Call Us: US - +1 845 478 5244 | UK - +44 20 7193 7850 | AUS - +61 2 8005 4826

the community and finance of a green future

The global bank

A multinational financial institution operates two subsidiaries, each located in a different jurisdiction, |$i=1,2$|⁠, say, the United States and the United Kingdom.2 Each operating subsidiary runs its own stylized banking operation, which we model as follows. At date |$0$|⁠, each subsidiary raises a fixed amount |$F$|⁠, which it invests in the provision of banking services. This investment is funded through a combination of short-term debt with face value |$R_{1}$| due at date |$1$| (e.g., demand deposits, wholesale funding, certificates of deposit, short-term commercial paper), long-term subordinated debt with face value |$R_{LT}$| due at date |$2$|⁠, and an outside equity stake |$\alpha _{0}$| that is issued at date |$0$|⁠. We assume that outside equity and long-term subordinated debt are issued by a holding company that owns the equity of the operating subsidiaries, as illustrated . Under this arrangement, operating subsidiary losses are automatically passed up to the holding company and absorbed by the holders of the TLAC securities (equity and long-term) debt issued by the holding company. Issuing loss-absorbing securities at the holding company level implies that these securities are structurally subordinated to the short-term debt claims that are issued by the operating subsidiaries. During a resolution, when time is of the essence, it is then straightforward to determine which claims will absorb losses, allowing for a speedy resolution.3 Moreover, issuing subordinated claims at the holding company level potentially allows for the sharing across jurisdictions of the loss-absorbing capacity provided by these securities.