Rishi Sunak is set to snub a post-Covid action plan put forward by a group of bankers that calls for the government to take responsibility for tens of billions of pounds of toxic business loans.
The City had proposed the creation of a state-backed organisation that would refinance soured coronavirus loans. But sources have told the Financial Times that the Treasury thinks banks should be the ones dealing with the cost and reputational risk of chasing borrowers that default.
Financiers including Lloyds chairman Norman Blackwell, a former policy chief to Margaret Thatcher and John Major, put forward the plan earlier this year amid concerns about the debt burden facing businesses. The proposals were put together by a taskforce led by trade body TheCityUK and accountant EY.
State support has been a lifeline for many businesses that have been unable to operate during the lockdown. The taxpayer covers up to 100pc of losses if a bank is unable to recover cash doled out through various lending schemes.
However, fears have grown among bankers about what will happen once the support is lifted and banks are forced to act as the Treasury's debt collectors. Banks have long feared that the terms of the government-backed loans have been misunderstood and wrongly viewed as grants that will never need to be repaid.
Lord Blackwell told The Telegraph earlier this year that as it stands bankers will be expected to do "everything they can" to recover toxic Covid-19 loans, including putting firms in administration and selling off the assets unless there is an agreed refinancing.
The Conservative peer said: "Some businesses will need to go into liquidation, but those which they think have a prospect [of surviving] the best thing is to take the loans off the banks, pay out their guarantee and put them in a vehicle which will over time try and recoup money from the companies."
However Mr Sunak said at a Treasury Select Committee hearing in July that he was "not completely persuaded of the scale of the [country's debt] problem" as corporate debt levels in the UK were in a "relatively healthy place coming into this crisis".
Miles Celic, who runs TheCityUK, said "we continue to have valuable discussions with government".