Abstract

Abstract We study the formation and resolution of multi-unit banking groups. Banking groups create financing synergies by transferring financing capacity across subsidiaries. Single-point-of-entry (SPOE) resolution imposes a single balance sheet on the banking group. This allows the regulator to shift resources across banking units upon resolution, thus permitting the ex-post efficient continuation of units that are hit by negative liquidity shocks. However, SPOE resolution can also prevent the ex-ante efficient formation of banking groups because outside investors take the ex-post transfers into account. Multiple-point-of-entry (MPOE) resolution separates banking units and maintains limited liability within the group. Separate resolution can commit the regulator to shut down units, which reduces the ex-post required financing capacity and may ease the ex-ante financing constraints. In addition, SPOE resolution may not allow the group to exploit all financing synergies because it may prevent the choice of capital structure that minimizes the costs of incentive provision. Making the choice between SPOE and MPOE resolution bank specific increases efficiency relative to the adoption of a uniform resolution regime for all banks. Resolution improves outcomes relative to friction-less private financial restructuring.