DP16192 Financing and Resolving Banking Groups

Author(s): Albert Banal-Estanol, Julian Kolm, Gyöngyi Lóránth
Publication Date: May 2021
Keyword(s): Complex banking groups, Resolution regimes, Restructuring
JEL(s): F23, G21, G28, L51
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16192

We study how bank resolution regimes affect investment. Banking groups create financing synergies by transferring excess financing capacity across units and lowering bankers' agency rents. Single-point-of-entry (SPOE) resolution mutualizes losses, which permits ex-post efficient continuation of weaker units following negative shocks, but can prevent optimal investment ex-ante. Multiple-point-of-entry (MPOE) resolution does not mutualize losses, which forces weaker units to shut down following negative shocks, but can foster ex-ante investment. MPOE resolution is more efficient when stronger units' financial excess capacity is small, weak units' financing deficits are large, and units' synergies are low or units face different risks.