Merlin claims to boost lending to businesses

HOUSTON, we have an agreement.” So joked one of the chancellor’s key allies yesterday, clearly relieved to have finally signed a deal of sorts with the four Merlin banks.

But the government has got precious little for the weeks it has spent locked in negotiations with HSBC, RBS, Lloyds and Barclays. Here City A.M. looks behind the smoke and mirrors to see if Merlin is really worth the paper it is written on.

The government says: “The Merlin banks will lend £190bn of new credit to business in 2011, up from £179bn actual lending in 2010.”

This six per cent nominal increase in business lending is no great shakes. According to the Office for Budget Responsibility, GDP will increase by 2.1 per cent next year while consumer price inflation will increase by 2.8 per cent, a total of 4.9 per cent.

So it is reasonable to assume that lending would have increased by around five per cent anyway, meaning the increase is in fact very small.

At any rate, this is a gross lending target, an almost meaningless measure which doesn’t take into account firms paying loans back. The net amount being borrowed by firms could still fall.

“£76bn of this new lending capacity will be to small and medium-sized firms (SMEs). This is a 15 per cent increase on the amount actually lent in 2010 (£66bn).”

If there is any meat to this deal, this is it. However, if banks can make a healthy return lending to creditworthy businesses, they will do it without a centrally imposed target. The BBA says banks are already approving SME loans at a rate of around 80 per cent.

If anything, the government runs the risk of encouraging banks to lend to unhealthy firms, which could end up defaulting.

Ironically, this is exactly what the US government did with mortgage lending, paving the way for the subprime disaster.

“The 2010 bonus pool of the four banks’ UK based staff will be lower than in 2009”.

Bonuses would have been lower anyway, after investment banking revenues slumped on subdued activity. Banks have also increased base pay to compensate for new European rules which effectively stop bankers from taking any more than 20 to 30 per cent of their bonus in up-front cash.

“Bonuses for UK staff at the four banks will be lower than they would have been without today’s settlement.”

If true, the government could claim the banks have heeded its calls for restraint.

However, there is no way of substantiating this claim. Although the chair of each bank’s remuneration committee will have to write to the FSA confirming that bonuses are lower than they otherwise would have been, they won’t have to say by how much. Bonus pools could be £1 smaller, say, and the bank would be meeting the demand.

“The pay of the five highest-paid senior executive officers will be published annually on an unnamed basis, in addition to pay of the executive directors already published by name in the annual accounts.”

It is hard to see what this will achieve, aside from inflating pay across the sector, as disgruntled bankers demand more after seeing what equivalent employees earn elsewhere.

At any rate, the government has only stipulated that “senior executive officers” should be included: the pay of the real high rollers – star traders and deal-making investment bankers – won’t be published.

Osborne’s aides say this brings the UK in line with Hong Kong, which has the strictest pay disclosure rules of any major global financial centre. But Hong Kong makes banks publish the pay of the top five earners, regardless of whether they are “executive officers”.

“The banks have today announced additional support of £1.2bn to support regional growth and the Big Society.”

Merlin banks have committed up to £1bn for the Business Growth Fund, a fund that is meant to redistribute growth to regions outside the south-east.

However, the cash won’t be up-front but will constitute “new capital available as soon as it is needed”. In other words, as with their lending commitment, banks have promised to fund investment in accordance with demand, an amount that will depend upon the government’s successful encouragement of regional growth.

Just £200m of the funds, meanwhile, will be committed to the Big Society bank. While a significant donation, this amount is far off the £1bn collective donation said to be in the works several weeks ago.

“In return, the government commits to the success of a strong, resilient, stable and globally competitive financial services sector in which UK banks can compete with the best banks in the world on a level playing field – and in which London is a world centre for finance.”

In short, the government is saying “we won’t clobber the banks with any more taxes or regulation.”

Of course, any statement of this kind should be welcome, and the chancellor yesterday said it was time to move from “retribution to recovery” (echoing Bob Diamond’s “the time for remorse is over” plea).

However, the chancellor’s aides say the ceasefire will only last for the duration of the Merlin deal – just one year. Banks don’t make decisions about where to base their headquarters or where to employ more staff based on one year (if they did, many would have upped sticks when Labour imposed the bonus tax).

Even if the entente cordiale were to last, an increasing amount of banking regulation is written by the European Union, with British ministers powerless to prevent its damaging effects.

What banks really need is long-term stability and visibility. Merlin offers neither.