Entry
Multiple Point of
The Forgotten Alternative
 by J ames Chew, Global Head of Regulatory Affairs, HSBC
The Financial Stability Board (“FSB”) has recognized two approaches for making
its Key Attributes of Effective Resolution Regimes for Financial Institutions (the “Key
Attributes”) operational.1 One of these is the Single Point of Entry (“SPOE”) approach
which is the core resolution approach being considered by all of the global systemically
important banks (“G-SIBs”) headquartered in the United States as well as a number
of other international banking groups and is also the approach on which the Federal
Deposit Insurance Corporation (“FDIC”) in the US recently consulted.2 The alternative
is the Multiple Point of Entry (“MPOE”) approach, which is a resolution strategy that
at least three of the world’s non-U.S. G-SIBs are likely to use. Together, the market
capitalization of these three banks is over US$350 billion and they serve almost 200
million customers across the world. However, as these groups represent a minority of
the G-SIBs, their resolution model is less well understood than SPOE.
44
1
See FSB, Recovery and Resolution Planning: Making the Key Attributes Requirements Operational, November 2012 (Consultative Document) at http://www.
financialstabilityboard.org/publications/r_121102.pdf [hereinafter Making the Key Attributes Operational]. See also FSB, Key Attributes of Effective Resolution
Regimes for Financial Institutions, October 2011 at http://www.financialstabilityboard.org/publications/r_111104cc.pdf
2
For a list of G-SIBs as designated by the Financial Stability Board, see http://www.financialstabilityboard.org/publications/r_121031ac.pdf
Banking Perspective Quarter 1 2014
Banking Perspective Quarter 1 2014
45
In its recent consultation on SPOE, the FDIC asked
questions that touched on key elements of the MPOE
model, including geographic ring-fencing of capital and
businesses (such ring-fencing has become an increasing
trend across the industry). In turn, this article seeks to
answers some of the most frequently asked questions about
MPOE: What are the characteristics of an MPOE group?
How does the MPOE approach work in resolution? Why do
some banks and regulators prefer the MPOE model?
What are the characteristics of an
MPOE group?
Management preference, efforts to expand
internationally, and regulatory requirements have all
combined to determine the structure of today’s global
banking groups; and therefore, it is clear that a range of
different approaches to resolution were required to deal
with the variety of legal structures and business models
that exist today. The two approaches outlined by the
Financial Stability Board in its Key Attributes paper were
therefore stylized—at opposite ends of a spectrum for
theoretical purposes—and the definition of MPOE was
naturally broad:
“…the application of resolution powers by two or
more resolution authorities to multiple parts of the group
(ideally simultaneously), including strategies in which the
group is broken up into two or more separate parts. While
the resolution of these parts would be under the direction
of host authorities, the home authority should play a role
in ensuring that the resolution process is coordinated.”1
In reaching an assessment that a group is organized so
that resolution can be effected on an MPOE basis, there
are four key characteristics to be considered.
SUBSIDIARIZATION
Subsidiarization can be a key element of the MPOE
strategy, because it neatly defines the point-of-entry at
which local supervisors and resolution authorities can
intervene, and the legal entity is the corporate vehicle
that is placed into resolution. The MPOE model is,
1
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Making the Key Attributes Operational at page 15.
Banking Perspective Quarter 1 2014
therefore, understandably favored by banks that have
developed their businesses through a network of locally
incorporated banks that are capitalized by their holding
company to meet all local requirements, but which are
then individually responsible for their own funding
requirements and liquidity facilities.
These local banks are typically entities that have
been acquired by their holding company as the holding
company expands its geographic footprint; and, in many
cases, these local banks retain the characteristics of local
retail banks. They are often funded almost entirely by
local retail deposits and local wholesale funding from
domestic markets in local currency. Such banks will be
locally supervised so that the host country determines
the prudential rules under which they operate—often
creating reporting issues for the group as different
regulations are overlaid further up the corporate chain.
The local banks will also be involved fully in the local
deposit guarantee scheme, and any resolution process
would be led locally.
