Resolution Design and Investment in Banking Groups

• Authors: Albert Banal-Estañol, Gyöngyi Lóránth and David Pothier
• Journal of Financial and Quantitative Analysis.June 2026

We study how resolution regimes affect investment in banking groups with subsidiaries of varying financial strength. Centralized regimes that preserve the group’s structure enable ex post support for weaker units but may constrain ex ante investment. Decentralized regimes that resolve units separately may enhance ex ante investment but limit risk-sharing ex post. The relative efficiency of each approach depends on the group’s risk profile and profitability. Allowing both regimes to coexist improves efficiency relative to imposing a uniform regime across all groups. However, a decentralized regime may not be credible if the regulator cannot commit to limit ex post risk-sharing.