The UK's banks are having their ability to lend squeezed by regulation and the eurozone crisis, which is putting the UK's economic recovery at risk, a powerful group of MPs have warned the Bank of England.
In a letter to Sir Mervyn King, the Bank's Governor, the Treasury Select Committee said that new regulatory requirements had made banks more cautious in their lending as competition for stable funding sources such as retail deposits increases.
UK banks are also having to cope with the withdrawal of emergency funding at a time when they need additional liquidity, according to committee chairman Andrew Tyrie.
While he said banks should be "weaned off" extraordinary official funding, he added: "Attempting to do it too quickly, in a hostile international economic environment, could risk setting economic recovery back for benefits that are unclear".
If this were to happen, regulators may be seen as having aggravated a second crisis rather than having alleviated it, he added.
"Quantitative easing may be a good policy but it does little to increase the supply of liquid assets to banks," the letter stated.
Mr Tyrie also said that new regulatory rules such as Basel 3 had forced the banks to hold more liquid assets, such as those that can easily be turned into cash.
While the rules do not officially come into force until 2015, worries about the health of banks have already resulted in firms being measured against the new standards.
Bank credit contracted by 7% in the year to the end of August, but there is a risk of further contraction if liquidity among the banks dried up further, something that could push back the prospects of economic recovery, the committee said.