"We're livid!"

Why the levy increase has got the bankers hot and bothered
Investment banking

If there's anyone who's been scorched by the burn of the media grill over past months, it's the bankers. George Osbourne has fulfilled the government's pledge to increase the levy on banks by asking them for £2.5 billion this year - a move that is expected to raise an extra £800 million more than expected. Great! Well - sort of. The bankers aren't happy, and critics are saying that the whole thing's just a political stunt to offset bad press rather than an informed economic decision.

A key figure among those criticising the move is Shadow Chancellor Ed Balls, who has lashed out at Osbourne's decision, commenting on the "hurriedness" of the announcement. Balls also wants the tax on bonuses to be retained fully, on top of the implementation of the levy. Osbourne added fuel to the argument by calling Balls "a deficit denier".

But the coalition maintains that the levy is a better way of ensuring that companies contribute fairly towards tackling the deficit than extending Labour's bank bonus tax. The FT reported that the Government had calculated that banks would provide £1.3 billion to the regions of the UK hardest hit by the spending cuts over a three year period. BBC business editor Robert Peston said that the move was "probably of more importance from a symbolic point of view" - in other words, it's more to get the Government some brownie points with the bank-hating general public than to produce significant amounts of capital that can be used effectively for the greater good of the British economy.

Project Merlin: what does it mean?

Project Merlin is an agreement between the government and the UK's four largest banks - Barclays, HSBC, RBS and Lloyds. It covers three main areas:

1) Freeing up capital

The Merlin banks have committed to freeing up more capital to lend to small businesses in 2011. They will make around £190 billion available - up £11 billion on last year.

2) Bonuses

They will also pledge to pay less in bonuses than last year, a move clearly driven by the uproar over the sums paid this year and last which, it's fair to say, have been far from modest.

3) Salaries

Finally, the banks will become more transparent about how much they pay their staff. After those working in local government earning far less than most bankers were forced to reveal their salaries, the secrecy surrounding banker's wages is becoming more and more untenable. This year will be the first year that the banks will reveal the salaries of their five-highest paid executives below board level. However, their names will not be brought to light.

So why was Project Merlin brought in? It's mainly down to small firms calling for an increase in bank lending because they feel they've been starved of capital since the onset of the financial crisis.The banks will also give £200 million to Cameron's new Big Society Bank - a project that will fund community projects throughout the UK in years to come, as well as an additional £1 billion of equity capital over three years to the Business Growth Fund, a scheme which supports small businesses in some of the most deprived areas of the UK.

All this lending sounds like the ideal antidote for the stagnant UK market, but how will it be monitored? Cameron's got that covered with a Bank of England panel, who will be advised by PwC to ensure that quotas are met every quarter. However, even if the banks do stick to their end of the bargain, they will only provide credit to the businesses who need it on commercial terms, which could mean that it will still be too expensive for many small companies.

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