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The Chancellor of the Exchequer, Alistair Darling, is apparently drawing up measures to boost lending to business, amid warnings that banks risk the ultimate sanction of full nationalisation unless they reopen credit lines to struggling companies.

Mr Darling wants new regulations to force banks to give companies more notice of changes in lending practice, including withdrawal of credit lines or sharp changes in interest rates. He is also looking at ways to extend government guarantees to support new business lending, building on existing proposals designed to release funds for new home loans.

Separately Mr Darling wants to clarify capital adequacy rules to make it clear that newly recapitalised banks do not need to sit on a fat cushion of capital and that regulators expect them to lend during the recession.

If these changes fail to reopen choked credit lines, Mr Darling has a range of fallback options, including the last resort of nationalising the whole banking sector.

Mervyn King, Bank of England governor, emphasised that threat, telling members of parliament: “I think, given what we have seen, it would be an extremely brave person that would rule anything out. It’s very unlikely to be the first option

Banks reject the suggestion that they have reined in lending in spite of the deteriorating economy. Lloyds TSB says its lending to small and medium-sized businesses is up by 18 per cent year-on-year.

Mr Darling this week ordered an inquiry to establish the full facts on business lending, but ministers are under increasing pressure from companies and the opposition Conservative party to take bold action.

Peter Mandelson, now the business secretary, weighed in to the debate saying, “It’s completely unacceptable to the government and to business in this country for banks indefinitely to stop functioning as banks. We are in very intensive discussions with the banks, believe me.”

Mr Darling must see the serious pitfalls in the most radical options available to him, including nationalising the banks, insuring all business loans or directly lending to companies. Bankers confirm that privately ministers are taking a measured approach to the problem.

In the first instance Mr Darling will probably use the Financial Services Authority and Office of Fair Trading to regulate and stamp out what he calls “bad practice” by banks in changing the terms of loans at short notice

He is also said to be looking at ways of extending government guarantees to bank debt to create a source of medium-term finance for new business loans, not just new mortgage lending.

Mervyn King recently told a parliamentary committee that banks are giving up profitable lending opportunities in order to behave defensively. He claims that, collectively, this is a recipe for a deep recession.

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Those thinking of seeking a loan in the near future should take note. Expectations of another interest rate cut have risen after the release of minutes from the Bank of England meeting at which rates were lowered from 4.5% to 3%.

The Bank’s nine-member committee voted unanimously for the cut on 6 November, but considered a bigger one.

The Bank’s own calculations showed that a cut to 2.5%, or even lower, would be needed to stop inflation falling too far below its target next year. But the rate-setters decided such a big cut would come as too much of a shock.

The one-and-a-half percentage point cut they agreed on was the biggest reduction since 1981, and took rates to the lowest level since 1955.

Commentators believe that this confirms that we’re going to see more rate cuts from the Bank of England, and more aggressive rate cuts.

The minutes said that: “Some members thought there was an argument for leaving some of the required policy loosening to the months ahead to support confidence as the economy weakened.”

There was also concern that if rates had been cut by any more, there could be too sharp a fall in the value of the pound, which would create inflationary problems.

In recent weeks the pound has fallen below $1.50 for the first time since 2002. The pound is also at its weakest level against the euro since the currency was created in 1999. Only twice in recent history has sterling fallen by such a degree. On 16 September 1992, the pound was withdrawn from the European Exchange Rate Mechanism, triggering a fall from around $2 to $1.40.

In addition, the committee’s members were worried that a bigger cut could be “misinterpreted” and that this could damage its credibility.

The Bank stressed that its decision was based on the government’s current tax and spending plans, which meant they would have to be reconsidered after the chancellor’s pre-Budget report, which will be published on Monday.

For those able to find a loan this will be good news, the interest rate falls will be passed on and you will repay less. In the current climate, however, this will be cold comfort to those who are unable to find a lender.