Germany’s banking sector rescue has failed and should be modified urgently if lasting damage to the economy is to be avoided, the MPs who oversee the €500bn ($668bn, £449bn) of funds warned on Friday.

In a letter to Peer Steinbrück, the finance minister, obtained by the Financial Times, the MPs said a €400bn fund set up by the government to guarantee bank debt had not led to a resumption of inter-bank lending and that German banks were not providing companies with sufficient credit.