Author(s): Albert Banal-Estanol, Julian Kolm, Gyöngyi Lóránth
We study how bank resolution regimes affect investment. Banking groups create financing synergies by transferring excess financing capacity across units and lowering bankers’ agency rents. Single-point-of-entry (SPOE) resolution mutualizes losses, which permits ex-post efficient continuation of weaker units following negative shocks, but can prevent optimal investment ex-ante. Multiple-point-of-entry (MPOE) resolution does not mutualize losses, which forces weaker units to shut down following negative shocks, but can foster ex-ante investment. MPOE resolution is more efficient when stronger units’ financial excess capacity is small, weak units’ financing deficits are large, and units’ synergies are low or units face different risks.
Link: Financing and Resolving Banking Groups