Duncan’s Economic Blog

Project Merlin: The first signs aren’t good

Posted in Uncategorized by duncanseconomicblog on May 9, 2011

Two months ago the Treasury published the details of its ‘Project Merlin’ agreement with the banks.

For me, looking at the economic issues rather than those around pay, the key failing of Merlin was the inclusion of gross, rather than net, lending targets. As I wrote at Left Foot Forward:

First the agreement is for gross lending rather than net lending – i.e. it only refers, it takes no account of repayments on existing loans. It would be perfectly possible for banks to issue gross loans of £190bn but fund this by calling in old loans. What matters for the UK is not gross lending but net lending.

The coalition agreement (page 9 of the pdf) emphasised that net lending targets could be introduced to ensure that banks lend to small and medium sized businesses:

“We will develop effective proposals to ensure the flow of credit to viable SMEs. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.”

This now seems to have been abandoned. As business secretary Vince Cable commented less than a year ago:

“This would be completely letting the banks off the hook. It’s perfectly possible for banks to achieve a gross lending target while withdrawing capital from small to medium-sized businesses.

“Even if they have a gross target, what assurances do we have that it will be enforced, because the banks have been running rings round the Government so far?”

This looks like a climb down from Vince Cable and a victory for the banks.

Last week we got the first official data that lets us see how far the banks are living up to their promises on lending. The Bank of England’s latest ‘sectoral breakdown’ of money holdings and lending was released on Wednesday.

The key figures for this purpose are lending to PNFCs (or private non-financial corporations – i.e. normal, non-financial businesses). In March, post-Merlin, sterling net lending by UK banks to these businesses fell by £1.4bn. In addition foreign currency net lending  by UK banks fell by an additional £1.1bn.

We have no data on what happened to gross lending (the Merlin target) in March, but we can say that net lending fell by £2.5bn.

It doesn’t look like Merlin has got off to a great start.

(The above uses the monthly ‘sectoral breakdown release’. The latest Trends in Lending, a more detailed report, was published in late April, but most the data only runs until the end of February, so I decided it wasn’t fair to use as indicator of Merlin progress. This release does contain a lot more data and the next edition (in July) will be an important release)

5 Responses

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  1. Dave Holden said, on May 9, 2011 at 5:27 pm

    What I don’t understand is if private debt’s the problem how more private debt can be the solution. Now I can understand the argument for government to take up the slack the problem is that the “slack” is massive and unsustainable. We’re at the end of a debt supercycle. – I wish I could see a – if not easy then doable – way of achieving an orderly deleveraging but?

    • Mike said, on May 10, 2011 at 12:00 am

      But is private debt even the problem?
      Is the debt not balanced by assets which could be liquified? (The debt is largely internal to the UK.)
      Eg. over-priced stock market, over-priced housing market.
      The larger companies are sitting on cash mountains, with no interest in investment. (It’s the smaller companies that will go bust for lack of cash flow when demand picks up.)
      The money wasted on unwarranted bonuses (now stashed away in offshore accounts)
      that could have been banking capital.
      Buy-to-let houses, households with multiple cars.

      • Dave Holden said, on May 10, 2011 at 10:00 am

        MIke,

        “Is the debt not balanced by assets which could be liquified? (The debt is largely internal to the UK.)
        Eg. over-priced stock market, over-priced housing market.”

        The problem is that the answer is no. Mark to market those assets aren’t worth their matching debt – they’re over priced. The result of too cheap money ending up in a debt based Ponzi asset bubble. This is why Government keep putting of forcing in the mark to market accounting change that was due in two years ago less they are all instantly rendered insolvent.

        “The larger companies are sitting on cash mountains, with no interest in investment. (It’s the smaller companies that will go bust for lack of cash flow when demand picks up.)”

        But how much of this “cash mountain” is real

        Mike Shedlock has something to say about this

        http://www.businessinsider.com/why-the-idea-of-corporate-cash-on-the-sidelines-is-a-myth-2010-8

  2. Metatone said, on May 9, 2011 at 6:36 pm

    @Dave Holden

    Typically an orderly deleveraging would involve a reduction in personal debt (e.g. credit cards, personal loans, mortgages) and a flat or even increased level of lending to businesses (especially growing ones)…

    Savings are not a virtue in themselves, they are valuable because they lead to investment in productive assets. Beyond the government investing in infrastructure (transport seems like an important category) productive assets are bought by businesses…

    Anecdotally, part of the reason UK exporters are not picking up as much as hoped for is their difficulties in raising investment from banks to ramp up production…

  3. Dave Holden said, on May 10, 2011 at 10:04 am

    “Typically an orderly deleveraging would involve a reduction in personal debt (e.g. credit cards, personal loans, mortgages) and a flat or even increased level of lending to businesses (especially growing ones)…”

    Precisely and it’s this that is required for banks to feel confident enough to start lending again.

    “Savings are not a virtue in themselves, they are valuable because they lead to investment in productive assets. Beyond the government investing in infrastructure (transport seems like an important category) productive assets are bought by businesses”

    I agree – sadly much of the “investment” that has taken place has been malinvestment and not based on savings but on banks “created money “.


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