Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.6.1:4.6.1 SPE or MPE strategy

Public funding of failing banks in the European Union (LBF vol. 19) 2020/4.6.1

4.6.1 SPE or MPE strategy

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A group resolution may entail (a) the taking of a resolution action at the level of the parent company or the bank subject to consolidated supervision, or (b) the coordination of the application of resolution tools and the exercise of resolution powers by resolution authorities in relation to group companies that meet the resolution conditions.1

If the resolution action is taken at the level of only one entity, this is considered a single point of entry (SPE) resolution. Under the SPE strategy, usually the parent is resolved, whereas other group entities are not put in resolution, but upstream their losses to the parent. Hence, the group itself is not disrupted. In order for an SPE strategy to be effective, there should be a parent company that can raise bail-inable debt. An SPE strategy can be convenient for a group, where intra-group operations are intensively inter-linked and integrated.

Resolution authorities may take a resolution action in relation to a parent company when the conditions for resolution are met with regard to both the parent company and with regard to one or more subsidiaries which are institutions, or where the subsidiary is not established in the EU, the third-country authority has determined that it meets the conditions for resolution under the law of that third country.2 In the situation that the parent company does not itself meet the conditions for resolution, the resolution authorities may still take resolution action with regard to this parent company when one or more of the subsidiaries which are institutions comply with the conditions for resolution and their assets and liabilities are such that their failure threatens an institution or the group as a whole or the insolvency law of the Member State requires that groups are treated as a whole and resolution action with regard to the parent company is necessary for the resolution of these subsidiaries which are institutions or for the resolution of the group as a whole.3

Banking groups can also apply the multiple point of entry (MPE) strategy. In case of an MPE strategy, the local entities will all be separately resolved by their local resolution authorities. This means that the resolution tools are applied by the different resolution authorities at the level of the local entities that can be resolved. In that case, the group resolution entails the coordination between these resolution authorities. An MPE strategy can be effective, if a banking group is organized into well-defined regional and functional subgroups. In addition common services, such as IT will need to be provided by stand-alone entities that can survive the break-up of an MPE group.4

The resolution plan of a banking group has to set out which strategy is applied to a banking group. In order to ensure that a strategy can be applied effectively, it may in some cases be necessary to restructure the banking group. If the MPE strategy is applied to a banking group in scope of the SRMR and the SRB is the designated resolution authority, coordination will be less of an issue, although the implementation of the resolution scheme adopted by the SRB will be done by the local resolution authorities. As a result, coordination between these authorities may still be necessary.

BRRD II and SRMR II provide for the introduction of the term ‘resolution entity’ and ‘resolution group’ in order to improve the effective application of the resolution strategy. See section 2.5.3.1 for the definition of ‘resolution entity’ and ‘resolution group’. In case of an SPE strategy, it will be usually the parent company that will be qualified as the resolution entity, while in case of an MPE strategy the operating banking subsidiaries will be the resolution entities. According to BRRD II and SRMR II, the resolution entities and resolution groups will have to be clearly identified in the resolution plans.

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