Banks let off the hook on lending

The long awaited outcome of the government’s “Project Merlin” deal with the banks has been published. Questions are already being asked about the failure of government to get tough on bonuses and the low level of transparency on pay, but perhaps most worrying is the failure to deal with the central question of bank lending to support the recovery.

Chancellor George Osborne has been keen to talk up that the banks have agreed to extend loans worth £190 billion to UK business in 2011, up from £178bn in 2010 – but there are two very important caveats to this.

First the agreement is for gross lending rather than net lending – i.e. it only refers, it takes no account of repayments on existing loans. It would be perfectly possible for banks to issue gross loans of £190bn but fund this by calling in old loans. What matters for the UK is not gross lending but net lending.

The coalition agreement (page 9 of the pdf) emphasised that net lending targets could be introduced to ensure that banks lend to small and medium sized businesses:

“We will develop effective proposals to ensure the flow of credit to viable SMEs. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.”

This now seems to have been abandoned. As business secretary Vince Cable commented less than a year ago:

“This would be completely letting the banks off the hook. It’s perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses.

“Even if they have a gross target, what assurances do we have that it will be enforced, because the banks have been running rings round the Government so far?”

This looks like a climb down from Vince Cable and a victory for the banks.

Furthermore, the agreement includes a let out clause for the banks:

“Each bank’s lending expectations, capacity and willingness, as set out above, will be subject to its normal commercial objectives, credit standards and processes and regulatory obligations, as well as the availability of the required funding.”

This potentially provides the banks with a ready made excuse when they fail to meet the targets.

12-month-grow-rate-growth-of-loans-to-UK-non-financial-companies-2008-2010
As the graph above shows, loans to UK non-financial companies have been falling for 18 months; this agreement may do nothing to reverse that trend.

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34 Responses to “Banks let off the hook on lending”

  1. Daniel Pitt

    RT @leftfootfwd: Banks let off the hook on lending: http://bit.ly/fe7v2y writes @DuncanWeldon

  2. Duncan Weldon

    RT @leftfootfwd: Banks let off the hook on lending: http://bit.ly/fe7v2y writes @DuncanWeldon

  3. Aditya Chakrabortty

    RT @leftfootfwd: Banks let off the hook on lending: http://bit.ly/fe7v2y writes @DuncanWeldon << excellent piece

  4. JamieSW

    RT @chakrabortty: RT @leftfootfwd: Banks let off the hook on lending: http://bit.ly/fe7v2y writes @DuncanWeldon << excellent piece

  5. Anthony Painter

    Very good blog on banking from @DuncanWeldon http://j.mp/dHr7cK

  6. Hasson Mali

    Very good analysis – the whole Project Merlin looks like a joke and Osborne will suffer politically for this, which presumably was exactly what he didn’t want http://bit.ly/gMZ4DX

  7. william

    Instant prosperity from government ordained lending policies by the banks.Gosplan?Commercial and residential property values are falling from the bust, hence collateral is shaky,sanity and sound lending and borrowing will only return when the property market bottoms,another 15 percent to go.Who was it said ‘no more boom and bust’over 100 times?

  8. Mehdi Hasan

    RT @anthonypainter: Very good blog on banking from @DuncanWeldon http://j.mp/dHr7cK

  9. Tamsin Dunedain

    Banks let off the hook on lending | @duncanweldon | @leftfootfwd http://bit.ly/gat6Ki -> @falseecon #falseeconomy

  10. barb milne

    RT via @anthonypainter via @ns_mehdihasan

    Very good blog on banking from @DuncanWeldon http://j.mp/dHr7cK

  11. barb milne

    RT via @anthonypainter via @ns_mehdihasan Very good blog on banking from @DuncanWeldon http://j.mp/dHr7cK #ProjectMerlin

  12. Malcolm Evison

    Banks let off the hook on lending | Left Foot Forward: http://bit.ly/fpKuRs via @addthis

  13. False Economy

    Banks let off the hook on lending, by @duncanweldon at @leftfootfwd http://bit.ly/gat6Ki #falseeconomy (via @tamsinchan)

  14. Stephen Lintott

    RT @FalseEcon: Banks let off the hook on lending, by @duncanweldon at @leftfootfwd http://bit.ly/gat6Ki #falseeconomy (via @tamsinchan)

  15. dave m

    RT @FalseEcon: Banks let off the hook on lending, by @duncanweldon at @leftfootfwd http://bit.ly/gat6Ki #falseeconomy (via @tamsinchan)

  16. James Rupa

    Tories let banks off hook http://t.co/UYBWX5S Surely nothing to do with 50% of Tory funding coming from the banks.

