George Osborne, chancellor, pulled the plug on a “peace deal” with Britain’s biggest banks at the last minute, after Nick Clegg and Vince Cable made it clear the Liberal Democrats could not accept the package.
Mr Osborne had negotiated the outline of an agreement on bank bonuses, lending and pay disclosure with John Varley, former Barclays chief executive, with a view to unveiling it on Monday.
Ministers had even ordered staff to identify a suitable business in south London at which to announce a commitment by Britain’s five biggest banks to increase lending to small companies by about 10 per cent.
The chancellor’s aides said the decision to return to the negotiating table had been taken by “common consent”, after discussions with Mr Clegg, deputy prime minister, Mr Cable, business secretary, and David Cameron, prime minister. However, some Lib Dems claim that only the intervention of Mr Clegg and Mr Cable stopped the banks getting away with only modest concessions.
“No deal with the banks is far better than a sell-out to the banks,” said Lord Oakeshott, a Lib Dem Treasury spokesman, who has previously accused the Treasury of hauling up the white flag under pressure from the industry.
Mr Osborne and Mr Cable agreed last Friday that they would try to announce a conclusion to the talks with the banks – named Project Merlin – on Monday.
Under the deal, the banks would agree to rein in bonus payments, disclose the pay of some top executives and announce an increase in gross lending to businesses from £160bn to nearer £180bn.
In exchange, the coalition would agree to create a “level playing field” with other big financial centres, removing the veiled threat of new taxes and regulations.
However, the prospect of some kind of split of retail and investment banking following Sir John Vickers’ review of bank structures in September remains. The Treasury says that aspect of banking reform is not covered by the agreement.
On Saturday, Mr Clegg and Mr Cameron agreed there were too many unanswered questions in the deal, including a lack of detail on the monitoring and enforcement of the bank lending targets. Details of the pay disclosure regime and the size of the bonus pool are still to be finalised.
“Everyone agreed it wasn’t ready,” said one aide to Mr Cable. An ally of Mr Osborne said it was “absolutely not the case” that the agreement was pulled purely because of Lib Dem opposition, adding: “We decided it should not be rushed through.”
A senior banker involved in the talks said an agreement had been “imminent” going into the weekend. “The work was very advanced and it was only a question of sorting out a few final figures. The reason given for holding back on it was described as ‘political’, so most likely it is a coalition issue.”
Mr Osborne hopes a deal can still be reached before the bonus season begins in earnest next month, but one banker said: “Momentum has gone out of it.”