past week, after global moves to bail out the system. But only larger companies, say those with 50 employees or more, will feel the knock-on benefit immediately.

For small companies, as for retail customers, banks do not offer bespoke borrowing, tailored exactly to a business’s needs. Instead they buy off-the-peg loans, the prices of which change far less quickly.

Small businesses make up a tiny part of the banks’ business. Total bank borrowings by small and medium-sized enterprises are £54 billion. In comparison, Barclays alone has lent £75 million in residential mortgages. There is little incentive for the banks to chase big increases in market share with razor-sharp price-cutting.

Small businesses will continue to be able to borrow, as long as their bank thinks that they are resilient to a recession. But the days of great rates and big overdrafts are over.

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