The Chancellor has declined to rule out new taxes on British banks as the Budget approaches, leaving senior financial executives uncertain about the scale of any increase. Ministers face a shortfall in public finances, and the banking sector is an obvious source of revenue. Lenders argue that the cost would fall on the businesses that depend on them.

Banks already pay a corporation tax surcharge and a levy on their balance sheets, in addition to the capital requirements set by regulators. Industry groups say a further increase would widen the gap between the burden on UK institutions and that borne by lenders in other financial centres. Executives have told ministers that a heavier tax bill reduces the capital available for lending, since retained profits are the main way a bank builds the buffers that support new loans.

Small and medium-sized enterprises are the most exposed. These firms rely heavily on overdrafts, term loans and asset finance from high-street banks, and they have fewer alternatives than larger companies, which can issue bonds or approach investors directly. When a bank's costs rise, it tends to concentrate on lower-risk borrowers with strong collateral. Smaller and younger businesses, or those in sectors regarded as volatile, are the first to see their applications declined or their terms tightened.

Demand for credit does not disappear when banks pull back. It moves. Private credit funds, many of them managed by large American firms, have expanded quickly in Europe over the past decade and hold substantial sums raised from pension funds, insurers and sovereign wealth investors. They are not deposit-takers and are not subject to the same capital rules or bank-specific levies. That allows them to price and structure loans with greater freedom and to act faster than a bank credit committee.

The terms are usually less favourable to the borrower. Private lenders commonly charge higher interest rates than banks to compensate for taking on loans that regulated institutions have passed over. Covenants can also be stricter, giving the lender more control over how a company is run and how quickly it must repay if performance weakens. For a small firm with thin margins, the extra cost may reduce the money available for hiring and investment.

There is also a question of oversight. Banks report to the Prudential Regulation Authority and the Financial Conduct Authority, which monitor their lending and test their resilience against economic shocks. Private credit funds fall largely outside that framework. The Bank of England has warned that rapid growth in the sector, combined with limited disclosure, makes it harder to see where risk is accumulating. If a downturn caused widespread defaults among borrowers financed by these funds, regulators would have less information with which to respond.

The competitive effect is equally relevant. If tax rises curb the ability of UK banks to lend, Wall Street firms and private equity groups stand to gain market share in British corporate debt. Much of the profit from that lending would accrue to overseas investors rather than to institutions that pay tax and employ staff in Britain. The Treasury could therefore raise less than it expects, as business shifts to lenders that fall outside the scope of the new charge.

Supporters of higher bank taxes make a different case. They point to the record profits that lenders have reported as interest rates rose, and argue that banks have been slow to pass those gains on to savers. In their view, the sector can absorb a larger contribution without a material effect on lending. The Treasury has not published an assessment of how a change would affect credit supply to smaller firms, which leaves the central question unanswered.

The Budget will show whether the Chancellor accepts the lenders' argument. A modest increase may have little effect on lending decisions. A large one would test the claim that banks can fund the economy and the public finances at the same time, and the answer would be felt first by the smaller companies that have the fewest places to turn.

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