The BBC News website contains a useful question and answer article on Project Merlin, which was agreed by major UK banks and the Coalition Government in February 2011.
The agreement arises from concern about the behaviour of major banks in the aftermath of the Credit Crunch of 2008/9. The crisis in banking resulted from reckless lending and investment by the banks. This recklessness, which was encouraged by bonuses awarded to investment bankers, endangered the very existence of the banks. Some only survived through a Government purchase of shares in the banks concerned (RBS, Lloyds-HBOS and Northern Rock) whilst others were acquired by rivals as an alternative to bank failure (acquisition of Alliance and Leicester and Bradford and Bingley by Santander)
After a long period of reckless lending, banks then moved to a period of ultra- cautiousness. The decline in the volume of lending created problems for UK businesses and contributed to some business failures. At the same time, banks that were propped up by the Government resumed paying bonuses to staff. At a time of austerity this was widely resented by the general public.
Project Merlin was designed to encourage banks to increase their lending and at the same time sought to cap bank bonuses. For students of business, the Project Merlin story illustrates a number of issues:
1. The importance of bank lending in lubricating the financial system and the business world.
2. The role of the Government in a market economy.
3. The danger of linking bonuses to short term performance.
4. The importance of offering competitive rewards to staff.
