Merlin the not-so-wizard

Official data on UK bank lending for 2011 will be released on Monday, and will reveal whether the major banks met their commitment to increase lending under the so-called "Project Merlin" agreement with the government.  Recent releases of these lending numbers have been poorly reported by the media, with the result that the banks have found themselves under assault from politicians and business lobbyists for their perceived failings. For example,  take a look at this post about the lending figures for the first three quarters of the year.


This time the banks are trying to get their retaliation in first.  On Friday the British Bankers Association announced that the major banks had easily beaten their Merlin targets, lending £215 billion in the year, versus a target of £190 billion. Predictably, though, this just started the firestorm of abuse a couple of days early. First up, as usual: the small business lobby, which noted that the BBA figures showed that banks' small business lending had fallen short of the separate target set for it. The shortfall appears to be not much more than 1%, but to hear the lobbyists tell it, that discrepancy is what's keeping the economy from powering ahead. 


Next up: Laura Kuenssberg, the ITV business correspondent recently poached from the BBC.    She told her Twitter followers:  "Remember crucially about Merlin, it is total lending that's been offered, not actual lending that's actually been taken up - big difference".  Indeed it is, but perhaps Laura should have paused to consider that if firms are not taking up all the credit that's being offered, then maybe the banks have a point when they claim that slow lending growth is the result of lagging demand rather than inadequate supply. 


Ms Kuenssberg also tweeted a number of quotes from Barclays' boss Bob Diamond, who was attempting at a press conference to bring off the unenviable double play of defending his bank's lending record and deflecting criticism of his own soon-to-be-revealed bonus. According to Laura: "Diamond says 'we don't need Project Merlin, lending is what we do'".  


Well, up to a point. Barclays is more vulnerable than the other big UK banks to criticism that its activities are too heavily skewed towards non-lending related activities -- so-called "casino banking".   For all the banks, though, there continues to be a delicate balancing act between making fresh loans -- which inevitably involves risk -- and rebuilding balance sheets. From this standpoint, it's unfortunate that the biggest player in the UK business loans market is RBS, which even more than most of its competitors needs to avoid making any more mistakes.   


If the official data confirm that the banks have in fact met their lending targets, questions may arise as to why the Bank of England saw a need to add £50 billion to its quantitative easing programme last week. One explanation is suggested by Chris Dillow, who has done some very creditable research that shows that most of the impact of past rounds of QE has not been on the banks, but on other types of financial institution, mainly institutional investors. Dillow's conclusion: you can't judge the success of QE by what happens to bank lending. It will be interesting to see whether any of the media pundits have picked up on that when they comment on the official Project Merlin data on Monday.