Senior Bank of Ireland management will have some explaining to do over the next couple of days if they are to restore the bank's credibility in the eyes of its shareholders and staff.

Shareholders can collectively heave a sigh of relief that the deal is off. Their shares are now set to move back towards levels they are more used to and the institutions can take some satisfaction in playing their part in - in their view - saving the day.

The demise of the merger plan will also be welcomed by Bank of Ireland staff - in particular its middle management - who were less than heartened to learn that A & L's chief executive, Mr Peter White was to become their new boss.

But in the longer term the fallout will prove more challenging.

The initial euphoria which greeted news of the merger between the two financial institutions reflected the market's desire for Bank of Ireland to diversify its earnings beyond the Republic. Together A & L and Bank of Ireland would have merged into a £13.5 billion (€17.6 billion) company with more than 500 branches. It would have become the fifth biggest mortgage bank and the eighth biggest financial institution in Britain.

Strategically, the move should have made sense for Bank of Ireland. It already has huge operations in the British market through its Bristol & West subsidiary. It has a long tradition of doing business in Britain and is clearly comfortable with the prospect of expansion there.

Down the line, the bank would have been hoping to further increase its operations in Britain and eventually be in a position to consider becoming part of a pan-European banking alliance. In a world where bigger is seen to be better, the A & L deal theoretically offered a good launching pad for Bank of Ireland to realise its ambitions. It was a defensive move offering the bank some degree of control of its ultimate destiny rather than waiting for a major European rival to launch a take-over bid for it.

The problems seemed to occur once it became clear that Bank of Ireland - the larger of the two organisations - had agreed to cede the chief executive's position to A & L's chief, Mr White. His lack of experience in running an operation as diverse as Bank of Ireland became the major concern, although his reputation for cost-cutting was seen as a strength. Under the terms of the deal, the bank accepted that the board of the enlarged entity would be equally made up of directors from both companies.

The investment institutions were astonished. Some fund managers began dumping the shares in disillusionment and the number of commentators questioning whether this was the right deal for Bank of Ireland began to swell. Based on details in the public domain, the bank seemed to be settling for a lot less than it should. At this point, the plan came under pressure. The bank, which by now was prohibited from commenting on the deal because of regulatory rules, was already fighting a rearguard action after the story was leaked, apparently by A & L. And with the stock market now firmly against it, Mr Maurice Keane and his senior advisers, were forced to reassess what they were doing. As each day passed, the chances of securing 75 per cent shareholder-approval were growing increasingly slim.

It is clear that Mr Keane's management team sought to renego tiate the original terms of the deal in the light of the adverse reaction. A cynical analyst might suggest this was their way of getting out of the talks knowing that to renege on what had been agreed would scupper the deal. Mr Keane insists that all of the details had not been finally agreed.

Mr Keane, who was one of the main drivers of this deal, is sorely disappointed at yesterday's outcome. The bank, which has done little to offend the investment community over the past 10 years, knows that it will have to work hard to repair the damage caused by this debacle.

In its statement last night, it was quick to stress that while the A & L merger was now firmly off the agenda, it is still pursuing a range of further options.

Mr Keane's credibility to deliver the right deal for Bank of Ireland is now damaged although the investment community has been very content to let him lead the bank until now.

The merger talks have also effectively put the bank into play as a potential acquisition target. Bank management may now be forced to fend off a take-over bid from an unwelcome quarter sooner than it otherwise might have had to.