Banks to back small firms with pledge to lend £1.3bn

Ministers and bank chiefs were edging towards a deal last night under which the City would pump £1.3bn into areas hardest hit by the downturn.

The Government and banks were understood to be close to resolving their differences after months of discussions. Under the agreement the banks would contribute £1.3bn into a regional growth fund aimed at areas such as the North East of England and Yorkshire. They would also increase lending across the economy by nearly 10 per cent to £190bn in an effort to foster growth.

The Government wants the major banks to reveal the pay and perks of senior executives. But the banks are only expected to promise restraint over annual bonuses. Stuart Gulliver, new chief executive of HSBC, is expected to accept a bonus of as much as £9m this month in reward for leading the bank's investment arm. His new counterpart at Barclay's, the American Bob Diamond, will receive the same. Stephen Hester, the chief executive of RBS, and Eric Daniels of Lloyds Banking Group are likely to be in line for £2.5m and £2m respectively.

Many Liberal Democrat MPs, as well as Labour, are certain to protest vigorously if more definite commitments are not made by the banks.

But Downing Street is understood to have concluded that swingeing curbs on bankers' bonuses could lead to high flying executives moving to foreign financial centres.

But Deputy Prime Minister Nick Clegg is likely to argue that the commitment on regional spending will make a real difference to areas struggling to recover from the economic crisis.

The cash would be paid over the next three years and would be in addition to a £1.5bn fund already backed by the banks over the next 10 years.

Mr Clegg has repeatedly promised to rebalance the economy away from London and the South East.

He will trumpet the promise as proof of the Liberal Democrats making a tangible difference to the negotiations with the banks.

Talks between the two sides were continuing last night, but appear to be moving towards a resolution.

Full details could be announced as early as this week.

The move to disclose more details of bankers' pay was a key demand from George Osborne, the Chancellor, who argued that it would only put the City in line with many financial centres around the world.

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