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Metro Bank exit ‘perfect storm’ with capital push

However, under the regulatory status quo—in which global financial institutions are resolved by national regulators—it may be difficult to realize the benefits of a global SPOE resolution. First, whenever expected cross-jurisdictional transfers are sufficiently asymmetric, the national regulator that makes the larger expected transfer has an incentive to opt out of a globally efficient cross-jurisdiction SPOE resolution and to set up a national resolution scheme instead. From an ex ante perspective, the creation of an efficient SPOE resolution regime is therefore feasible only if the expected cross-jurisdictional transfers are sufficiently symmetric.

Second, SPOE resolution may not be implementable ex post, even when agreed upon ex ante. When the cross-jurisdictional transfer required for a successful SPOE resolution is too large, regulators may prefer to ring-fence assets in their own jurisdiction, thereby preventing the required transfers. The planned SPOE resolution breaks down, leading to a disorderly liquidation or a tax-funded bailout. We show that the possibility of such an ex post breakdown of a planned SPOE resolution depends on the risk profile and operational structure of the financial institution at hand. In particular, incentive-compatible SPOE resolution requires operational complementarities across national banking operations, such as those arising from joint cash management or other shared services. The prospect of losing these complementarities incentivizes regulators not to ring-fence assets ex post.