  17. Duncan Weldon

    Two posts from me today. Project Merlin at @leftfootfwd http://bit.ly/gat6Ki & awful trade figures at @FalseEcon http://bit.ly/ejSAn4

  18. simon trott

    RT @FalseEcon: Banks let off the hook on lending, by @duncanweldon at @leftfootfwd http://bit.ly/gat6Ki #falseeconomy (via @tamsinchan)

  19. Mr. Sensible

    I think we’re all quite clear what Lord Oakeshott made of Mr Osborne’s weasel words…
    http://www.bbc.co.uk/news/uk-politics-12411664

  20. False Economy

    RT @DuncanWeldon 2 posts from me today. #ProjectMerlin @leftfootfwd http://bit.ly/gat6Ki Awful trade figures @FalseEcon http://bit.ly/ejSAn4

  21. L DTUC

    RT @FalseEcon: Banks let off the hook on lending, by @duncanweldon at @leftfootfwd http://bit.ly/gat6Ki #falseeconomy (via @tamsinchan)

  22. L DTUC

    RT @leftfootfwd: Banks let off the hook on lending: http://bit.ly/fe7v2y writes @DuncanWeldon

  23. Shiraz Chakera

    RT @leftfootfwd: Banks let off the hook on lending http://bit.ly/gat6Ki

  24. Helen Brown

    RT @jamesrupa: Tories let banks off hook http://t.co/UYBWX5S Surely nothing to do with 50% of Tory funding coming from the banks.

  25. Matt Cawson

    RT @leftfootfwd: Banks let off the hook on lending http://bit.ly/gat6Ki

  26. Ian Rathbone

    Questions are already being asked about the failure of government to get tough on bonuses and the low level of… http://fb.me/Lahls5Y6

  27. philip murtagh

    Banks let off the hook on lending | Left Foot Forward: Commercial and residential property values are falling fr… http://bit.ly/haRrgO

  28. downinjamaica

    RT @FalseEcon: RT @DuncanWeldon 2 posts from me today. #ProjectMerlin @leftfootfwd http://bit.ly/gat6Ki Awful trade figures @FalseEcon h …

  29. scandalousbill

    William,

    Rant all you like, but Ed Balls has a valid point with regard to the get out clause in the Project Merlin deal.

    “1. The small print of today’s Project Merlin agreement today has a clear get-out clause for the banks:

    “3.5 Nothing in this statement derogates from the obligation of the banks, and their boards and remuneration committees, to manage pay policy in a way which protects and enhances the interests of their shareholders.”
    Merlin Agreement, 9 February 2011”

    http://www.edballs4labour.org/blog/?p=1437

    So, for example, if the bank management decides that higher bonuses are the means to attract and maintain new talent, or publishing remuneration details could be detrimental to their interests, there is nothing in the Merlin deal to preclude it.

  30. Look Left – Mubarak finally resigns; next stop: democracy | Left Foot Forward

    […] Project Merlin, Duncan Weldon wrote on Left Foot Forward that the banks had been “let off the hook” on lending: […]

  31. Diane Hain

    RT @chakrabortty: RT @leftfootfwd: Banks let off the hook on lending: http://bit.ly/fe7v2y writes @DuncanWeldon << excellent piece

  32. A blueprint for real banking sector reform | Left Foot Forward

    […] process of banking reform we all waited with bated breath. The two key results emerging from the Project Merlin deal were that banks would now lend more to U.K. businesses and in turn take a reduction in […]

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