The most damning indictment of Project Merlin – the Government's deal with the banks that green-lights big bonuses in return for promises of more lending to businesses – is not so much that it is too little, but that it is too late.
The keenest demand for short-term finance from firms in distress was during the credit crunch and the recession between 2008 and 2010. Many of the firms that would then have benefited from a Project Merlin-style agreement have now gone bust, their productive capacity gone forever, wiping out a whole chunk of the potential output of the British economy. The fact that the previous government's targets for Royal Bank of Scotland and Lloyds were missed – insofar they could ever be measured in the first place – is cold comfort to businesses now in ruins.
Still, the latest data from the Bank of England suggests that Project Merlin may be of some help in some quarters. In December, bank lending to UK business shrank yet again, by £6.3bn, to leave an outstanding balance of £536bn. In that context, a gross or new lending target of £190bn looks fairly healthy, as does the target of £76bn for smaller businesses. But there is still no guarantee that the banks will direct more lending to manufacturing to rebalance the economy; lending to industry is in fact roughly where it stood in 1997; most of the increase in bank lending since then went into the property bubble.
Another objection to Merlin is that looking solely at gross lending "would be completely letting the banks off the hook. It's perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses", as Vince Cable put it in opposition. But many firms, over the worst of the slump, now want to scale back borrowings and "de-leverage".
The stark truth is that they may now be so worried about the future of the economy that they do not want to borrow, even when the banks want to lend and the Bank of England has cut rates to a 315-year low of 0.5 per cent. Firms want to hoard money rather than invest it and that means lower investment in new machinery, computers, vehicles and stock that would drive the recovery at a faster pace and create more jobs.
There is nothing in Merlin for first-time home buyers. The terms of loans – fees, rates, collateral – may still be onerous. The 15 per cent uplift on last year's figures for smaller businesses is from a low base. And it is all subject to demand, which of course may not be forthcoming.
Longer term, ministers privately say the real goal is to restore competition through the Banking Commission headed by Sir John Vickers, to report in September. That would improve the availability of funds for borrowing and lower its cost. But for many struggling businesses, it will arrive too late.Reuse content