David Prosser: Lloyds is an example of how the banks can be forced to lend more

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The Independent Online

Outlook Lucky old Lloyds Banking Group found itself singled out for praise by the Business Secretary yesterday as the bank doing the most to stick to the targets for small business lending agreed under Project Merlin. And why shouldn't it get a little praise from Vince Cable? After all, it has so far met its targets – unlike its fellow state-backed bank Royal Bank of Scotland, which came up short in the first quarter.

In fact, Lloyds is an interesting case study for policymakers to consider further as they ponder how to force the banks to do more for SMEs.

The bank currently has more to gain than any other from keeping ministers onside. While the sale of 600 branches has been forced upon it by European competition authorities, Sir John Vickers' Independent Commission on Banking has made it clear that he could yet recommend further asset sales – or even more draconian reforms such as the unwinding of Lloyds' merger with HBOS. Whatever Sir John recommends, however, will only be implemented if the Chancellor agrees – so Lloyds needs all the friends in Government it can get just now.

Indeed, it may be that the Commission is a much more powerful stick with which to beat the banks than the sort of measures being threatened by Mr Cable yesterday. In particular, it seems unlikely Mr Cable is really going to persuade George Osborne to impose new levies on the banks. In any case, it would be difficult to do so if, as seems likely, some banks hit their targets while others do not.

A coalition of Sir John and Government ministers would be well placed to crack down on Royal Bank of Scotland, in particular, given that it is 84 per cent owned by the taxpayer. But it is within the Commission's powers to target the other banks too. As for Mr Cable's other ideas yesterday, greater transparency on the link between lending targets and pay looks the best bet because this is something that can be applied bank by bank. My colleague Sean Farrell revealed in The Independent last month that moves were afoot in Westminster to force the banks to spell out how executives' remuneration would be hit were they to miss their targets. It is encouraging to see Mr Cable follow through on that, since in the absence of any specific detail, the banks' pledge to put such a link into their pay structures was beginning to look a little hollow. Finally, to return to the Business Secretary's singling out of Lloyds, the bank's success is good news for its borrowers, of course, but also for everyone else. After all, if one bank is capable of hitting its targets, it rather damns the argument of its rivals that the demand for loans is not there.

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