A wizard day for the banks, George
Project Merlin turned out to be a convincing victory for the financial sector, no matter what George Osborne says
Chancellor George Osborne during his visit to Ultra Electronics in Cheltenham. PRESS ASSOCIATION Photo. Picture date: Friday February 4, 2011. See PA story POLITICS Osborne. Photo credit should read: Ben Birchall/PA Wire hli Photograph: Ben Birchall/PA Chalk up Project Merlin as a comprehensive victory for the banks: call it 3-1 if one is being generous to George Osborne. On lending, tax and pay, the banks will feel no pain. The government's consolation is the extra £1bn of funding to the business growth fund: this would not have happened without a prod. On lending, the document talks not of targets but of "expectations and capacity". There is a "desire" to see net lending balances to UK businesses increase but "the actual outcome will be based on decisions by customers". In other words, the government is hoping the banks will be embarrassed if they fall short. But even Osborne should have realised by now that embarrassment does not come easily to banks.On tax, the banks will comply with "both the spirit and the letter of the law". One should hope so too. On pay, the shackles are off. Stephen Hester at Royal Bank of Scotland and Eric Daniels at Lloyds will have to accept a modest haircut this year (there's always next time, for Hester anyway) but the path is clear for Bob Diamond at Barclays and Stuart Gulliver at HSBC to scoop £9m apiece. The £9m men will be able to say the government approves. Meanwhile, the disclosure requirements will allow the rewards of the top traders – which may total more than £9m – to remain out of view. City investors (generally a supine bunch on pay matters anyway) will have little fresh ammunition to use to ask hard questions of remuneration committees. Yes, as the chancellor says, Britain will have a more transparent regime than other countries – but that's not saying much. The growth fund, which will provide equity capital to small companies, is welcome: there is a gap in the market that the venture capital industry has failed to fill. But even here there is an important rider: the banks' contribution is being increased because the fund's initial firepower was too feeble. Even another £1bn may not be enough. Why is Merlin, in aggregate, such a limp document? One reason is that the government got itself back-to-front. If it is serious about increasing lending to small business, it should have asked the big structural question: is a lack of competition strangling the flow of credit? RBS and Lloyds have 52% of the market for small business loans and Barclays and HSBC account for a further 33%. But the competition question has been farmed out to the independent commission on banking, which will not report until September. Similarly, the bonus issue is wrapped up in questions about the backstop provided by taxpayers to the banks. Getting the banks to stand up for themselves (or provide ways to make it safe for failing banks to fail) is another matter for the commission. Osborne said today that Merlin would not affect the government's response to the commission's recommendations. In other words, the chancellor is holding open the possibility that structural reform of the banking industry could follow. Well, let's see. The banks won the minor skirmish over Merlin hands down and would redouble their lobbying efforts if a break-up is contemplated. On current form, few would back Osborne to win a rematch.