Britain’s coalition government pulled back from demands that banks specify how they will cut bonuses, according to three people with knowledge of the policy.
With banks including Barclays Plc and HSBC Holdings Plc set to announce bonus payments this month, the softening is an acknowledgement by the government that it can’t force institutions in which it doesn’t have a stake to cap pay. The government will now only ask lenders’ remuneration panels to take into account a need for restraint, and explain how they are responding to popular anger over pay without illustrating where or by how much pay will be cut, one person said.
The change of tone came as Chancellor of the Exchequer George Osborne yesterday increased a tax on bank balance sheets to raise an extra 800 million pounds ($1.3 billion) this year. Britain’s major lenders were angered that Osborne made the announcement without informing them, according to a person involved in the discussions, even though they’ve been in talks since December on bonuses and lending targets, known as Project Merlin. The people declined to be identified because the discussions are private.
“Both the government and the banks understand there is a lot of pressure from the electorate. It is merely a political smokescreen and Project Merlin won’t amount to very much,” said Tom Kirchmaier, a fellow at the London School of Economics. “In the end the bankers will get their bonuses, Osborne will get a bit more tax and everyone will be happy.”
Osborne will announce the details of the Merlin deal at 12:30 p.m. in the House of Commons.
Bank shares rose as the FTSE-100 fell 0.3 percent at 10:58 a.m. in London. HSBC added 0.9 percent and Barclays 0.5 percent.
One person familiar with the banks’ position said their ire at yesterday’s announcement by Osborne was more at the timing, outside the normal framework of a budget statement to Parliament and when the Merlin talks were close to a deal, than at the sums involved. The banks’ negotiating teams called each other in the morning to check others hadn’t been informed, the person said.
Under Merlin, four banks will agree to disclose the remuneration details of their five most senior employees below board level, one of the people said.
Lloyds Banking Group Plc, Barclays, HSBC, Royal Bank of Scotland Group Plc and Banco Santander U.K. are expected to agree to make loans of about 190 billion pounds this year to companies with fewer than 250 employees, according to two people. That compares with the 200 billion pounds the government was aiming for. Money won’t be directed toward supporting home mortgage lending, one person said.
About 1 billion pounds in equity funding will also be set aside to support lending in Britain’s regions, the person added.
The Project Merlin talks were intended to rehabilitate Britain’s banks after the previous Labour government provided support for the financial system that saddled taxpayers with 1 trillion pounds of liabilities, including a bailout of Royal Bank of Scotland Group Plc.
Prime Minister David Cameron, like Osborne a Conservative, began the year proposing a “settlement” with bankers, under which politicians would stop attacking them in return for cooperation on bonuses and lending. That was after Deputy Prime Minister Nick Clegg, a Liberal Democrat, said last year the government wouldn’t “stand idly by” if banks paid out large bonuses in 2011.
Osborne told Parliament last month that banks would not only have to cut compensation but demonstrate that they would “pay smaller bonuses than they would otherwise have done.” That statement came after other officials suggested the chancellor was backing down on steps to control pay.
A sign that the talks weren’t going well for the government came Jan. 27, when Liberal Democrat Business Secretary Vince Cable told a journalists’ lunch that, as he had sat in a meeting with “our friends,” a joke about dead bankers had jumped into his mind.
“There are two dead bodies on a motorway, one cat and one banker,” Cable said. “The difference is that the cat is surrounded by skid marks.”
High bonuses are difficult for the government to sell to the public in what Cameron warned Jan. 9 will be a “difficult” year, with tax rises, public-sector pay freezes and job cuts to help curb the record budget deficit.
London’s 300,000 financial-services workers will receive bonuses totaling as much as 7 billion pounds for this year, about 5 percent less than in 2009, according to the Centre for Economics & Business Research Ltd. That’s down from 11.6 billion pounds in 2007.