9 Feb 2011

Banks deal set out to boost lending and control bonuses

The Government has outlined the Project Merlin deal on bonuses and lending for the UK’s biggest banks. But will it work? Businesses and economists tell Channel 4 News they are unsure.

Bank bonus graphic

The Chancellor George Osborne has outlined a deal struck with the UK’s biggest banks – Lloyds, Royal Bank of Scotland, Barclays and HSBC.

The banks will have to pay lower bonuses, lend more to small businesses, and curb the pay of their top executives as part of the Project Merlin deal, forged over months of talks between the Treasury and the banks.

In total, the banks committed to a total of £190bn of new lending a year, including £10bn more to small business than last year – a total of £76bn. Santander joined the four banks to agree to the lending targets element of the deal only.

The banks will also put £1bn into the Business Growth Fund, on top of the £1.5bn they have already committed, and £200m into the Big Society bank.


All four banks agreed that this year’s bonuses will be lower than last year’s, and the two part-nationalised banks, RBS and Lloyds, agreed set financial limits to what they will pay out to staff in cash bonuses.

For all staff at RBS and Lloyds, the maximum upfront cash bonuses will be limited to a maximum of £2,000 this year; all Executive Directors, including the Chief Executives, have agreed to receive this year’s bonuses entirely in the form of shares; and directors will have to wait until 2013 to convert these shares into cash.

Mr Osborne told MPs: “Today I can tell the House that the four major British banks have agreed that total bonuses for their UK-based staff will be lower than last year and lower than they would have been without today’s settlement.”

The anger will remain…But Britain needs to move from retribution to recovery. Chancellor George Osborne

Following Mr Osborne’s announcement, the part-nationalised banks confirmed that RBS Chief Executive Stephen Hester will receive a bonus of £2m for his work at the bank last year, entirely in shares – although he will not get a pay rise this year. Outgoing Lloyds boss Eric Daniels will be offered £1.5m, also in shares. RBS is 83 per cent owned by the British taxpayer, who also owns 41 per cent of Lloyds.

Under terms agreed with UKFI, which manages the Government stake in RBS and Lloyds, the bonus pool for RBS’s investment banking arm will be less than £950m in 2010, compared to 2009’s £1.3bn.

As part of the Project Merlin deal, the bank board remuneration committees will also need to approve the top ten earners in the banks. The salaries of at least seven of the highest paid executives at the banks will also be made public – and these transparency criteria could become more stringent from 2012, with a consultation planned on whether all large UK banks will have to publish the pay of both the board plus the eight highest paid senior executive officers.


The Chancellor said: “The anger at the terrible mistakes of the banking industry, and the failure of those who regulated it, will long remain – and rightly so. But let us as a country confront this hard truth. Anger and retribution will not bring one percentage point of economic growth or create one single new job.

“The anger will remain. And we must never make the same mistakes again. But Britain needs to move from retribution to recovery.”

The Chancellor also mentioned the bank levy he made permanent and immediate on Tuesday, saying the tax would bring in £10bn over the course of this parliament.


Shadow Chancellor Ed Balls described the deal as “shambolic” and a “damp squib”, adding that Project Merlin had become like the Wizard of Oz.

And the Liberal Democrat Treasury spokesman Lord Oakeshott left his Treasury role “by mutual agreement” after criticising Project Merlin. The departure was confirmed live on Channel 4 News by Danny Alexander.

Lord Oakeshott will no longer speak in the Lords on behalf of the Liberal Democrats on Treasury matters after his departure from the role was revealed on Channel 4 News by Lib Dem Chief Secretary to the Treasury Danny Alexander.

Earlier Lord Oakeshott had branded George Osborne‘s agreement with the banks – aimed at reducing bonuses and increasing lending – as “pitiful” and “incompetent”.

Manufacturers’ organisation, the EEF, said the deal did not go far enough.

Read the Channel 4 News Special Report on the economy: from crash to cuts

Chief Executive Terry Scuoler told Channel 4 News: “Industry will feel today’s statement on bank lending did not go nearly far enough. The new targets may lead to some increase in lending to SMEs, but the track record of previous agreements is not a good one.

“Today’s statement left untouched the key issues of lack of competition amongst the banks, insufficient transparency in lending decisions and the lack of understanding of its customers. Until these issues are resolved, access to finance will remain the weak link in the Government’s strategy for growth.”

Other organisations cautiously welcomed the deal, but said more needed to be done.

Today’s announcement should not be allowed to let the Government or the banks off the hook. John Walker, Chairman of the Federation of Small Businesses

John Walker, National Chairman of the Federation of Small Businesses, said: “Today’s announcement should not be allowed to let the Government or the banks off the hook, and is a preamble to what we hope will be bigger announcements from the Independent Banking Commission. While we welcome the intention to lend more to small businesses, we still need to see a major restructure of the sector.

“Many small firms aren’t going to the banks to access finance and credit and the main problem they face is the cost of credit. Many small businesses have lost faith in the sector and are looking at other means of finance – and it is the smallest of firms that need finance most.

“To achieve robust economic recovery, the smallest firms and start-ups need to have access to finance, but today’s commitments – as with previous lending targets – are unenforceable.”

Graeme Leach, Chief Economist at the Institute of Directors, said: “While we certainly don’t oppose today’s agreement, we doubt whether it will have a major impact on overall lending to business. The truth is that lending conditions are unlikely to improve until businesses and banks are confident about the durability and strength of the recovery. When they are, both the demand for and supply of money to businesses is likely to improve. Positive economic news would give businesses more confidence to seek finance and banks more confidence to lend.”

The banks need to have common sense
Small business owner Pauline Osborne, from Darlington in Teeside, told Channel 4 News that banks need to be sensible about lending. Last year, she took out a £3,000 overdraft with Barclays - at the high rate of 16.99 per cent plus £35 per quarter - for one of her businesses. She runs two major businesses, a web advertising company and a multi-fuel stores retail business.

"The banks just need a common sense attitude," she said.

"They seem to have gone from one extreme to the other. Before they were throwing money at you, now they have had their fingers burnt. They were just a bit greedy, we thought, and when you need money, you need it - you can't go anywhere else. I wasn't a new customer - they knew me. We needed the overdraft quickly but of course it is so dear. It would not be sustainable if you needed it for months. For us we just had to cut down as much as we could to pay for it.

"It's quite difficult for businesses and it seems the less you want the more it costs. It's very much computer based now as well - before you could go and talk to someone but now the computer just says no! The Government should absolutely pressure the banks and make it easier for small businesses to get money so they can help the recovery. That's what we need to do to support local businesses that put money in the area."

Project Merlin – live blog