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Bank structures

The main goal of our analysis is to isolate the key trade-offs involved in choosing between different resolution regimes for global banks. To do this in a transparent fashion, our model is intentionally simple and a number of model features are simply represented in reduced form. The model could be extended to explicitly microfound these ingredients, but, doing so, would result in a more complicated and much less transparent framework.

Of course, the simplicity of our model necessarily implies that some important aspects of bank resolution are not addressed in our framework. For example, our model assumes that it is always feasible to set aside sufficient loss-absorbing capacity to recapitalize a troubled subsidiary. An interesting extension of our analysis would consider what happens when this is not the case. Moreover, the two-period structure of our model does not deal with some important dynamic issues, such as how banks rebuild loss-absorbing capital over time after a resolution. It also precludes a quantitative analysis of the required amount of loss-absorbing capital. These are certainly interesting issues for future research.