No deal yet on bonuses or bank lending

BBC business editor Robert Peston on lending to small businesses in 2011

Bank chief executives have been summoned to a meeting next week with the Chancellor of the Exchequer and the Business Secretary, to discuss the contentious questions of how much they lend to small businesses and the bonuses they plan to announce early in 2011 and in future years.

The date for the meeting hasn't yet been fixed. But well-placed sources tell me it may happen as late as Wednesday.

The talks may well be seen as the climax of weeks of discussion between the banks and ministers to reach some kind of repair of their uneasy relationship - although it is looking increasingly unlikely that a deal on bonuses and small business finance will be struck before Christmas.

"This is probably going to rumble on into January" said a source. "It would be wrong to expect too much from next week's chat".

That said, the Business Secretary, Vince Cable, is understood to be keeping the pressure on banks to voluntarily cut bonuses and to make new commitments to lend more to smaller companies: he is giving television and newspaper interviews this weekend in which he will say that the option of imposing further taxes on the banks will remain a live one, until the banks are perceived to be showing the kind of pay restraint and providing the amount of credit that the government wishes.

For the Lib Dems, some kind of victory in their long running campaign to force what they would see as more responsible conduct from the banks is hugely important, in the wake of the criticism they have faced for abandoning their manifesto commitment to oppose an increase in university tuition fees.

My very strong sense however is that George Osborne at the Treasury is taking a rather less aggressive approach to the negotiations with banks.

Bankers and officials tell me that no very meaningful agreement is yet in sight on either lending or bonuses, although they accept that it would be damaging for both sides if no pact is agreed.

"The economic recovery will be much weaker unless we are focussed on how to support business and households" said a senior banker. "And it's much harder for us to do that when the government see us as part of the problem rather than as part of the solution".

The total sum of bonuses announced by banks this year will be considerably less than last year, because it has been a poorer year for investment banking, which is where the bulk of bonuses are paid. But the overall bonus pool for London will still be several billion pounds, which will be viewed by many - including many Lib Dems - as too much.

Those who run banks tell me they dare not make binding commitments to pay considerably smaller bonuses now and in future years, because they have no doubt that many of their best profit-generators would defect to banks based in Asia, Switzerland or the US.

Banks also remain at loggerheads with the government and Bank of England over the cause of the long-running decline in lending to small and medium size businesses.

The banks continue to insist that the fundamental problem is a lack of demand, that small businesses don't wish to borrow. In stark contrast, the Bank of England recently reiterated that it believes the problem is that the banks are not supplying enough credit.‬‪

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.