‘Project Merlin’ has finally reported. This is the much vaunted, Government-led agreement with the UK’s biggest four bank lenders on their bonuses and lending. Even the Government’s late decision to increase the levy on banks’ balance sheets did not appear to jeopardise Merlin’s proposals.
Merlin promised much as the branchild of John Varley (former Head of Barclays) and the flagship Government-led agreement of George Osborne. Mr Osborne described the conclusion of the protracted Merlin deliberations as a ‘move from retribution to recovery’. He emphasised that the new deal would see the banking industry creating ‘hundreds of thousands’ of jobs.
Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland have all signed up to the new joint agreement. Santander UK was also involved in the talks that concerned lending. Merlin is intended to demonstrate the banks commitment to economic recovery via increased and targetted bank lending to help fund growth.
The main commitments from Merlin include:
- £190bn of gross new business lending (an increase of 6 percent) and £76bn of this will be new lending to small and medium-sized businesses (SMEs)
- £1bn to help finance regional growth
- £200m towards the ‘Big Society Bank’
- Bank chief executive pay will be linked to agreed lending targets
- Disclosure of the top five earners pay in the banks
- Bonus pools will be reduced (smaller than 2009) and RBS and Lloyd’s (where there is still significant UK state ownership) will get all-share bonuses that total £3.5bn
These moves appear substantial and a senior banker has described the five months of complex talks as ‘a bit tough’. The banks also welcomed the Government’s renewed commitment to a level international playing field for London and its international businesses. The hope of the banks is that Merlin will mark the beginning of the end of so-called ‘banker bashing’.
However, others have not been so fulsome in their praises. Many feel strongly that Merlin is ‘not as tough as it should have been’. In similar vein, Mark Kleinman (Financial Times, February 12/February 13) comments: ‘It was fitting that this week’s deal between the UK’s big banks and the government turned out to have been named after a bird of prey rather than the hitherto-supposed wizard’. Strong words indeed and these were by no means isolated views.
At best, the response to Merlin has been very cautious from the UK’s main business bodies. Many others were openly critical and hostile. Some of the choice words and phrases included ‘pitiful’, ‘pantomime’ and ‘damp squib’. There is a view that Merlin has ultimately produced a package that will have at best a minor impact on bank lending, remuneration or transparency.
For example, the Merlin target 6 % increase in gross business lending does not seem to take into account that business lending was already increasing before the Merlin package. With a UK GDP forecast (by the Office of Budgetary Responsibility) of 2.1% in 2011 and consumer price inflation forecast to rise by 2.8 %, a 6 % nominal rise in gross business lending is pretty small in real terms (Santanders’ UK operation had already planned a 12 % increase in business for 2011). Some critics have suggested that a net (rather than gross) lending commitment would have been more transparent. Net lending to companies last year, for example, shrunk by £27.4bn (much of this shrinkage was the result of international banks withdrawing from the UK market in the wake of the financial crisis).
Another fundamental concern is that these moves by themselves are unlikely to change business credit conditions or apparent bank lending attitudes to businesses, especially SMEs. Nevertheless, the Merlin talks do appear to have highlighted the real and continuing problems faced by UK small businesses in obtaining bank finance and the banks have ‘promised’ to improve their services in this key sector.
The £1bn proposed new regional lending is apparently £300m short of the target set by John Varley to George Osborne. The extra £300m was to come from the ‘desired contribution’ of other banks (including foreign banks) located in the City. But the big foreign banks in London have already snubbed this proposal. So far, the initiative to persuade the non-Merlin banks to contribute this extra £300m into a ‘business growth fund’ has apparently not met with any success.
There is also considerable cynicism about the ability of Merlin to curb bank bonuses. Although Ministers have been talking up the Merlin proposals for many months, they still appear to fall a long way short of expectations. Many believe that the City has been ‘let off the hook’. A headline in the Financial Times, February 12/February 13 conveys an apparent widespread view – ‘Farewell Merlin, hello business as usual at the banks’. As we enter the UK bank bonus round, few believe that bonuses will be curbed. Barclay’s (John Varley’s old bank) bonuses announced on February 15th were greeted with fury as they were (at £3.5bn) up 25% on last year. Barclay’s emphasised that these bonuses were lower as a result of Merlin, but this only seemed to add fuel to the fire.
But Merlin has, at the least, recognised some real problems in bank lending, transparency and bankers pay and bonuses. The Government has also engaged the banks on these issues. Nevertheless, the jury must stay out on whether the apparent ‘magic of Merlin’ is merely a foil for the ‘Wizard of Os’.
At the same time, further rifts in the Coalition look unavoidable as Mr Cable reviews his criticisms of the ‘big bank’ model and ‘offensive’ bankers’ bonuses. His apparent ambivalence on the Project Merlin agreement is well known. Vince Cable favours breaking up the big UK banks and separating retail banking from investment (so-called ‘casino’) banking. But critics fear the resultant consequences on London’s position as a leading financial centre. This kind of talk could help pre-empt the eventual findings of the Independent Banking Commission set up to address the apparent divergences of Tory and LibDem views on banking reforms.
Professor Bullion
