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Tags: UK | Bank | Deal | Bonuses | Lending

UK Forges Bank Deal to Cut Bonuses, Boost Lending

Wednesday, 09 February 2011 02:06 PM EST

Britain finalized a tortuous deal with banks on Wednesday to curb bonuses and boost lending to business, but critics said the agreement would be hard to enforce describing it as "political theatre."

Finance Minister George Osborne said the deal, known as "Project Merlin," would see Britain's top banks lend about 190 billion pounds ($305.3 billion) gross to business this year, up from about 179 billion previously.

The major banks also agreed to cut their bonuses for U.K. staff this year and to link the remuneration of their chief executives to how much money their companies lend to small and medium-sized enterprises (SMEs).

The Conservative/Liberal Democrat coalition government has a tough balancing act as it seeks to assuage anger over the use of public funds to rescue the banking system during the credit crisis, without damaging London as a global financial capital.

"Project Merlin" had stalled several times, with the banks arguing that an excessive clampdown on them would harm the U.K.'s role at the helm of world finance.

"If ... the banks fail to live up to their promises, then the government reserves the right to return to the issue and take further measures," Osborne told parliament.

News of the deal came as research by The Bureau of Investigative Journalism revealed a leap in the amount of funding the main governing Conservative Party receives from London's financial institutions and as opposition politicians accused the government of shying away from penalizing bankers.

Osborne's new Labor party opponent Ed Balls said the Merlin deal was "toothless and unenforceable."

Several investors said the banks could duck out of lending targets by blaming a lack of demand for credit from companies.

"I think it's going to be difficult to enforce," said Royal London Asset Management fund manager Jane Coffey.

Part-nationalized Royal Bank of Scotland will cut the bonus pool for its investment bankers while outgoing Lloyds chief executive Eric Daniels will only take up 62 percent of his potential bonus, equating to 1.45 million pounds.

However, the banks could find ways around the deal, such as by countering a cut in bonuses with an increase in basic pay.

"Greater disclosure has been shown to increase overall pay rather than decrease it," said Nicholas Stretch from law firm CMS Cameron McKenna.


The latest curbs on bonuses come on top of European Union limits which are already the toughest in the world and as scrutiny of the banking sector moderates in the United States where less stringent globally-agreed rules have been applied.

Andrew Cave, head of policy at the U.K.'s Federation of Small Businesses, welcomed the deal but said it did not do anything to tackle "an appalling lack of competition" in the banking sector.

"It's made for great political theatre," Cave told the BBC. "Yesterday we hear the banks squealing about 800 million pounds which amounts to nothing more than a week's profits for three of the banks and today we hear about lending targets."

On Tuesday, the government sprang a surprise by saddling the heavyweight U.K. banks with an extra 800 million pounds in taxes this year as it brought forward existing plans to impose a 2.5 billion pounds a year levy on them from 2012.

Labor said Osborne's new tax was a fig leaf to cover up failure to make much progress on tackling bankers' pay, while unions also accused the government of running up the white flag.

"Banks will only act against their own commercial instincts if there is a credible threat, but the government has done little more than cave into the lobbying of the finance sector," said Trades Union Congress General Secretary Brendan Barber.

The "Project Merlin" delays also exposed rifts within the Conservative and Liberal Democrat coalition government, with LibDem members such as Business Secretary Vince Cable often attacking the banks harder than many Conservatives.

Britain's banking sector is dominated by the "Big Four" of Barclays, HSBC and part-nationalized lenders Royal Bank of Scotland and Lloyds and they face further a probe into whether or not the biggest banks should be broken up.

Shares in the lenders edged higher on Wednesday.

HSBC was up 1.1 percent by 1505 GMT, outperforming a 0.3 percent weaker FTSE 100 blue-chip index. Barclays, Lloyds and RBS all made modest gains of up to 1 percent as well.

"Once the Merlin agreement goes through, it will calm the waters and remove some of the uncertainty over the U.K. banking sector," said Cavendish Asset Management's Paul Mumford.

© 2024 Thomson/Reuters. All rights reserved.

Britain finalized a tortuous deal with banks on Wednesday to curb bonuses and boost lending to business, but critics said the agreement would be hard to enforce describing it as political theatre. Finance Minister George Osborne said the deal, known as Project Merlin, ...
Wednesday, 09 February 2011 02:06 PM
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