DP11171 Cross-Border Resolution of Global Banks: Bail in under Single Point of Entry versus Multiple Points of Entry
The design of resolution regimes for global groups has been the central theme since the global financial crisis. No model rationalized the optimal design of bail-in regimes and their welfare consequences. We do so in a model with strategically optimizing authorities and banks. We model three regimes: cooperative-SPE (Single Point of Entry), uncooperative-SPE and MPE (Multiple Points of Entry). Welfare losses in each regime depend on the degree of banks’ liabilities home bias. SPE cooperative generally minimizes losses since authorities internalize cross-country spillovers, unless groups are highly decentralized. High capital requirements by acting as discipline devise reduce losses and blur the difference between regimes. SPE has however unintended consequences: under cooperation it increases financial re-trenchment in previously segmented markets (by the same token it stimulates integration in well integrated markets), under non-cooperation subsidiarization emerges as an endogenous outcome.