The exercise considers a bank for which the competent authority has approved a resolution plan with a
preferred SoB resolution strategy. That strategy consists of transferring, when resolution is triggered, all
deposits9 to a suitable acquirer. The acquirer will assume those deposits and in exchange receive the failing
bank’s assets as well as, if needed and feasible, cash support from the DIF. The transaction would only be
feasible if the sum of the expected value of transferred assets and the available DIF support exceeds the
volume of assumed deposits. The relation between transferable assets and assumed liabilities would be determined by the
availability in the failing bank’s balance sheet of sufficient loss-absorbing liabilities that would not be
transferred to the acquirer. Those liabilities would be directly written down or remain in the residual entity
that would be wound up after the execution of the SoB transaction. The maximum support the DIF is
allowed to provide is the net cost of paying out covered deposits in a piecemeal liquidation under the
applicable insolvency regime (the financial cap). That financial cap will therefore depend on the ranking of
DIF claims in the insolvency procedures.
The competent authority should determine, given the available DIF support, the lowest possible
level of gone-concern capital that the bank should be required to hold in order to be able to transfer
sufficient assets to the acquirer for it to assume all the failing bank’s deposits.
10 That amount should
depend on the expected value of the assets held by the bank when failing as well as on the composition
of liabilities – ie the ratio between covered and uncovered deposits – as the latter affects the financial cap
for DIF support, depending on the prevailing hierarchy of DIF claims in insolvency.
Note that the concept of gone-concern capital is not identical to MREL. The former would be
composed of those loss-absorbing liabilities that would remain on the balance sheet after the bank is
declared failing or likely to fail. The latter also includes going-concern capital able to absorb losses before
resolution. Within the current two-component framework for MREL determination, MREL for SoB banks
could be approximated by the sum of (going-concern) minimum regulatory capital (the current LAA
component) and the gone-concern capital requirements derived from the exercise (a new RCA amount).
Suppose a failing bank whose assets have an accounting value (net of asset-backed and other preferred
claims)11 of A. Those assets are funded by deposits (D) and gone-concern capital (K).
12 Part of the deposits
are covered (CD) and the rest (ND) are not covered by the DIF. Therefore A = CD + ND + K.
We assume, for simplicity, that all deposits and assets would be transferred to the acquirer under
the SoB transaction. The acquirer will also receive cash support from the DIF with a maximum amount of
MS. When valuing the bank’s assets, the acquirer applies a haircut to their accounting value. The acquirer
will assume the deposits only if the sum of the value of the transferred assets and the support received
from the DIF exceeds the volume of transferred deposits. Thus, the transaction would only be feasible if:
ℎ𝐴𝐴 − 𝐷𝐷 + 𝑀𝑀𝑀𝑀 ≥ 0,
where h is the value preservation proportion of the accounting value of the assets for the acquirer (or
Given a specific amount of deposits (D), an estimate of the franchise value parameter (h), and the
maximum available DIF support (MS), the authority could derive the minimum amount of loss-absorbing liabilities (K) that would need to be available in order to be able to transfer sufficient assets (D+K) to the
Replacing A by its counterparts and rearranging terms permits the required gone-concern capital
to be expressed as:
1 − ℎ
ℎ 𝐷𝐷 − 𝑀𝑀𝑀𝑀
ℎ . (1)
Therefore, quite intuitively, required gone-concern capital would depend positively on the
amount of transferred deposits and negatively on the available DIF support and on the acquirer’s valuation
of the assets.
Maximum DIF support
Following Restoy et al (2020), the financial cap (the maximum net cost for the DIF in liquidation) depends
on the hierarchy of liabilities in the applicable liquidation framework. In particular, it depends on whether
DIF-covered deposits – and, therefore, DIF claims in liquidation – rank senior to non-covered deposits and
thus are super-preferred (SP) or rank pari passu as in a general deposit preference regime (GP). In the SP
case, the DIF would be entitled to receive the proceeds of the liquidation of all assets before all other
unsecured creditors if needed to compensate for paying out covered deposits. In the GP case, the
proceedings of asset liquidation must be shared pro rata between the DIF and holders of non-covered
Denoting by m (𝑚𝑚 < ℎ) the proportion of the assets’ accounting value that would be preserved
in piecemeal liquidation, the net cost of paying out deposits in liquidation under super-preference of
covered deposits (𝑀𝑀𝑀𝑀𝑆𝑆𝑆𝑆) would be:
𝑀𝑀𝑀𝑀𝑆𝑆𝑆𝑆 = max(0, 𝐶𝐶𝐶𝐶 − 𝑚𝑚𝑚𝑚), (2)
since the DIF would only suffer costs if the cash obtained from the liquidation of assets is below the amount
required for paying out covered deposits.
