UK banks got better end of government showdown

February 9, 2011

By George Hay
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — UK banks have got the better of their showdown with the government. After months of discussions, the UK coalition finally revealed details of “Project Merlin” on Feb. 9. It may look as if George Osborne, the Chancellor of the Exchequer, has won major concessions from lenders. Almost the exact opposite is true.

Merlin’s best trick is to get the UK’s biggest five banks to lend 76 billion pounds to small and medium-sized businesses this year — 15 percent more than in 2010. Failure to hit the target could hurt the pay of bank chief executives. In addition, lenders must pay lower bonuses than last year, and disclose the pay of the highest-paid five executives not already on the board of directors.

Those last two commitments are hardly robust. Banks were almost certainly going to set aside smaller bonus pools this year anyway. Meanwhile, the highly-paid executives will not be named.

But it is the lending targets that are truly lame. The 190 billion pound objective is measured on a gross basis — which does not take account of repayments. Besides, banks only have to prove to the government that they made the credit available. If they judge a borrower not to be creditworthy, they do not have to make a loan. Bank chiefs will hardly be worried about their bonuses when they depend on criteria they themselves set.

True, the increased focus on business lending may prompt bank CEOs to give the issue more attention than they did before. That may encourage banks to approve loans they would previously have turned down. But it is inevitable that numerous borrowers will still be rejected — as they should.

The government has already recognised that Project Merlin is a sham. The day before the deal was struck, Osborne impulsively squeezed an extra 800 million pounds out of the banks through his bank levy. In their moment of victory, however, banks may ponder an unsettling thought. The government has probably not done enough to assuage public rage at banker excess. When the UK’s Independent Commission on Banking comes up with more radical recommendations for tackling big banks later this year, the anger will probably still be there.

Comments

The Government should focus on protecting the tax payer from the risks of bank failure. Since the taxpayer is the insurer of last resort it is not unreasonable to expect banks to pay a premium for this service based on their individual risk profile. The higher the risk the more a bank would have to pay to be under-written by the tax payer.

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