Project Merlin - the agreement between the UK Government and some major banks - has started the move towards the reform of important banking issues in the UK. One of the reasons for opting for a non-binding agreement instead of hard law is the assumption that the banks may perceive high probabilities of regulation if they do not comply with the provisions of the agreement and, hence, they will have an incentive to comply with it. However, a regulatory threat would require two elements to be credible and to influence the behaviour of the banks as regards compliance with the agreement.
The first required element is a real commitment and clarity by the regulator, in this case the UK Government, in relation to regulatory targets. This article outlines the agreement, then questions whether it succeeds in properly providing clear rules by setting very general principles and by granting banks discretion in the interpretation of compliance.
The second condition is that the costs associated with the imposition of regulation - for the banks - are lower than the benefits related to being incorporated in the UK. The article considers the possible reaction of the banks to excessive pressure.
The author finally looks at whether legislative initiative or regulation would be a likely future response by the UK Government should the banks not comply with the agreement.
Business Law Review