Project Merlin - A banker writes: 'The impact seems unlikely to be positive'

The agreement between the major banks and the UK government is a step forward. There has been a long debate about how to reconcile the demand for more lending with changed economic fundamentals.

Moreover, there is a great deal of pressure on the banking sector to revise its approach to capital provision and a range of arguments go back and forth about how much more should be held in reserve against currently unforeseeable risks.

The banks are lending to SMEs and all of our banking members are very clear that they are open for business. But they operate in an economic environment very different to that of 2007. Money is just more expensive than it was.

There is a tension between the requirement for more lending and the need to be more cautious and to hold more capital against unforeseen contingencies. While the agreement announced today is valuable, we also urge the UK government to look urgently at improving the Enterprise Investment Scheme and any other means by which fiscal and other incentives can encourage small company growth.

The second area of greatest controversy in recent months has been pay, especially bonuses. The proposals in Merlin on pay will arguably make the UK banking sector the most transparent in the world.

However, it remains to be seen what impact that might have on the City's attractiveness as a place to work for these individuals, who pay a lot of tax, but it seems unlikely to be positive.

• Owen Kelly is chief executive of Scottish Financial Enterprise