As separately incorporated entities, these banks will
have their own boards of directors, including nonexecutive directors, and a bank-specific governance
process. But this model in no way precludes the
development of a common culture across entities under
common control and approaches to business and risk
can be applied across these subsidiaries within a global
framework. While this requires a degree of coordination
and cooperation, done well, this can produce a very
effective blend of local implementation under global
direction within global standards.
Intra-Group Exposures
To make subsidiarization effective, and to have the
capability of ring-fencing these local operations for
resolution purposes, there need to be strict controls
on intra-group financial interdependencies and
other exposures between group entities. If these were
widespread, this would undermine subsidiarization and
hamper the clean separation and resolution of a troubled
subsidiary, risking contagion throughout the group. As
a result, the FSB guidance on MPOE structures says, “…
exposures between group entities may need to be reduced
and any intra-group funding should be provided at ‘arm’s
length’ and subject to appropriate large exposure limits.”2
This does not mean that there can be no financial links
between members of the same group. All banks have
intra-group arrangements with domestic and international
counterparties to facilitate their business. It is natural that
a bank within a wider group should create financial links
with its affiliates as they will have common standards
on products and customer service and share business
goals and risk appetite. For an MPOE firm, however,
these exposures are necessarily monitored as if the
counterparties were fully at arms’ length with appropriate
documentation and risk management requirements and in
compliance with the relevant large exposures regulations.
Within this framework, the holding company at the head
of the financial group can still operate as a source of strength
and provide capital support for its subsidiaries. The large,
geographically diverse franchise it heads offers considerable
scope for the parent company to raise funds both internally
and externally to provide capital support to an ailing
subsidiary. Dividends can be raised from other subsidiaries,
businesses can be sold to raise cash, and shareholders can
be asked to contribute cash, capital or reduced dividends,
which is perhaps likely for wider, well performing business.
In troubled times, parent companies and their
shareholders will have a clear interest in ensuring that
their subsidiaries remain solvent, because, for example,
they will have made considerable investments in these
businesses and supporting them will offer the best
opportunity to maximize the return on that investment.
In addition, any banking group will be aware of the
possible long-term negative reaction from markets,
customers, staff and other stakeholders if the parent is
seen as not providing support to its subsidiary where it
has the resources to do so.
Operational Resilience
Achieving clarity on financial linkages sets boundaries
on the potential financial contagion that could arise
2
See FSB, Recovery and Resolution Planning for Systemically
Important Financial Institutions: Guidance on Developing
Effective Resolution Strategies, July 2013 at http://www.
financialstabilityboard.org/publications/r_130716b.pdf
within a financial group; it is also critical that during
a stress event, all businesses continue to receive core
services, even if they leave the group or if another group
member fails. Again, the Financial Stability Board is clear
that a credible resolution strategy will require that “…
critical services be provided through structures that are
resilient and adequately protected from failure of different
parts of the group.”3 In the failure of Lehman, it was
operational linkages between subsidiaries that caused
some of the greatest disruption in the early hours and
days of resolution.
“
The MPOE model is…
understandably favored by banks
which have developed their
businesses through a network of
locally incorporated banks…
Continuity of critical services could be addressed at
the regulatory level, where supervisors and prospective
resolution authorities could agree to use their ‘best
endeavors’ to ensure that systems and services remain
in place provided that the banks continue to pay. But
the promises of regulators may not be sufficient to quell
concerns about operational continuity, and many MPOE
firms are focusing on creating separate operational
subsidiaries.
These are companies within the financial group
with the sole function of providing services, including
IT systems, back office processing and other support
services, which are shared across the members of the
group. These services would be provided under contracts
that would survive the resolution of any bank within
3
Making the Key Attributes Operational at page 18.
Banking Perspective Quarter 1 2014
47
“
the group and allow for that bank to leave the group if
that is the consequence of its resolution. Tax rules, as
well as their own operational integrity, will mean that
these operational companies have a degree of financial
separation—they will charge for their services with a
profit margin and hold a cash buffer so there is no danger
of bankruptcy even if some customers and revenues
disappear. The cash buffer will also allow the company
time to adjust its operating model while continuing to
provide services to the remaining banks.
Any loss-absorbing
capacity is not free and countries
need to balance the benefits of
financial stability with the economic
consequences of curtailing credit
creation through regulation.
and under local supervisory rules), as well as have local
internal governance processes covering all areas of the
firm culminating in oversight from the local board with
non-executive representatives, sitting alongside group
executives.
