Nothing to say, but Vince Cable says it anyway

You'd think there was enough ammunition around to fire at the UK banking system, without politicians and the media needing to manufacture more, but apparently you'd be wrong. Bank of England statistics released today show that the UK's five major banks have fallen slightly short of their agreed business lending targets under the so-called "Project Merlin" agreement with the Government. Overall business lending in Q1/2011 was £47.3 bn, which is virtually on target to hit the agreed annual level of £190 bn. However, lending to the small and medium-sized enterprise (SME) sector, unaccountably beloved of politicians and mediacrats alike, was £16.8 billion, more than 10% short of the level needed to hit the £76 bn target for the year.

Cue large-type headlines on media websites and harsh warnings from politicians, with Vince Cable predictably in the van. Even at the most superficial level, however, there are at least two problems with all of this confected fury. First, Project Merlin wasn't signed until mid-February, half way through the quarter to which these supposedly unacceptable numbers refer. Second, the targets apply to the year as a whole; only an idiot (or, I suppose we now have to assume, Vince Cable) would think that each quarter's numbers should amount to exactly one-fourth of the annual target.

On a less superficial level, there are significant issues with the whole "Project Merlin" approach. Governments have never acknowledged the obvious contradiction between the two tasks that they have imposed on the banks: rebuilding of their capital bases and a return to pre-crisis levels of lending. It's certainly true that banks can't make profits and rebuild their capital resources if they don't lend, but it's equally the case that pushing loans too hard could get them into serious trouble and trigger further losses. Could it really be the case that the lessons taught by the gung-ho lending of the pre-crisis era have already been forgotten by politicians? Apparently it could.

Things could yet become even more bizarre. The banks see their role under Project Merlin as a commitment to increase the availability of loans; the Government (or at least Uncle Vince) interpret it as a target for loan disbursements. The Bank of England data today show that while overall business credit demand is rising, demand from SMEs is continuing to fall. That may not cut much ice with the politicians. As Robert Peston puts it in a surprisingly balanced posting on his blog:

"...what is striking to me is that if the banks fail to hit the target for the year as a whole, members of the government say that they will not accept that the demand for loans from small business wasn't there.

Ministers want the banks not only to take this particular horse to water, but they expect the banks to force the horse to drink, where he is thirsty or not".

So even Pesto is taking the banks' side, after a fashion. Still, I guess we can't begrudge Vince Cable a chance to sound off, not after the month the LibDems have had.