Osborne the Magnificent

Chancellor George Osborne’s recent embellishment of ‘Project Merlin’, an agreement between the Government and the UK’s four largest retail banks – Barclays, HSBC, RBS and Lloyds – has been met with lukewarm reception. Presented as the long overdue holding to account of the protagonists behind the recession, it seeks to redress banking practices relating to bonuses, salaries and the freeing up of capital to small medium enterprises (SMEs). Excoriated, on the one hand, as an excessively punitive stunt to defuse public anger with the financial community, and on the other as simply not enough, reform of this nature has not failed to draw controversy. So what is Project Merlin and is it any good?

Since fulfilling an early pledge to raise the levy on banks by £800m to £2.5bn, the coalition has demonstrated a degree of backbone in overhauling elements of the sector, including outlining its plans for a ‘Big Society Bank’. In this vein, the proposals of Project Merlin relate to increasing liquidity in the economy through making credit readily available to those who have struggled to receive it previously. The four banks, as well as Santander, will commit to providing £190bn of credit to firms, a 6 percent increase on the £179bn lent in 2010. Crucially, £76bn of this sum will be made available to SMEs, an increase of 15 percent on last year; and with 4.3m of these firms in the UK accounting for almost 50 percent of employment, their unobstructed operation is vital to recovery.

An extra £1bn of equity capital will be further pledged over three years to the Business Growth Fund, which provides finance to firms in economically depressed areas of the UK and £200m to Cameron’s fledgling Big Society Bank that finances community projects, in line with his vision of rejuvenated localism. All proposals make for great rhetoric, though many reservations remain.
Stipulating none of the collaborators experience a competitive disadvantage from Project Merlin, market forces will dictate the terms of lending, sparing no concessions for SMEs. Many speculate that rates of interest will still remain too high to be effective and such commitments to relaxing granting of equity are largely symbolic. A resolute third party in this arrangement could work against this, though the government’s minor influence is exemplified in Goldman Sachs’ hard-hitting rebuke to any call for involvement in the project.

Moreover, threats, no matter how empty, of relocation to other global financial hubs reduce the government’s leverage. The city undeniably remains a lifeline due to vast taxation receipts and with US contemporaries such as Lloyd Blankfein, head of Goldman Sachs, and James Gorman, CEO of Morgan Stanley, enjoying bonuses of $12.6m and $7.4m respectively, any scope for bonus curtailment could be wrong-footed.

Whilst Project Merlin poses as the perfect remedy for the UK’s present economic quandary, being both redistributive and forcing bank acknowledgment of previous wrongdoing, it is an exercise in restraint. The City, as divorced as it is from government control today, has little scope for social conscience. But don’t expect public ire to quieten down anytime soon.