For resolution purposes, they will prepare an
individual resolution plan since the process may vary
from country to country, even if it complies with the
FSB’s Key Attributes. These plans will be approved locally
but they will also form part of the wider group resolution
strategy, to be agreed between the various regulators
and coordinated by the home supervisor through the
Crisis Management Group. This group is a sub-set of the
Supervisory College and will contain the regulators for
all the major banking entities within the group.
How does the MPOE approach work in
resolution?
Having considered the characteristics of MPOE
banks, it is worth rehearsing how an MPOE approach to
resolution works in practice, illustrating why the above
attributes are important to making this model work.
Emerging Issues and Support from the
Group
Provision of Information
To meet regulatory requirements, MPOE firms need
to be able to produce “…legal entity specific information
upon request in respect of their recovery or operational
resolution plans for all legal entities that are systemic
in the home or any host jurisdiction” and prove that
“Management Information Systems should be readily
separable from the rest of the corporate organization so
that they can be used at the local subsidiary or bloc level.”4
This is consistent with the core principle that
resolution shall be conducted at the local level. These
separate banking subsidiaries will have a full set of local
information, and they must inform their local regulators
of their activities and risk exposures (on local GAAP
4
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Making the Key Attributes Operational at page 18.
Banking Perspective Quarter 1 2014
In any banking group, the issues will be at the frontline—where loans are made, risks are taken and losses
incurred. As these emerge, steps will be taken in the
ordinary course of business or under a Recovery Plan
to address the deficiencies. This may mean changes in
the scale or nature of the business undertaken to reduce
costs or capital requirements or additional capital
resources being requested from the group.
At this stage, the wider group is a considerable source
of strength for the ailing subsidiary given a diverse
range of strategies available to find additional capital.
Ultimately, however, there will be limits on the support
that can be provided. Capital cannot be stripped from
any other bank in the group without supervisory
approval, and there will eventually be limits on what the
market is prepared to provide to the wider franchise. Any
final determination not to provide additional support
would be made only after the most searching internal
consideration, given the reputational impact; but at some
point, in extremis, the holding company may be forced to
inform the local bank and its supervisors that it cannot
provide any further cash.
Local Resolution
At this point, the troubled bank subsidiary would be
placed into local resolution where the outcome could
vary considerably depending on the nature of the bank
and the local resolution regime, including its approach to
gone-concern loss absorbing capacity (“GLAC”).
Where the local operations are not domestically
significant, it is likely they could be either wound-up or
transferred within the private sector through a purchaseand-assumption agreement, much as smaller banks are
resolved by the FDIC in the U.S. For larger and more
systemically important banking operations, other steps
will need to be taken. These will critically depend upon
the local resolution regime in place at the start of the
crisis in any country, but they may also be affected by
much wider issues including:
• The nature of the crisis affecting the bank—is it
systemic within that country or idiosyncratic?
• The social and political stance to the banking
system—is public ownership considered feasible and
how should moral hazard be addressed?
• The structure of the financial system—who will suffer
in different resolution scenarios and is that fair, and
what are the safety nets?
• The scale of liquidity support which is available—how
much time will the central bank give for assets to be
realised and will this improve long-term solvency?
These are significant issues that must be considered
when the local resolution regime is established and its
GLAC strategy is put in place. At present, the FSB is
only working on proposals for a GLAC framework for
G-SIBs, but for local banks, we would expect the strategy
which any country adopts to be heavily influenced by the
above questions and fundamental decisions about the
nation’s risk appetite for bail-out as opposed to bail-in.
Any loss-absorbing capacity is not free and countries
need to balance the benefits of financial stability with
the economic consequences of curtailing credit creation
through regulation. As the UK Chancellor observed,
there is a need to avoid “the financial stability of a
graveyard”. Where the ultimate decisions on these issues
are local—as they are for capital support for a locally
incorporated bank—a consolidated metric for GLAC
across an MPOE group may not be an appropriate
measure.
Where bail-in is adopted, control of the bank could
pass outside of the group to another set of shareholders.
