By Manos Schizas, senior policy adviser, ACCA
The Chancellor has waved his wand in the Commons and revealed the details of the banks’ and Government’s Project Merlin deal.
The amazing thing about the Merlin agreement is that, if the detailed statement published by HMT was a contract, no one would agree to sign it; there's too much wiggle room. Part of this has to do with the setting of gross rather than net lending targets, but I particularly enjoyed this ultimate disclaimer:
"1.5 Each bank’s lending expectations, capacity and willingness, as set out above, will be subject to its normal commercial objectives, credit standards and processes and regulatory obligations, as well as the availability of the required funding."
Mind you it couldn't have been any other way, as I explained in my recent note.
So is a 15% increase in gross lending enough? Well HMT has now explained to us that the banks originally expected the demand for finance to fall this year. In the small business loan market, a simple plot of the 15% increase (assuming a 15% yoy increase each month) would look a bit like this. The fact that the banks' collective action is expected to prompt enough additional demand in order to make this increase in lending sustainable would make sense if there was a 'discouraged demand' for loans equal to about 30% - 40% of the market. I seriously doubt this, even though that problem does exist.
Worse, the targets agreed show that neither the Government nor the banks ever meant to address the real problems through Merlin (although they do try in other, less public, fora). Not all SMEs are alike, and not all loans are alike. After accounting for inflation and changes to the stock of businesses, overdrafts outstanding to small businesses (<£1m account turnover) are down an amazing 25% since mid-2007, while term loans are only down about 3%. Yet the word 'overdraft' isn't mentioned once in the Merlin commitments.
Despite this general cynicism, I do admit that since all of the banks make a point of talking about how strategic their relationships with small businesses are to them, this should be reflected in their remuneration structure. It's a helpful nudge for the government to force this upon them, and hopefully this information will be published so the rest of us can hold them to account. Again, though, the incentive should not be to lend more no matter what loans you give and who to: banks should set themselves higher standards than that.
Ps. Thanks to FTAlphaville for the H/T