The British government has struck a hard-won deal with the country's top banks to get them to curb their bonuses and boost lending, people familiar with the matter said today.
The talks, dubbed "Project Merlin", will see the top five UK banks agree to lend about £190 billion gross to businesses this year, up from £175 billion previously, the sources said, adding that the parties involved were hoping to announce a deal later today.
The Conservative-Liberal Democrat coalition government has a tough balancing act on its hands as it seeks to assuage anger over the use of public funds to support the banking system at the height of the financial crisis without damaging London's competitiveness as a major financial centre.
As part of the Merlin deal, the banks will also agree to pay lower bonuses for 2010 than in 2009 and disclose the pay of the top five paid executives in addition to the most senior executives on the board, the sources said.
"Once the Merlin agreement goes through, it will calm the waters and remove some of the uncertainty over the UK banking sector," said Cavendish Asset Management fund manager Paul Mumford.
Yesterday, the government sprang a surprise, saddling Britain's heavyweight banks with an extra £800 million in taxes, ramping up an original plan to collect £1.7 billion this year and aim for £2.5 billion in 2012 and subsequent years.
The banks responded angrily and sterling fell as the move dented sentiment towards the UK.
The government has faced a long battle to get the banks to sign up to the deal and opposition politicians have accused finance minister George Osborne of using the new tax as a fig leaf to cover up failure to make much progress in getting the banks to make significant commitments, particularly on bonus restraint.
Mr Osborne's announcement yesterday coincided with a first parliamentary clash with his new Labour party opponent Ed Balls, who was central to the previous government's economic policy-making and is seen as a combative figure.
"Project Merlin" has already stalled several times in the past due to last minute disagreements between the banks and the government, with the banks arguing that an excessive clampdown on them would harm the UK's role at the helm of world finance.
Britain's "Big Four" banks are Barclays, HSBC and part-nationalised lenders Royal Bank of Scotland and Lloyds, who have all been criticised for not lending enough to businesses to boost the country's faltering economy.
The Treasury and British Bankers Association declined to comment.
Reuters