This was the outcome when the Cooperative Bank in the
UK was restructured in 2013 with external shareholders
holding 70% of the shares while the original parent
retains a 30% interest. Of course, in a resolution scenario,
the bank may leave the group in other ways, for example
through temporary conservatorship by resolution
authorities or by direct public intervention.
In any circumstances, the bank has to retain its access
to the shared services provided by the group’s operational
subsidiaries, subject to continuing to pay. As discussed
above, the contracts underpinning these services need to
account for both the resolution of the bank, as well as a
continuing situation where it ceased to be a member of
the original group.
Impact on the Remaining Group
The supervisors of other banks within the impacted
group have to be kept up to date with the decisions taken
at a local level through the Crisis Management Groups
and any institution specific Cross-Border Cooperation
Agreements (“COAGs”).
The absence of significant financial linkages in MPOE
groups will act as a natural firewall to avoid negative
spillover effects to other jurisdictions. Inevitably, there
will be questions of confidence for the remaining bank
subsidiaries within the group, but systemic issues
typically arise within jurisdictions and asset classes
rather than idiosyncratically within a banking group.
Where there are no troubles outside the failed subsidiary,
the other banks in the group will remain solvent. Their
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49
liquidity buffers and, ultimately, central bank liquidity
facilities should be sufficient to address increases in retail
customer withdrawals and curtailed wholesale funding.
Ironically, in a globally connected world, ‘bad news’ from
other banks in the same country may have more impact
than problems within the group that arise overseas.
Why might some banks and regulators
prefer the MPOE model?
Given the characteristics outlined above, there are
some banks that naturally favor an MPOE model.
History and business models are key determinants of
how the structure of financial groups has developed.
Those who have grown through acquisition and through
more locally focused delivery of products or services
tend to favor MPOE. For example, the HSBC Group has
two home markets and a further 20 markets that are
priorities for growth in which there is significant local
presence, albeit not necessarily for all customers and
products in all markets.
Critics of this model point to drawbacks such as the
lack of fungibility for capital and funding across the
various entities within the group and note that this
can lead to inefficiencies where excess resources are
trapped within a local entity and cannot be deployed.
But, with experience, these issues can be managed, and
an acceptable return can be delivered to shareholders.
Banks structured on an MPOE model have proved to
be enduring and resilient in recent years. And for these
banks and their regulators, the MPOE model can offer
material advantages:
• Most banks within an MPOE structure operate
predominantly within a single country, even when
serving internationally orientated customers. This
allows for a greater alignment between the corporate
structure and the mandates of supervisors and
resolution authorities on issues such as capital, lossabsorbency, and resolution strategies where they are
locally focused.
• While there will still be coordination amongst
regulators in any resolution scenario, local regulators
have clear and direct control over the local process
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Banking Perspective Quarter 1 2014
without needing to rely on resources or actions
from other countries to be able to implement their
preferred strategies.
• For national regulators and governments,
subsidiarization provides them with a mechanism
to ensure that resources cannot be extracted from
jurisdictions to support a troubled business to the
detriment of local solvency. There is also clarity for
central banks about who will benefit if they provide
liquidity facilities to support that solvent bank if it
suffers contagion effects.
• Ultimately, it enables the group and its shareholders
to limit their financial exposures to particular
jurisdictions. Resolution at the level of the local
subsidiaries (and avoiding pushing losses to the
holding company) limits the group exposure to the
equity investment that has already been made and
any additional investment which those shareholders
voluntarily chose to make or are required by
regulators to make.
• This also reduces the extent to which creditors, such
as debt holders in a consolidating entity that may be
disproportionately from that jurisdiction, will suffer
from a failure in another country. This in turn reduces
the secondary contagion risks from resolution into
this investor community and beyond.
The MPOE model is not suited to all banks, but, I
believe that it is important that there is diversity of
model in the financial system. Systemic risks increase if
all providers of finance are organized in a similar fashion
and rely on the same pools of capital, liquidity and
funding. MPOE clearly requires a particular structure
that many banks do not have, and they would incur
significant costs and operational risks in moving to this
model. However, if implemented in the right group,
and in the right way, it can be an effective approach to
resolution by providing greater certainty on resolution
outcomes. 