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judicious prepositioning

MPOE involves a separate resolution in each jurisdiction. During this process, the global bank is broken up.16 In addition, TLAC for each subsidiary is issued by the respective national holding company and is not shared across jurisdictions. Accordingly, TLAC in each jurisdiction must be set such that the operating subsidiary can meet its short-term liabilities |$R_{1}$| even when it generates only |$C_{1}^{L}$| at date |$1$| and the G-SIB is split up during resolution.

To guarantee a successful resolution, the amount of short-term debt issued by the operating subsidiary must be limited to an amount that can be safely serviced or rolled over during a resolution. The maximum amount of short-term debt that can be rolled over at date |$1$| (with the resolution authority imposing losses on long-term claims if necessary) depends on whether the G-SIB has redundant systems in place. Without redundant systems, splitting up the bank at date |$1$| leads to a reduction in expected franchise value to |$\lambda \overline{p}_{2}V$|⁠, meaning that the maximum amount of safe short-term debt that can be issued is |$C_{1}^{L}+\lambda \overline{p}_{2}V$|⁠. In the presence of redundant systems, the expected franchise value is unaffected by the organizational split resulting from MPOE resolution, and the maximum safe short-term debt is |$C_{1}^{L}+\overline{p}_{2}V$|⁠. It is efficient to set up redundant systems only if the benefits outweigh the additional ex ante investment |$\widetilde{F}-F$|⁠. Such redundancy offers two benefits: (1) increased short-term debt issuance |$\gamma (1-\lambda )\overline{p}_{2}V$| and (2) no expected separation costs from MPOE resolution |$(1-p_{1})(1-\lambda )\overline{p}_{2}V$|⁠.