Hopes fade of early announcement on bank lending and bonuses deal

HOPES look to have been dashed that an announcement on a deal between the banks and the UK government on lending and bonuses could be made as early as this week due to sticking points on levels, industry sources say.

One source close to the talks said the lack of agreement between the parties in the so-called Project Merlin talks meant an announcement could now be "some weeks away".

This could prove problematic for lenders with big investment banking arms - such as Royal Bank of Scotland, HSBC and Barclays - which may now have to set their bonus pools without knowing the final lending commitments they are signed up to.

It is believed a decision was made over the weekend, after a series of phone calls between the bank negotiators and the Treasury, that this week was now too early to say definite agreement had been reached.

A further complication is that Chancellor George Osborne and a number of top UK banking executives will be in Davos at the tailend of this week for the World Economic Forum.

It is understood the main negotiating hurdle is some Treasury reservations that the offer by the UK's five major banks to lend 180 billion this year, up 10 per cent on the 160-165bn lent in 2010, is high enough.

Some Treasury officials are also said to be concerned about how this number could be verified. Meanwhile, it is believed the banks have been unhappy at one mooted suggestion by the Treasury that, quite apart from the general bonuses issue, chief executives' pay could be linked to lending targets.

That is the case for Antonio Horta-Osorio, who joined Lloyds Banking Group from Santander last week and is due to take over from Eric Daniels as chief executive in March.

Ironically, Santander - which has acquired Abbey, Alliance & Leicester and Bradford & Bingley in the UK - has pulled out of the Project Merlin talks, saying it wants to reach its own agreement with the UK government.

The City was generally sanguine about any delay to a deal being announced on Project Merlin. One analyst said: "For one thing, the City is less fussed about bonuses than the public. It is more concerned with the trading performance of the banks and the effect on the share prices. It is not for lending at any price even though this is a political hot potato.

"And having said that, the (UK] government also probably thinks it is better to get an agreement that will play out well with the public rather than just a quick deal that causes problems."

A Treasury spokesman said: "Talks are ongoing regarding Project Merlin.We have no other comment."

• Financial services group Oval revealed at the weekend that it has poached six consultants from Bank of Scotland Investment Services (BOSIS), the investment arm of retail bank HBOS, part of Lloyds, to bolster its financial services team in Glasgow, Edinburgh and Aberdeen.