PROJECT MERLIN: Osborne takes on the banks or a damp squib?

So here it is, Project Merlin, that the coalition, David Cameron and George Osborne have been negotiating, and pinning their hopes on for so long.

So what did we get??

Lending

First of all, the government has been trying to get the banks to lend more. One of the biggest problems with the recession we are in, is not that bad businesses have failed, but that good businesses have not been able to access credit on good terms to either expand or to stand still.

Small businesses have been going to the wall due to the lack of availability of credit. Larger businesses have done better in the climate, but still on unfavourable terms.

They have announced that lending will be up from £179bn to £190bn. Not a massive rise but it amounts to an extra 15% allocated for small businesses.  This is a voluntary agreement to be policed by the Bank of England – no sanctions are to be applied.

Bonuses

The Banks will reduce the amount of bonuses this year (£950m) as a result of these negotiations and a target indicator of the amount of lending will be used to calculate bonuses in the future. – This should at least give some hope without sanctions that banks meet these targets.

Pay is to be made more transparent, but not as transparent as in the USA, with the publishing of board member salaries and the 8 highest earners below board level from 2012.  The 4 “Merlin” banks will do this sooner.

The remuneration committees of big British banks will commit that they will  sign off the pay of the ten highest paid individuals in each business division. This is designed to make it easier for shareholders to hold the banks to account for what they pay.

More risk capital to be given to areas of the UK that are less advantaged. The amount though is disputed by the banks, the government say it is an extra £1bn.

£200m for the Big Society equity banks.

A Good Deal or a Damp Squib?

Well credit where credit is due (no pun intended), there is some transparency here that has been required for some time and it will be good for the economy if more lending is available for small businesses.

However, the amount of extra capital for hard hit areas of the UK is disputed by the banks.  In addition the amount available to small businesses will still be at commercial rates which is one of the main complaints, therefore it may be available but unaffordable .

In addition, as economies come out of recession, more credit is normally available, so when the figures come out to test how well these measures are working it will be difficult to say what has affected the change, normal economic activity or the measures agreed.

The measures on bank bonuses has been late in coming and will not settle the concerns of the public.  The reduction of bonuses to a little under £950m people will regard as still too high.

The big disappointment for the government politically must be the £200m for the Big Society project. It sounds a lot, but like the mental health strategy of £400million injection, it is a drop in the ocean compared to the amount that is being cut by councils around the country.  It will not make up the shortfall let alone add to diversification of service provision.

Conclusion

This has been a long time coming but will ultimately be seen as a damp squib.  If this is all they were arguing about, it is obvious that the banks still have their heads in the sand and still have the upper hand when it comes to political power.

The structural problems have not been dealt with.  The transparency is not far enough and there is no legislative clout behind these agreements.

Extra credit agreements without the terms by which they offer the credit is useless in a commercial environment where it is a soft market for banks to make large profits from benign conditions and little competition.

Until the banking system is fully reformed, which under Osborne is doubtful, the systemic problems remain. (see previous post https://extranea.wordpress.com/2011/01/19/bankers-do-it-again-and-again-and-again-and/

As for the Big Society, I think the PR problems will continue as more communities around the country experience how the cuts will affect them.

I would give Osborne 3/10 for effort – we won’t find out much about the performance for another 18 months to 2 years.

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