Reasons why Project Merlin might be a charade
I am deeply sceptical about Project Merlin, and I would like to be proved wrong. I’ll stick my neck out and say it is a charade designed for easy 24 hour news headlines. At the moment unless something remarkable is conjured up in the next few days, it lies somewhere along the spectrum between charade and sham. And if sounds critical of the current Government, it is merely a continuation of what went before under Labour. An attempt to sound in tune with the public’s desire for banker-bashing, when the reality is almost no real change and a light bankers’ slap today.
1. Lending targets will be “gross”, and entirely consistent with not one pound of extra net lending in the economy. In fact there could be a reduction in the net amount of credit going to business, whilst still hitting a gross target of £190bn.
2. There are different definitions of “gross lending”, some bankers have never previously measured gross lending.
3. Some banks want to count a renewal of a loan facility as “new lending”. A Merlin-related banker: “If you had a one year facility that was up for renewal on 30 June and you asked to renew that: would that be new lending or not? If you have £50m one year facility and renew it, on a gross basis that counts as new lending, even though it has zero net effect”.
4. The banks/Government can’t decide the actual definition of a small and medium enterprise. Some say £15m some say £25m. PWC have been trying to create a model.
5. The idea that bankers’ pay will be conditional upon these lending targets is likely to be a restatement of the conditions placed on the contracts of RBS’s Stephen Hester and Lloyds’ Eric Daniels. So little change there.
6. Disclosure of bonuses will marginally exceed the “Hong Kong” model of the Board plus the five next highest paid executives, but fall woefully short of David Walker’s recommendations and also the total disclosure achieved for US recipients of TARP money. See here Andrew Cuomo’s US report from page 5: http://bit.ly/ndM98 Apparently in Britain, that level of disclosure at the very least for RBS and Lloyds is deemed unacceptable. Why?
7. Bank’s £1.3bn contribution to the Regional Growth Fund, (announced in the FT’s splash this morning) which will provide equity funding to small businesses in cuts-affected regions, is not necessarily new money.
8. The £190bn available lending that will be much-hyped in this deal, is an increase on last year, but only needs to be proven to be available. But ask small businesses and they will tell you it is the price of credit, rather than the quantity that is the problem.
9. Banks being “forced to lend” also means banks making a healthy profit in the course of doing their job, which is to lend money to businesses. Is it really a “deal” that high bonuses are deemed acceptable for banks basically pursuing their incentives for profitable lending.
10. “Project Merlin is a sham designed to influence who becomes the next Bank of England Governor,” – a rival bank executive, presumably referring to a recent senior banker with eyes on Threadneedle Street. Not absurd.
But that is just detail. There is a much bigger picture here, about which the Government, the Banks and most of Britain seems in utter denial.
We are obsessing over extra lending as the panacea. Every metric says we are heading for the opposite. Nobody wants to talk about it. Don’t believe me? What about this from a senior UK banker:
“We have got ourselves into a bit of a muddle in the UK, because the UK has to deleverage, and there’s absolutely no way that the banks will be able to meet the Basel 3 [Capital] requirements without deleveraging. On one level the UK as a whole has to deleverage, on another the key banks have to deleverage because they don’t have the liquidity and they don’t have the capital, so there’s a sort of Canute style quality to this debate,” I was told before today’s announcement.
At the very least, to the extent that what little available capital is deployed towards business lending, then it is coming off personal and mortgage lending. This might be a welcome shift. No one wants to talk about it. As it stands our deal-broking wizard is sitting on a beach with the tide of credit still coming in. Project Merlin, should probably be rechristened Project Canute.