Why Merlin turned out a damp squib

Anthony Hilton
1 Mar 2011

The Government offered to emasculate the Independent Commission on Banking as it tried to strike a deal on bank bonuses a few weeks ago. I am told it backed off only when Sir John Vickers, chairman of the inquiry, and his entire committee, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf threatened to resign.

The row emerged in the last few days of frenzied negotiations around Project Merlin early in the New Year. A key objective of Merlin from the perspective of the banks taking part was to normalise relations between them and the Government. Thus the impression created by both sides was that the main area of discussion was bonuses and lending to small businesses.

It has now emerged, however, that the chief reason the banks took part was to lift the threat that Vickers's commission would recommend a major restructuring of the banking industry which would have the potential fundamentally to alter how they do business and where they make their money.

The banks involved - Barclays, HSBC, Lloyds, RBS and Santander - were particularly anxious to avoid High Street banking being separated from investment banking, or a similar requirement which would force them to choose between acting as an agent for clients wishing to gain access to the markets or as a principal dealing on their own account in those markets.

The Merlin deal was finally announced in mid February and contained commitments to lend more the small businesses, to give more disclosure on the pay of the top bank employees and a degree of restraint on bonuses, but was generally considered to be a damp squib. Chancellor George Osborne sought to defuse such criticism by pre-announcing an increase in what was supposed to be a one-off levy on bank profits just before the deal was unveiled.

However, it now appears that the reason the deal achieved little was that the banks would not offer worthwhile concessions unless Vickers was reined in. Although Osborne was said to have been willing to do this - in return for the political capital he thought he would get from solving the bonus problem - he was forced to back off in the face of a collective threat from Vickers and his colleagues to quit.

That at least is the story now being whispered round Whitehall. No one will confirm it but like all good conspiracy theories it does have that uncomfortable ring of truth. One can just imagine all the parties involved behaving in just the way described.