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Finance Minister Jim Flaherty delivered the banks a deadline of just a few weeks to get more loans out into the sagging economy, prompting the banks to counter that they're already doing enough and added lending could prove irresponsible.

With the country entering a recession, Mr. Flaherty and Bank of Canada Governor Mark Carney will meet with the banks' chief executives early next month to discuss why credit remains tight even after unprecedented efforts by the federal government to pump cash into the financial system.

“We expect the banks to provide adequate credit in Canada,” Mr. Flaherty said at a news conference in Saskatoon yesterday. At the meeting in January, “I expect them to make it evident to us that they are taking steps to make that more available in Canada.”

The showdown promises to be tense. Bankers argue that they are lending responsibly and that anything more would be risky. Creditworthy borrowers are still able to access funds, they argue.

“We are continuing to apply our consistent approach in order to make credit available to Canadians and their businesses,” said Frank Techar, the head of Canadian banking at Bank of Montreal.

“How do people, whether it's a politician or a business or a Canadian, think banks should conduct their business in this current time?” said Don Drummond, chief economist at Toronto-Dominion Bank. “On the one hand, every politician in the country was waving around the World Economic Forum finding that we have the most stable, sound banking system in the world.

“Well,” Mr. Drummond added, “why did we? Because the banking sector didn't take crazy risks.”

Mr. Drummond said that, through to October, there has actually been impressive growth in bank lending. The sector points to a recently released report from the Canadian Bankers Association that shows business lending by the six biggest banks increased by 11.3 per cent from October, 2007, to October, 2008, which is the most recent set of figures available.

But the dramatic worsening of the credit crunch since mid-September has left a number of Canadian businesses without access to loans. Companies' inability to secure loans emerged as one of the biggest worries at a meeting between Mr. Flaherty and his provincial and territorial counterparts on Wednesday.

The big banks insist they are being unfairly blamed.

“It is true that there has been a contraction of lending, but the contraction of lending has not come from the banking sector, it has come from others,” Mr. Drummond said. One senior bank executive noted that foreign banks and the auto makers' lending arms have been retreating from Canada. And troubles in the markets for bonds, commercial paper and initial public offerings are contributing to a significant pullback in the financing available to some companies, said Nancy Hughes Anthony, head of the Canadian Bankers Association. Banks are working to fill the gap, but don't have the capacity to do it all, she said.

The industry also argues that the demand for many types of loans is starting to drop. “We know mortgage originations really softened in November, but that doesn't mean that banks have tightened up on credit,” Mr. Drummond said. Housing starts have fallen, and there has been roughly a 50-per-cent decline in resale homes, he said. “So obviously, the demand for mortgage credit has dropped very suddenly.”

“I have not received a single letter from a single client saying, ‘You're cutting me off credit,'” one top bank executive said yesterday. “Not a single letter.”

Most senior bank executives were not willing to speak on the record about the situation, saying there's no upside to publicly sparring with Ottawa. Privately, a number of executives expressed a high level of frustration. They say they are caught between the market, which would punish their stock prices if they didn't rein in risky lending and boost their financial cushions, and the federal government.

The banks have recently gone to extreme lengths to increase capital levels, which act as a financial cushion in lending to clients. But Mr. Carney told The Globe and Mail's editorial board Wednesday that banks were too concerned over building up capital at a time when companies need more access to loans.

“It is not clear to me that they need additional capital buffers,” he said. “What is clear to me is that there is unfilled demand for credit for worthy investments, and I'm sure that our banks will see these opportunities in the fullness of time.”

The question of whether it's better for banks to raise capital or dole out loans in tough times will be one of the bigger industry debates in the coming year, former Bank of Nova Scotia CEO Peter Godsoe said yesterday. He noted that the banks used to raise their financial reserves in good times and decrease them in bad times, helping to smooth the economic cycle.

(In the 1990s, the Bank of Canada stopped demanding that banks hold certain amounts of reserves, favouring instead its current policy of controlling the overnight rate for lending between private financial institutions.)

One top bank executive said the banks are getting mixed signals from Ottawa, with the country's banking regulator signalling they should be holding more capital and now Mr. Flaherty pushing for higher lending, which would reduce capital.

Rod Giles, a spokesman for the Office of the Superintendent of Financial Institutions, said there are no plans to change the banks' minimum capital requirements at this time.

With a report from Andrew Willis