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financing short-term debt

SPOE dominates under supranational regulation. In the benchmark case with a supranational regulator, SPOE resolution dominates MPOE resolution. SPOE resolution allows for a larger provision of liquidity services at the same level of risk and allows the two subsidiaries to capture the benefits from global banking, generating a net social benefit (relative to MPOE resolution) of
\begin{align} \label{eq:propSPOE} \underset{\substack{\text{additional liquidity services}\ \text{from diversification}}}{\underbrace{\gamma \Delta }}+\underset{\substack{\text{ benefits from} \ \text{global banking}}}{\underbrace{2\min [ \widetilde{F}-F,(1-p_{1}+\gamma )(1-\lambda )\overline{p}_{2}V]}}. \end{align}
(2)
It is efficient to structure global banks as multinational holding companies with shared services across jurisdictions, with national banking subsidiaries sharing TLAC issued by the global holding company.

Proposition 2 highlights the appeal of SPOE resolution: if regulators can commit to cooperate in the midst of a crisis, then SPOE dominates MPOE resolution. The reason is twofold. First, the ability to make cross-jurisdictional transfers under SPOE resolution lowers the amount of required loss-absorbing capital. Accordingly, under SPOE, the G-SIB can increase its issuance of safe short-term debt by a total amount of |$\Delta $|⁠, resulting in additional surplus arising from liquidity services of |$\gamma \Delta $|⁠. Second, SPOE resolution allows the G-SIB to fully harness economies of scale or scope that result from global banking, because effective SPOE resolution guarantees that the two subsidiaries remain integrated in the global bank organization. This means, in particular, that subsidiaries can reap the benefits of shared services (such as joint cash management or IT systems) without risk of incurring separation costs or the cost of setting up redundant systems. As shown in Proposition 2, this second channel results in an additional increase in surplus of |$2\min [\widetilde{F}-F,(1-p_{1}+\gamma )(1-\lambda ) \overline{p}_{2}V]$|⁠. Note that this second channel is reinforced by the first: Because benefits from global banking are preserved in resolution, the bank can issue safe short-term debt against future banking activities that, under MPOE, would be lost due to the separation of the bank’s activities. In short, a higher value of liquidity services |$\gamma $| reinforces the benefit from preserving the global bank, as indicated in the second term of Equation