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Saturday, 18 February 2012

Banks' promises to lend to British businesses disappear like a rabbit into Merlin's hat. Treachery or incompetence?

Project Merlin, the deal done by the banks in 2011 to avoid harsher government treatment for causing the Credit Crisis, would have more aptly been titled Project Morgana, known to viewers of the BBC's Camelot-inspired television series for her pitiless pouting treachery. The treachery in Project Merlin comes from all sides: the treachery of the banks for keeping their promises while not doing what they promised to do; the treachery of the government for knowingly (or was it incompetently?) offering terms and conditions that were as constraining to the banks as a spiders web to a witch’s pet spider-eating cat. Promising to lend much more, the banks lent much less, and yet surpassed the witless target set by the government. 


Banks who had promised to lend £190 billion to British businesses as part of Project Merlin were able to claim, vaguely truthfully, that they exceeded the target and lent £214.9 billion. Even when the amount the banks actually lent, using the word 'lent' in its usual form as understood by the Bank of England, was only £99.9 billion. The Bank of England, gentlemanly as ever, published the Merlin figures of £214.9 billion (which includes undrawn facilities and rolled-over loans), and just below published their own £99.9 billion figure (actual loans given to businesses) describing it rather coyly as "alternative measures of lending".


Bank of England: Lending to UK businesses by the five major UK banks (£ billions)
'Project Merlin' data 
2011 Q1 
2011 Q2 
2011 Q3 
2011 Q4 
2011 Total2
Gross lending facilities3
47.3
53.0
57.4
57.2
214.9
 o/w gross lending facilities to SMEs4
16.8
20.5
18.8
18.9
74.9
Alternative measures of lending (Trends in Lending basis)
2011 Q15
2011 Q26,7
2011 Q38
2011 Q4 
Gross lending9
26.7
24.3
23.9
25.0
Net lending10
-2.8
-3.7
-0.1
-3.0

This successful failure made the headlines for a scant few days and is already forgotten. So we at Ripped-off Britons will continue to remind you that governments of all complexions treat us as the lawful prey of the banks. Something to remember as the Chancellor plans, in the next budget, to hand further "credit easing" billions to the banks trusting(!) them to reduce borrowing costs to British business.


It would be unfair to accuse the banks of deliberately lying. There is no deliberation: they have little interest in whether what they say is true or not. A consequence of waving big bonuses at people who are excessively motivated by money. When banks offer 'high interest', 'low risk', 'low cost', 'alpha', 'prosperous retirement' they don't mean what they say, nor does the law require them to mean it. Nor did they mean what we thought they said when they promised as part of Project Merlin to lend £190 billion to British businesses in 2011.


What the banks actually did was 'make available' £214.9 billion. Half of which was never actually borrowed. It was 'made available' to companies who didn't want the money, or on terms and interest rates that were too horrible. It was not because the demand didn't exist. The Federation of Small Businesses' survey, taken in November 2011, showed that 60% of members surveyed resorted to other sources of finance to grow their businesses, including credit cards, friends, personal savings and inheritances. We wonder why the Confederation of British Industry (CBI) applauded the banks on this accounting trick, rather than calling them to account. We will look into that in a separate blog.

The Bank of England’s graph exposes the continuing slump in lending during 2011. Note the British Banking Association (BBA) stopped publishing figures for lending to Small Businesses in June 2011 – too much smoke coming from that gun. And yet the banks were able to boast about their increased lending, thus reducing political pressure to do anything. The Bank of England's figures show that actual new lending to UK businesses was £100 billion, well below the Merlin target.

Comments by bank executives reported in the Guardian newspaper include:
  • Barclays: Bob Diamond claimed lending to all non-financial businesses was up 3%.
  • Lloyds: Claimed to have exceeded its £11.7 billion target lending to small businesses by £0.8 billion.
  • Santander and HSBC: Both claimed to have exceeded targets.
  • RBS: Stephen Hester said RBS, which missed its target, lent more than twice all its rivals combined. "Forget Project Merlin and how it's defined - that's damned impressive," he said.
Successes are claimed by the banks, and used to justify bonuses, yet actual lending to SMEs fell at a faster rate than the previous year.

So what was Project Merlin all about? The government needed an excuse to give voters for doing nothing, including not repeating the bumper 2009 tax on bank bonuses. And the banks were happy to submit to a deal that required them to do nothing. The core aim for both banks and government was to make a promise to increase lending to British industry that could be achieved without actually increasing lending to British industry. This was done in the following weasel words taken from the agreement:

“the five banks have agreed to make available the appropriate capital and resources to support gross new lending to UK small and medium sized businesses that is 15% higher than what was delivered in 2010 should their efforts to foster demand succeed above and beyond their current expectations. That will put in place for 2011 new committed lending capacity of £76 billion for UK small and medium sized businesses, which is materially higher than both the actual gross new lending delivered by the five banks in 2010 of £66 billion and the banks’ revised expectations for 2011.”

The chancellor, George Osborne, responded to this offer:
“I welcome this unprecedented industry initiative, and am grateful for the considerable work that has gone into producing it.”

The barn-door sized loophole being the words “make available”. It's like a private sports club seeking public funds by pledging to ‘make available’ their facilities to the hoi-polloi but failing to give anybody the key to the gate.

The Bank of England report released in February 2012 seems to show that the banks exceeded their target of lending £190 billion, showing a total of £214.9 billion. However a look at the notes in the Bank of England's press release reveals that this is money 'made available', rather than money actually loaned. It was either 'made available' to companies who didn't want it, or on terms too horrible for companies to accept it. It also included 'rollovers', i.e. renewals of existing loans rather than new money.

Another skeleton peeping out of the cupboard is the 'net lending', which includes the money the banks took back from businesses. Far from £214.9 billion being lent to businesses, the banks actually took back nearly £10 billion more than they lent. The net effect is that the banks' lending over 2011 actually reduced.

Not wanting to look any more of a fool than nature intended, the Chancellor declined to renew the lending targets for 2012. He opted instead for a 'credit easing' strategy', in which the government gives the banks a subsidy which they trust the banks will pass on to SMEs.

Trust? Banks?! The way villains get away with their schemes in television dramas, like Merlin, would be entirely implausible but for the fact that it happens all the time in real life. Morgana stabs you in the back every episode, and still you trust her! But more on Credit Easing another time. 

1 comment:

  1. BBC report:
    "Banks reduce loans, in spite of Funding for Lending The number of loans being offered by banks has continued to fall in spite of the Funding for Lending Scheme (FLS)....Last week, the Bank's deputy governor, Paul Tucker, admitted that the majority of loans funded by FLS had gone to homebuyers rather than small and medium-sized businesses. "
    http://www.bbc.co.uk/news/business-21653603

    ReplyDelete