Varley's hope for last-ditch bonus deal

John Varley, the former chief executive of Barclays, is in the final stages of brokering a peace deal over bonuses and lending to put to the coalition to allay further public anger over the role of the banks in Britain's financial crisis.

Mr Varley, who leads the industry-wide secret Project Merlin negotiations, is still in talks with the banks but hopes to have an agreement ready to put to the Government within the next few days. Once the peace plan has been finalised, he will then present it to the Chancellor, George Osborne, and the Business Secretary, Vince Cable, for approval. But it is unlikely that any statement will be made until after Mr Cable returns on Thursday from his trade mission to India.

One source said that Mr Varley is optimistic that the package of measures put together after months of negotiations between Barclays, HSBC, the government-owned Royal Bank of Scotland and Lloyds will be accepted. They have put increased lending to small businesses, disclosure of pay packages of the most highly paid, better treatment of customers, restraint over bonuses and more money to social lending, such as a Big Society bank, at the heart of any deal.

Central to any settlement is a pledge by the big banks to lend about £200bn to British companies this year and for a net lending target for SMEs – small- to medium-sized companies – which have been feeling the credit squeeze and high interest rates most acutely. Santander, the Spanish bank which owns Alliance & Leicester and Abbey, pulled out of the talks last week but will take part in new lending targets.

Lord Oakeshott, the Liberal Democrat spokesman at the Treasury, said: "It is vital to the coalition agreement that all the banks agree to a target for net lending to SMEs this year as providing credit to these companies is critical for economic recovery. It is quite clear that the banks are not lending enough and in many cases are charging ridiculous rates. We hope banks will make us an acceptable offer."

It is still not known if Mr Varley has been able to get banks to limit bonuses being paid this year. A bonus pool of about £7bn has been set aside, but banks have yet to decide on final payouts and will do so ahead of results due around mid-February.

Bob Diamond, the new Barclays chief executive, told a hostile Treasury Select Committee last week that he had yet to make up his mind over taking an £8m payout after waiving his bonus for the past two years.

One source said: "Bonuses are still the trickiest bit. Even if the banks cut down the bonuses from £7bn to £4bn there would still be an outcry. Most of the banks want to tough it out and pay what they think is right and want politicians to back them. If they give in to other measures, like agreeing to disclosure, maybe they will get away with it. It's unlikely to be a deal-breaker."

Lord Oakeshott said that some restraint on bonuses – particularly at RBS – is essential. However, he added that real change will only come about if the Independent Commission on Banking introduces radical reform.

IBC's chairman, Sir John Vickers, is due to give his first big speech this Saturday on the direction of reform, ahead of the commission's interim report due to be published in April.