Will Project Merlin prove a charm or a curse for ministers and the banks?
Here's a cautionary fairy tale about financial wizardry for you to enjoy...
Magic bankers
Once upon a time, the British government was very wary of throwing spanners into the magical machinery of global capitalism. Indeed, for the first ten years of Labour's reign from 1997, light-touch regulation was the order of the day.
Thus, regulators, politicians and other interfering goblins were actively discouraged from prying into the affairs of Britain's banks, for fear of bursting the bubble. This gave bankers free rein to boost their balance sheets (and their bonuses) by engaging in an increasingly reckless lending spree.
Fuelled by cheap credit and rapidly rising asset prices (including a tripling of house prices between 1995 and 2007), the UK economy took off on a record-breaking growth spell.
The three bears
Thus, the UK was all set to live Happily Ever After -- until along came three bears.
- The first bear was the credit crunch, which choked off the supply of cheap credit from August 2007 onwards.
- The second bear was the banking meltdown of 2008, when the entire UK banking system was days from collapse.
- The third bear was the deepest British recession since the Thirties, lasting 15 months until the end of 2009.
Prince Charming
In a morality tale which came to be known as the 'global financial crash', banking emperors were revealed to be wearing no clothes. It turns out their financial wizardry was nothing more than a highly leveraged bet on ever-rising asset prices, with no thought as to what would happen when their blissful fairy tale abruptly ended.
At this point, Prince Charming and his subjects (in the form of Gordon Brown and 31 million British taxpayers) rode to the bankers' rescue. By injecting hundreds of billions of pounds into the banking system in liquidity, loans and equity, brave Sir Gordon slew the dragon of financial meltdown.
Merlin's magic
Alas, despite Sir Gordon's best efforts, British banks continued to rein in their horns by hoarding cash and refusing to lend to small businesses at reasonable rates of interest.
Thus, a band of brave knights (consisting of the finest politicians in the kingdom) laid siege to the bankers' castles, insisting that lenders stop treating small businesses like the ugly stepsisters.
At the end of this crusade a truce was reached, known as Project Merlin after the wise wizard of Arthurian legend. Here are the details of this powerful sorcery:
Lending legends
- The UK's four biggest lenders -- Barclays (LSE: BARC), HSBC (LSE: HSBA), Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS), plus Santander UK -- have agree to lend £190 billion to businesses this year, 6% more than the £179 billion they handed over in 2010.
- Of this sum, £76 billion will be aimed at smaller companies, a rise of £10 billion (15%) over 2010's lending. Across the land, this will assist firms desperate for credit in the lending famine.
- Over the next three years, the banks will provide an extra £1 billion of equity capital to the Business Growth Fund (set up to aid small firms in the hardest-hit parts of the UK).
- The banks have agreed to commit £200 million to help fund the coalition's Big Society Bank, providing funding for community initiatives.
- Performance targets for bank CEOs will include payouts based on meeting these agreed lending goals.
- The Bank of England will act as watchdog, publishing quarterly reviews of business lending.
Pay and bonuses
- As well as revealing the pay of their board members, four of the five banks (excluding Spanish-owned Santander) will publish the pay -- but not the names -- of the five highest-paid non-board executives. This will exclude highly paid traders without management responsibilities.
- Bank chiefs have agreed to cut individual bonuses for 2010 to bring them more in line with their overall financial performance last year.
- To improve shareholder representation, the ten highest-paid individuals in each bank's business division will have their pay formally reviewed and signed off by each bank's remuneration committee.
- From 2012, new legislation will force all big UK banks to publish the pay of the eight highest-paid executives below board level. This will apply to the UK operations of foreign banks, including investment banks such as Goldman Sachs and JP Morgan.
Neither fairy godmother nor wicked witch
What Project Merlin failed to conjure was a formal bonus tax aimed at transferring coins from bankers' bulging purses to the Treasury's coffers. Thus, there will be no super-tax on an estimated £6 billion of bonuses to be paid out in the coming weeks.
For example, at 84% state-owned RBS, bankers will share a bonus pool of under £950 million, versus £1.3 billion in 2009. Despite lower financial returns than in 2009, perhaps 200 top staff will trouser £1 million-plus.
RBS CEO Stephen Hester will receive an all-shares bonus worth over £2 million, payable after three years. At Lloyds (41% taxpayer-owned), CEO Eric Daniels will get £1.45 million in shares. However, at both state-supported banks, cash bonuses will be capped at £2,000, with the remainder paid in shares.
Then again, the Chancellor did increase the 2011 bank levy by £800 million to £2.5 billion yesterday, so banks will pay a little more to repent for their misdeeds.
Brothers Grimm times
On all levels, Merlin's magic is more of a political triumph than an economic success. One glaring omission is the absence of the big investment banks responsible for some of the greatest excesses when paying bonuses and taking risks.
In addition, the cost of borrowing continues to rise for both individuals and consumers, despite the Bank of England's base rate being stuck at an all-time low of 0.5% since March 2009.
Hence, townsfolk with pitchforks and flaming torches may yet storm the banking ramparts if the economy faces dark nights once again.
The frog princes
One final warning to politicians who may be tempted to sing sagas of their great deeds in Project Merlin: sometimes, when you kiss a frog, it stays a frog and never transforms into a handsome prince.
Indeed, thanks to the Law of Unintended Consequences, kissing up to slimy bankers may give you nasty warts!
More from Cliff D'Arcy:
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