So Project Merlin has finally been given the go-ahead, and the terms of the deal have been locked down, but will it actually improve access to finance for small and medium-sized businesses?
At first glance, pledges from the UK's biggest banks to increase lending to small and medium-sized firms sound highly promising.
In case you missed it, here are the headline announcements:
- An agreement between the four 'Merlin' banks - HSBC, RBS, Lloyds and Barclays - along with Santander, to increase overall lending to businesses from £179bn to £190bn this year, £76bn of which has been earmarked for small and medium-sized businesses. (This equates to a 15% increase on the £66bn that was lent to SMEs in 2010).
- The Bank of England will monitor whether credit is reaching businesses and publish quarterly assessments. Lending targets will affect the bonus payments of bank bosses.
- The banks will also provide £1bn of equity capital for the Business Growth Fund, (intended to boost business growth outside of the South East), and £200m for David Cameron's 'Big Society Bank', intended to finance community projects.
- In an effort to increase transparency, the banks have agreed to anonymously publish the remuneration packages of the top five executives not on the board (although details of how much top traders and investment bankers receive will remain undisclosed).
The government said the agreement, which has been brokered by former Barclays boss John Varley (pictured above), will increase transparency and stability in the banking sector, and crucially, improve access to finance for small and medium-sized firms. But will this be the case?
John Walker, national chairman of the Federation of Small Businesses (FSB), believes Project Merlin alone does not go far enough. "While we welcome the intention to lend more to small businesses, we still need to see a major restructure of the [banking] sector," he argued.
The FSB also called for clarification on some of the terms of Project Merlin, such as how far off the targets the banks will have to be before they face repercussions, and what constitutes an SME in the eyes of the banks to ensure that the smallest businesses - particularly early-stage firms - also receive funding.
"It is also a concern that the additional £1.5bn (for the Business Growth Fund) will only go to businesses looking to receive between £2m and £10m in equity finance and so will not hit the smallest of businesses that need it most," added Walker.
Commentators have also noted that Project Merlin deals with gross lending targets; since these don't take into account firms paying loans back, the net amount being borrowed by firms could still potentially fall. And, if strict penalties for missing lending targets are introduced, isn't this potentially encouraging the type of irresponsible lending that the banks were reprimanded for in the first place?
But crucially, lending targets alone do little to address one of the biggest problems facing small firms looking for finance in the UK - the cost of borrowing. Even if more small firms are approved for loans, this is no good if the terms prove too prohibitive.
Many firms have faced higher charges and stricter lending covenants on existing debts, while others with viable business models are falling at the first hurdle due to a lack of security. With inflation rising and the Bank of England under mounting pressure to increase the interest rate, credit conditions could soon get even harsher.
"Many small firms aren't going to the banks to access finance and credit and the main problem they face is the cost of credit," said Walker.
"To achieve robust economic recovery, the smallest firms and start-ups need to have access to finance, but [Project Merlin's] commitments - as with previous lending targets - are unenforceable."
Edward Rimmer, UK chief executive of Bibby Financial Services, agrees: "Even if the banks do agree to meet the government's growth targets for lending to SMEs, we could still see the introduction of new lending criteria which is as stringent as existing regulations already preventing businesses from securing financial support. It is hard, therefore, to see how this differs from what the banks are already doing," he said.
"The fact of the matter is that continued cuts in public sector spending, rising VAT, inflation and fuel costs have already hit UK businesses hard - not to mention their cashflow - and the key question remains: will this initiative be enough to offset the burden firms are already being asked to bear? The answer is doubtful."