UK bank pact holds no magic remedy

Few concessions on bonuses

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As the peace pact between the UK government and banks was finally unveiled on Wednesday, one of the biggest surprises was that the codename Merlin referred to the bird of prey rather than the wizard, as many had presumed.

The disclosure by John Varley, former head of Barclays and architect of the deal, is perhaps symbolic given the seeming lack of any remedies that will magically transform the banking sector’s dealings with ministers after months of talks aimed at repairing their fractured relationship.

The big banks have walked away from the accord largely unscathed – a point acknowledged by the government’s move to slap an £800m tax on the industry just a day before announcing the deal.

On the political flash point of bonuses, Mr Osborne extracted few concessions from the banks.

The agreement will make little difference to how much they pay this year – and in effect cleared the way for Royal Bank of Scotland and Lloyds Banking Group, the two state-backed banks, to hand their chief executives share awards of £2m and £1.45m respectively. One thorn in RBS’s side is a pledge to restrict the cash element of bonuses to £2,000 for a second year running, a commitment that could test the patience of investment bankers who feel they could earn more outside the state-backed bank.

Otherwise, the stipulation the total bonus pool across the “Big Four” banks will be lower in 2010 than it was in 2009 was largely meaningless given that a sharp drop-off in profits meant incentive payments were already going to be smaller.

Banks also fought off attempts to make them disclose the pay of their highest earning traders and investment bankers, despite claims from Mr Osborne that he was setting up the most transparent pay regime in any world financial centre. Institutions will have to identify the salaries of five “senior executive officers” outside the boardroom – with the government keen to push this up to eight – but the banks can decide for themselves whom to nominate, meaning the commercially confidential pay details of star traders will be kept neatly out of the public spotlight.

In the end, the government seems to have chosen to sacrifice tougher measures on pay and bonuses in exchange for a coveted agreement on lending, which Mr Varley admits was the biggest sticking point in the negotiations.

The top five UK lenders agreed to provide £190bn of new loans to UK businesses this year, £76bn of which will go to small and medium sized companies.

Mr Cable insisted the 15 per cent increase in SME lending was “real money” and that the Bank of England would independently monitor the scheme. “This is a good step forward for British business,” he said.

However Ed Balls, shadow chancellor, echoed the fears of some business organisations that this lending commitment did not go far enough, especially as it was a gross figure that does not acknowledge how much businesses repay.

Bankers pointed out that the target was conditional on there being sufficient good-quality demand this year and some in the industry believed that in reality the figure would be lower.

“If Mr Osborne improves the economy, thus enabling us to lend, then the money’s there,” said one.

Even Mr Varley said the target was more a signal of banks’ “capacity and willingness” to lend than a firm commitment.

But while the banks have not had to make any great sacrifices, neither have they extracted many concrete promises from the government.

Mr Osborne reassured the industry he would oversee a “level playing field” and a competitive market for banks operating in Britain and refrain from introducing further taxes this year.

The chancellor was careful not to make any longer term promises to an industry that is yet to show it will play ball. This caution was echoed by the banks. While they were publicly united in praise for the Merlin deal, saying it would aid economic growth and create jobs, behind closed doors many were more pragmatic.

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