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Brooklyn Journal of Corporate, Financial & Commercial Law

Abstract

Risks associated with incentive misalignment are liable to seriously jeopardize the effectiveness of bank resolution, when not properly contained. This Article considers the management of misaligned incentives between regulators that are found in a vertical relationship of public governance. Using the EU legal framework of bank resolution as its case study, this Article explores the effectiveness of the quasi-enforcement powers of the Single Resolution Board (SRB) and, where relevant, of the European Banking Authority (EBA) as an incentive realignment legal technique. Two principal difficulties are identified: on the one hand, the problematic interinstitutional dynamic of the SRB and the EBA and, on the other hand, the exposure of these two EU agencies to legal contestation. Although this Article questions the wisdom of enforcement avoidance as an optimal long-term strategy, its purpose is not to defend enforcement as a means for incentive realignment, but rather, to warn of the obstacles lying ahead should the SRB and the EBA decide to go down that path. The key message of this Article is that, if there is a case to be made for EU agency enforcement action as a means for incentive realignment, further medium and long-term reform will be required to (a) improve the effectiveness of the enforcement powers of the EU agencies, (b) ameliorate instances of bank nationalism, which is traditionally a major source of regulatory misalignment in Europe, and (c) strengthen the incentive-based elements that are already embodied into the EU system of financial regulation.