Osborne set to scale back Merlin plan

GEORGE Osborne is planning to water down his flagship peace deal with British banks, in a desperate bid to push through an agreement before UK bonuses are announced next month.

The chancellor had originally hoped to convince banks to agree 10 per cent more business loans this year than they did in 2010, as part of the so-called Merlin plan which will see the government cease attacks on bank remuneration in exchange for higher lending.

But City A.M. understands the Treasury is now working on a scaled-back plan that will see banks increase business lending by more than GDP plus inflation.

According to the Office for Budget Responsibility, GDP will grow by 2.1 per cent this year while inflation will increase by 2.8 per cent.

That would mean banks would only have to increase business loans by more than five per cent, although inflation – which is consistently above target – is likely to be much higher.

However, the new agreement is likely to see banks lend less than the chancellor had originally hoped, and gives them more wriggle-room should growth and demand be lower than expected.

The Treasury still expects Santander to agree to new lending targets, although it will do so under a separate agreement rather than signing up to the Merlin plan.

The Spanish bank – which owns Bradford & Bingley and Alliance & Leicester – doesn’t want to be part of a deal on bonuses, when most of its UK operations don’t receive a significant pay-out.

The Merlin deal, which was expected to be agreed this week, has been delayed by a number of factors, including anti-trust considerations that prevent UK banks sharing information on their plans for business lending.

The recent appointment of Labour’s Ed Balls as shadow chancellor has also thrown a spanner in the works. Osborne is expecting his new opponent to scrutinise any agreement more closely that predecessor Alan Johnson, and wants to ensure the terms of the deal are watertight before it is made public.