Coalition left exposed over bonuses after talks collapse

(REUTERS)

Talks between the Government and Britain's biggest banks over bonuses and lending levels are in disarray, ending hopes of an announcement that had been expected today.

Arguments over lending levels to small businesses have derailed the plan, known as Project Merlin. A series of fraught telephone calls on Saturday led to the delay.

The proposal for the banks to lend more to small businesses was intended to help boost economic recovery, as well as to ease public anger about the huge bonuses expected to be paid out soon to bankers.

Any agreement is now expected to be at least several weeks away, leaving major banks – including the largely state-owned Royal Bank of Scotland and Lloyds Banking Group – with the difficulty of having to set bonus pools without knowing the deal's final details.

The former Barclays chief executive John Varley had been working hard to encourage the banks to sign the landmark agreement, but the talks have been fraught with difficulty.

It became apparent on Saturday that final agreement had still not been reached on a number of issues.

At the heart of the problem is the offer made by the UK's five major banks – Lloyds, Royal Bank of Scotland, Barclays, HSBC and Santander – to lend £180bn this year.

Although that is higher than the £160bn to £165bn lent in 2010, many in the Treasury are still not convinced that the amount is sufficient.

The banks are also understood to be unwilling to cut their bonus levels for the third year in a row.

A further delay relates to the impact of forthcoming recommendations from the Independent Commission on Banking, which is looking into whether or not to break up the big banks.

Sir John Vickers, the former chief economist at the Bank of England, who chairs the commission, said in a speech on Saturday that it was considering plans to split investment banks from high street deposit-taking institutions.

He also said banks may need to set aside more capital for emergencies.

There has been strong support from within the Government for the commission's work, due to be reported in the autumn.

The Deputy Prime Minister, Nick Clegg, told BBC1's The Andrew Marr Show: "I think there is a strong case to look at the way in which you can hive off or insulate the very high-risk, over-leveraged banking activities from low-risk, high street retail banking."

He added: "We cannot as a country tolerate a situation again where we have a banking system which is so large in relation to the size of our economy, that it becomes at one moment an asset and the next moment a massive liability."