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Banks’ response to Project Merlin commitments on lending and bonuses

Top banks had pledged to lend £190bn in 2011 with £76bn earmarked for funding small businesses

On 9 February last year, Project Merlin was finally agreed between the banks and the government. It was intended to cool the political temperature in the banking industry but instantly led to a high profile resignation – Lord Oakeshott, the Liberal Democrat peer who spoke for his party in the Lords on Treasury matters. At the time, Oakeshott said, with reference to the chief executive of Barclays: “If this is robust action on bank bonuses, my name’s Bob Diamond.”

With the 2011 bonus season now underway and the banks all preparing to report results for 2011, how does the Merlin report card stack up for Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group?

• Lending: The banks pledged to lend £190bn in 2011 – up from £179bn in 2010 – some £76bn of this was to go to small businesses. The Bank of England will publish the official verdict on Monday but Royal Bank of Scotland, bailed out by the taxpayer, admitted last Friday that it had not met all its targets. Data from the Bank of England showed that up to the end of September banks were £1bn behind.

Lending was also supposed to have an influence on bosses’ bonuses – whether this has been the case might become more apparent in the coming weeks when the banks publish the annual reports which contain details of directors’ pay.

• Pay and disclosure

The banks promised their 2010 bonus pools would be lower than 2009. They also promised to publish the pay of the five highest “senior executive officers”. This description proved controversial. HSBC illustrates this. For 2010, under Hong Kong listing rules HSBC’s five “highest paid individuals globally” received a combined £34.3m. But, under the Project Merlin disclosure the “five highest paid senior executives” took home just over £12m. The biggest earners are not necessarily executives.

The government also promised to consult to introduce similar mandatory disclosures for all large banks from 2012 onwards and for the pay of the eight highest paid “senior executive officers” to be published. This is underway, although the necessary legislation will not be passed until the summer, which means the high street banks may not need to comply until later in the year even though their annual remuneration reports are published in the next few weeks.

• Tax

The four leading banks promised to abide by the UK code of practice, a document originally drawn up by Labour but implemented by the coalition. They promised to contribute a cumulative £8bn of total tax take (covering direct and indirect sources, including the bank levy and VAT) in 2010 and £10bn in 2011. The Treasury said it had not published this data. For the financial year 2010, Barclays paid £2.8bn of UK tax, HSBC £1.2bn, while bailed out Lloyds and RBS paid £2.9bn and £4bn respectively. The numbers are not a direct comparison with the £8bn covered by the agreement, as tax can be owed in one year and paid in another and the tax year does not correspond to the financial year.

• “Societal contributions”

Banks promised to put another £1bn into the UK business growth fund, which was launched in May and has invested just £12.5m so far in three companies. The banks were also to support the Big Society Bank, contributing £200m of capital over two years. Since renamed Big Society Capital, the banks have agreed to make their contribution although the venture is yet to fund its first deal.

It may be a coincidence, but in the weeks after Project Merlin was signed, bank bosses were able to take their bonuses for the first time since the banking crisis. This year the picture is different. RBS chief executive Stephen Hester and António Horta-Osório at Lloyds have waived bonuses. On Friday, Barclays – whose former chief executive John Varley was the architect of Merlin – reports 2011 profits. It could be the next test of political sentiment towards the banking sector. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds