A couple of months ago I wrote in Progress magazine that George Osborne was a highly political chancellor, driven as much by positioning as policy. If there was any doubt, yesterday's announcement on the bank levy dispelled it.

Faced with his first treasury questions against Ed Balls, the chancellor launched an £800 million dawn raid on the banks. It wasn't a subtle move. The point was to hold up a chunk of bankers' flesh to protect himself from answering awkward questions about the last quarter's growth figures or the wider implications of the depth and scale of the cuts in government spending. If that was the intention, it didn't work. The move was too obvious. Business, disliking surprise moves like this, will now trust the chancellor a little less. And Ed Balls will quite fairly conclude that if the prospect of answering a few questions can produce such a panicky move, then more will follow.

This move fooled no one and looked exactly like the stroke it was. The bigger issue is how much banks lend to the businesses that Britain depends on for jobs and growth in the future.

The Conservatives, although highly funded by major City figures, came into office riding the wave of business and popular resentment against the banks. They and the Liberal Democrats claimed the banks had "run rings round" Labour by accepting the bailout but not guaranteeing net lending to businesses. The new government would get tough. They would really show the banks who was boss. But what have we had? A protracted negotiation on Project Merlin which by the end looked to be as much about saving face for the government as a genuine attempt to meet the credit problem still being experienced by businesses up and down the country.

The outcome of all this is hugely important because for many small and medium sized businesses on the ground, the price of credit has risen markedly, the charges associated with it have gone up and the goodwill they expect from banks appears to have been withdrawn. This description of the credit environment is a constant refrain in any group of small businesses met by politicians over the past year or two. Meanwhile the banks tell the government that they can't control net lending because they can't control how much businesses will want to repay, nor can they control demand in a still nervous and uncertain economic climate.

At the centre of the Merlin announcement is another gross lending target. Business will feel they have been in this movie before. They know it is not just a matter of gross lending but the conditions attached to this lending and the price at which it is available which matter. The proof of the worth of the announcement on Project Merlin will centre on whether it does really result in a change in the lending conditions on the ground and whether it meets public anger about the level of bonuses paid out. In the end, the first of these things is the more important because it is that which will dictate whether hard pressed first time buyers can get a mortgage and whether businesses get the credit they need for the economy to grow.

If the banks are only in business because of taxpayer help, and if those who haven't received the help still operate under the implicit guarantee of such help, then it is fair to expect an understanding of the kind of conditions there should be on small business lending and on help for first time buyers, many of whom are finding it impossible to get on to the housing ladder at present.

The government is desperate for Merlin to turn the page on dialogue with, and about, the banks. But that will only happen if the changes they are parading are real.

And to complete the picture, later this year the government's commission on banking reports. The business secretary has made no secret of his wish to see it recommend a division between investment banking and retail banking. The Treasury is rumoured to be opposed to this. One of them is going to be very disappointed.

The page on banking hasn't turned yet. And it is conditions on the ground which will dictate when it does, not announcements about gross sums of new lending which will mean little to would be homeowners and small businesses.

Posted on 9 February 2011. 


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