Osborne accused of letting banks off hook

Ministers will strike a deal with bank chiefs over bonuses and lending within a week, George Osborne promised MPs yesterday. In stormy Commons scenes, the Chancellor fended off accusations that attempts to reach agreement with the banks had stalled.

He said there would be an announcement by next Tuesday – just as Barclays discloses its rewards for high-fliers. The banks are likely to promise restraint over bonuses but avoid detailed commitment. Ministers are under immense pressure to exact cast-iron promises.

The banks are expected to boost corporate lending by about 10 per cent to £190bn this year, to promise to increase help for small firms in areas hit by the downturn and to provide more details of senior employees' pay.

Mr Osborne also announced that banks would face an extra £800m tax this year on their profits – although they were already to benefit from cuts to corporation tax. Ed Balls, the shadow Chancellor, accused Mr Osborne of making a "panicky announcement" as a "fig leaf" to hide his failure to reach a deal on bonuses.

So what's the Chancellor up to?

He will charge the full banking levy – the new tax on a bank's global assets – a year sooner than he was going to. This means that the banks will pay £2.5bn this year, instead of the £1.7bn they had expected.

Why has he done that?

Cynics might note that the banking results season is about to start. The big British banks are getting back to doing what they did before the financial crisis: making lots of money and lavishing their top bankers with multimillion-pound bonuses. Their chief executives, who have waived their own bonuses for the past couple of years, are unlikely to do so for a third year. Cellars of wine, Bentleys and yachts cost money to replace. This as the public is fearful of the impact of cuts on their salaries and jobs. So it pays to be seen as tough on banks. The change also allows Mr Osborne to throw a bone to his Liberal Democrat allies.

It's been reported that the bank bosses are "livid". Are they really?

No. That's an exaggeration. The banks' bosses, while hardly delighted, are probably pretty relaxed about it.

John Varley, the former Barclays chief executive, may be furious. He's been trying to negotiate a deal between the banks and the Government under the title of Project Merlin whereby the banks would lend more to small businesses, show a bit of restraint (but not much) on bonuses and put some money to fund worthy projects into a Big Society Bank. The Government would then stop being mean to them. But progress has stalled and Varley wasn't told about this latest move.

And the City reaction?

Lots of noise from the usual suspects, but interestingly, the shares of the big banks were barely affected in London trading yesterday. Which tells the story.

Why isn't the City bothered then?

Look at it this way: the £800m extra the banks will have to pay this year doesn't dent their annual profits of billions much. The Chancellor has promised the total yield from the tax will not go above £2.5bn. City analysts will barely have to change their profit forecasts.

Why are the unions upset?

The TUC said the levy was "pathetically small compared with the amount UK taxpayers are owed for the financial crash and barely covers the cost of the corporation tax cut the Chancellor is giving the banks". And £800m will barely chip away at Britain's debt mountain (which has grown so quickly in part because of the money that has had to be injected into the banking system).

Is the High Pay Commission right that bankers won't quit Britain?

Up to a point, yes. Despite what bankers would have you believe, there are measures designed to rein in banks being introduced in several countries, including our major competitors. And moving an entire bank is not as simple as it sounds. The consequences of, say, HSBC moving to Hong Kong is that Chinese taxpayers would be liable for any future bailout were it to fail, just as the US taxpayer would be liable if Barclays headed for New York. Those governments might not be all that keen. Because the liability for bailing out those two, and RBS and Lloyds (both of which have already received two bailouts), lies with us, it doesn't seem that unreasonable for us to receive some sort of premium from the banks for that.

George Osborne is in a win-win then?

Up to a point. The problem with a move like this is that it looks, and probably is, motivated by short-term political and public relations considerations. Businesses like to know where they are, particularly when it comes to tax. Unexpected changes make them nervous and they could be reluctant to commit funds for investment as a result. In other words, the move could sully the UK's reputation as a place to do business beyond the banking sector.