EDITOR'S TAKE: "Either you make these loans, or the bonus tax comes back"

For a small moment, it's worth remembering HBOS.

HBOS made a lot of risky corporate loans. More than subprime, more than structured credit, it was these that brought it down. When Lloyds opened HBOS's corporate loan books it found that a massive 69% of them were outside its own risk appetite.

What was behind this rush of lending? Hubris, stupidity and compensation. Peter Cummings, head of HBOS's corporate business was the only HBOS director able to earn up to 200% of salary as a bonus in 2007 and 2008. In 2007 he earned 2.6m, a lot for a corporate banker.

The HBOS experience therefore suggests incentivising individuals to make loans is not necessarily a good idea.

Why, then, does Project Merlin dictate that banks have to make 190bn of loans to businesses, or else?

Banks are already emphasising that the lending target is conditional on there being sufficient 'high quality demand' existing. However, yesterday George Osborne clearly stated that:

'To help ensure today's agreement is honoured, for the first time the pay of the Chief Executives of each bank, as well as the relevant business area leaders, will be linked to performance against the SME lending targets.'

The Financial Times claims Osborne also dropped a 'dark hint' that the bonus tax could be reintroduced next year if the loans don't happen.

Do we really want British banks to be compelled to make loans by the fear of financial penalties? Probably not. Corporate lending isn't risk free; HBOS clearly illustrated that.