Lending a hand

Posted on 10 Feb 2011 by The Manufacturer

Howard Wheeldon, senior strategist at BGC Partners, discusses Project Merlin and lending.

It has been a long time coming, and flawed as it may be, it is in the interest of everyone to make the agreement between the five major UK banks and the Government, known as Project Merlin, work.

Covering issues such as increased lending to SMEs together with ‘restraint’ and greater transparency on bonuses, there will soon be those who say that Project Merlin is now an accident waiting to happen. Even accepting that this is a politically-derived agreement, I beg to differ, for the simple reason that an agreement is after all something that has been signed up to by all parties and thus to be perceived as being in the interests of all parties to make it work.

We’ll see. You can take a horse to water but you can’t force it to drink, meaning banks have a duty of care with regard to risk. Meanwhile, the bonus transparency requirement of Project Merlin may look pretty onerous now but remember that the same was being said back in the late 1970s when attempts to oblige companies to report director/highest paid remuneration were first being aired.

The bottom line for non state owned bank signatories to this agreement is that the bonus pool and amount of remuneration that they pay staff is effectively left under their own control just as it should be albeit that bank employers must in some circumstances make due account to the current regulator.

On the most significant issue in terms of the economy – the commitment to increase lending to small and medium sized enterprises from £66bn last year to £76bn this, which increases the overall total lending commitment for banks in 2011 to £190bn – our view, reasoned by the fact that there is nothing in this agreement to cover what banks charge would-be borrowers, is that this should not be perceived as a matter of serious concern to the banks or investors. Indeed, although we do not doubt the spirit or intention of banks in signing up to increased lending, we have great doubts about likely demand.

While few can doubt the Coalition government’s intentions or the massive effort put in by bank chiefs to come to terms with what has after all been a politically-induced requirement, it will be a year or more before we can judge the outcome. In terms of the economy Project Merlin probably does not add that much value, unless perchance there is a dramatic increase in lending.

We doubt that we will see a dramatic push by banks to lend to industry, but at the very least banks will be kept on their toes. It is also clear that, while agreement on Project Merlin may get the government and public off banks’ backs, it does not mean that the government is also off the hook. Indeed, if we are right on loan take up, the Coalition government will need to redouble efforts to provide greater support to SMEs and others, such as those struggling to obtain mortgage funds.