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23 May 2011

The banks fail their first test

The five big banks fail to meet even Project Merlin’s feeble lending targets.

By George Eaton

When the government agreed the Project Merlin deal with the banks, George Osborne promised that the top five banks would make “much more money available” to small and medium-sized businesses. But the Bank of England’s quarterly lending data report shows that they’ve fallen at the first hurdle.

The Merlin deal included a pledge by the banks to make £76bn of credit available to business this year, implying a quarterly rate of £19bn. But today’s figures show that gross lending in the first quarter of 2011 was just £16.8bn, £2.2bn short of the coalition’s target.

However, gross lending figures, which take no account of loan repayments by businesses, are a poor guide to how the banks are performing. They could issue £76bn of credit but fund this by calling in old loans. As a pre-coalition Vince Cable argued in March 2010, gross targets let the banks “off the hook”

“It’s perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses,” he noted. “Even if they have a gross target, what assurances do we have that it will be enforced, because the banks have been running rings round the government so far?”

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Today’s report shows that net lending fell by £2.8bn in the first quarter of this year (revised up from £2.5bn). In other words, under the only measure that counts, the banks are lending less, not more, to small businesses. It’s for this reason that the coalition agreement promised that the government would consider “net lending targets for the nationalised banks”. But the feeble Project Merlin did not include any targets for net lending.

The banks will undoubtedly blame subdued demand from business and will point out that the lending figures fluctuate from quarter to quarter. As things stand, however, Lord Oakeshott’s warning that the banks “have taken the Treasury for a ride” looks all too accurate.

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