Cross-Border Resolution of Global Banks

SAFE Working Paper No. 88

31 Pages Posted: 3 Mar 2015 Last revised: 15 Jul 2015

See all articles by Ester Faia

Ester Faia

Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Beatrice Weder di Mauro

Graduate Institute Geneva, IHEID

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2015

Abstract

Most recent regulations establish that resolution of global banking groups shall be done according to bail-in procedures and following a Single Point of Entry (SPE) as opposed to a Multiple Point of Entry (MPE) approach. The latter requires parent holding of global groups to put up front the equity capital needed to absorb losses possibly emerging in foreign subsidiaries-branches. No model rationalized so far such resolution regime. We build a model of optimal design of resolution regimes and compare three regimes: SPE with cooperative authorities, SPE with non-cooperative authorities and MPE (ring-fencing). We find that the costs for bondholders of bail-inable instruments is generally higher under noncooperative regimes and ring-fencing. We also find that in those cases banks have ex ante incentives to reduce their exposure in foreign assets. We also examine recent case studies that help us rationalize the model results.

Keywords: single point of entry, multiple point of entry, strategic interaction of regulators, financial spillover, financial retrenchment

JEL Classification: G18, F3

Suggested Citation

Faia, Ester and Weder di Mauro, Beatrice, Cross-Border Resolution of Global Banks (March 1, 2015). SAFE Working Paper No. 88, Available at SSRN: https://ssrn.com/abstract=2572882 or http://dx.doi.org/10.2139/ssrn.2572882

Ester Faia (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Beatrice Weder di Mauro

Graduate Institute Geneva, IHEID ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland
1211 (Fax)

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