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Deutsche Bank successful manoeuvre with reverse yankees

MPOE and SPOE resolution The figure illustrates multiple-point-of-entry (MPOE) and single-point-of-entry (SPOE) resolution. Under MPOE (left panel), loss-absorbing capital, in the form of outside equity and long-term debt, is separately issued by national holding companies in each jurisdiction. In resolution the global bank is split up, and national regulators perform separate resolutions, drawing on the loss-absorbing capital available in each jurisdiction. Consequently, loss-absorbing capital is not shared, and no cross-jurisdictional transfers occur during resolution. Under SPOE (right panel), loss-absorbing capital is issued by a global holding company and is therefore shared across jurisdictions. Because the bank is resolved as a whole, in contrast to MPOE, SPOE allows for cross-jurisdictional transfers during resolution.

MPOE and SPOE resolution The figure illustrates multiple-point-of-entry (MPOE) and single-point-of-entry (SPOE) resolution. Under MPOE (left panel), loss-absorbing capital, in the form of outside equity and long-term debt, is separately issued by national holding companies in each jurisdiction. In resolution the global bank is split up, and national regulators perform separate resolutions, drawing on the loss-absorbing capital available in each jurisdiction. Consequently, loss-absorbing capital is not shared, and no cross-jurisdictional transfers occur during resolution. Under SPOE (right panel), loss-absorbing capital is issued by a global holding company and is therefore shared across jurisdictions. Because the bank is resolved as a whole, in contrast to MPOE, SPOE allows for cross-jurisdictional transfers during resolution.

The contribution of our paper is to characterize the main trade-offs between MPOE and SPOE resolution in the context of a simple model of global banks and national regulators. We first show that bank resolution that is exclusively conducted through an intervention on the liability side—by imposing losses on equity or writing down debt issued by the financial institution’s holding company—has to go hand in hand with a regulatory requirement for holding companies to issue a sufficient amount of equity or long-term debt so as to guarantee sufficient loss-absorbing capacity. In our model, asymmetric information about long-term cash flows makes equity and long-term debt expensive relative to short-term debt. Therefore, absent a requirement to issue long-term loss-absorbing securities, financial institutions may choose to rely excessively on short-term debt as a source of funding. Because runnable short-term debt cannot credibly be written down, an orderly resolution then becomes impossible. Like in the fall of 2008, this would leave a disorderly liquidation via a bank run or a tax-funded bailout as the only remaining options.