Hiding behind Merlin's smoke

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On Monday this week we had a story in the FT claiming that the real Merlin lending targets for UK banks didn't actually appear in the final published document.

Instead ‘stretch' targets, insisted on by the government were used – even though the banks have no expectation that demand will emerge sufficient to meet these figures.

Separately there are ‘real' targets, which are about 10% lower, that the banks, happily enough, look on course to meet.

HMT seems at odds with Business Minister Mark Prisk on this but the whole story creates uncertainty around how tough the agreement really is.

No doubt this sets up a nice wheeze for both the politicians and the banks at the end of the process next February where both can save face on lending results.

The politicians can say they pushed the banks as far as they could and can make threatening noises all through the year about what will happen if the banks don't meet the targets, all the time being less than frank about what these targets actually are.

Next year, the banks can justifiably point to the real agreement on lending, which they believe they will honour, and say that demand hasn't materialised for the government's ‘stretch' ambitions.

Of course left out of all this game playing in the press will be what's really happening to access to finance in the UK and whether it is improving.

From the start we were sceptical about the value of lending targets – gross or net, stretch or real – as a tool to deliver better credit conditions for UK firms. The targets are hard to enforce and potentially meaningless (if net lending continues to contract, credit could conceivably still be withdrawn from SMEs, as Vince Cable himself said in March 2010).

That's not to say we want Merlin to fail. If it turns out that credit conditions improve and Merlin has had some role in that, great. And it's encouraging to see from our latest credit conditions survey that availability of finance, including for smaller firms, appears to be improving.

But the bigger risk is that Merlin ‘succeeds' however that's framed and that debate on improving access to finance is shut down.

Already the government seems to use Merlin and the banks' own set of commitments as an excuse for doing little to improve access to finance.

Commendable as the banks actions are, it shouldn't be a surprise to anyone that they will primarily act in their own interest and not necessarily go as far as would be warranted in the interests of the wider economy.

We've consistently called for progress in four areas:

• Improved competition in the banking sector;• Increased sources of finance outside banks;• Better real business expertise in the financial sector;• Better customer services.

Rather than hiding behind Merlin's smoke and mirrors the government should be thinking hard how it can address these areas.

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