In the GP case, the net cost for the DIF in liquidation (𝑀𝑀𝑀𝑀𝐺𝐺𝐺𝐺) would be
𝑀𝑀𝑀𝑀𝐺𝐺𝐺𝐺 = max(0, 𝐶𝐶𝐶𝐶 − 𝑚𝑚′𝐴𝐴), (3)
where m’ ≡ 𝑚𝑚 𝐶𝐶𝐶𝐶/(𝐶𝐶𝐶𝐶 + 𝑁𝑁𝑁𝑁).
Therefore, as 𝑚𝑚′ ≤ 𝑚𝑚, the financial cap for the DIF would be tighter under SP than under GP as
long as the failing bank holds non-covered deposits.
Since A = D + K, in both regimes the maximum support available correlates negatively with the
amount of gone-concern capital. For a given volume of deposits, losses for the DIF in liquidation (the
financial cap) will be lower the larger the volume of junior liabilities. In other words, by increasing the
required volume of bail-in-able liabilities, the scope for DIF support in SoB transactions would be smaller.
Minimum gone-concern capital
Putting together equations (1), (2) and (3), we can derive expressions for minimum gone-concern capital
under the SP and GP regimes.
Under the SP regime, in the absence of DIF support (𝑀𝑀𝑀𝑀𝑆𝑆𝑆𝑆 = 0 in (2)), the ratio of going-concern
capital to deposits satisfies:
1 − ℎ
If there is DIF support (𝑀𝑀𝑀𝑀𝑆𝑆𝑆𝑆 = 𝐶𝐶𝐶𝐶 − 𝑚𝑚𝑚𝑚 > 0 in (2)) minimum K / D can be expressed as
ℎ − 𝑚𝑚
𝐷𝐷 − 1.
As required gone-concern capital would need to be larger when there is no DIF support, minimum
requirements under the SP regime (𝐾𝐾𝑆𝑆𝑆𝑆) should satisfy:
𝐷𝐷 ≥ min � 1
ℎ − 𝑚𝑚
𝐷𝐷 − 1,
1 − ℎ
ℎ � . (4)
Expression (4) shows that minimum gone-concern capital requirements depend crucially on three
parameters which reflect the valuation of the bank’s assets for the acquirer as well as the size of the
expected DIF support, if any. Those parameters are the franchise value coefficient in SoB (h), the proportion
of covered deposits over total deposits, and the value preservation coefficient in liquidation (m). The higher
the valuation of assets by the acquirer, the less assets required to facilitate the transaction and, therefore,
the lower the amount of loss-absorbing liabilities that could be left behind for liquidation that the bank
needs to hold. In addition, the larger the proportion of non-covered deposits over total deposits, the lower
the support from the DIF as a proportion of transferred liabilities and the larger the need to transfer assets
to the acquirer. That can only be achieved by holding more loss-absorbing liabilities. Finally, the larger the
value preservation in liquidation, the lower the costs for the DIF in liquidation (thus tightening the financial
cap) and, therefore, the higher the need to transfer assets (and therefore the amount of loss-absorbing
Under the GP regime, minimum gone-concern capital requirements could analogously be
𝐷𝐷 ≥ min � 1
ℎ − 𝑚𝑚′
𝐷𝐷 − 1,
1 − ℎ
ℎ � , (5)
where 𝑚𝑚′ = 𝑚𝑚
The difference between 𝐾𝐾𝑆𝑆𝑆𝑆 and 𝐾𝐾𝐺𝐺𝐺𝐺 is just that, under the GP regime, the value preservation coefficient in
liquidation appears weighted by the proportion of covered deposits over total deposits, since the
proceedings from asset sales should be shared by all deposit holders. This makes the costs for the DIF in
liquidation larger and, therefore, increases the support that the DIF can provide for SoB. As a consequence,
in relation to SP, GP reduces the amount of assets that need to be transferred under SoB and therefore,
there is less need for gone-concern capital.
According to (4) and (5), when the ratio of non-covered deposits is low there is no need for goneconcern capital to support the SoB transaction (ie minimum K / D becomes zero or negative). The reason
is that in such a case, the costs for the acquirer of assuming deposits could be largely offset by the DIF
support as its losses for paying out covered deposits in liquidation would be large. In the limit, with zero
non-covered deposits, there would be no need to transfer assets (K = – D and A = 0)) since, in that case,
the DIF would be exposed to a cost for paying out covered deposits in liquidation that would be exactly
equal to the liabilities assumed by the acquirer. In that case, the DIF could fully compensate by itself the
acquirer’s costs of assuming all deposits, thereby making the transaction feasible. In the calibrations below,
whenever (4) and (5) yield a negative value for minimum gone-concern capital we assume K = 0. We then
adjust DIF support (MS) downward accordingly by setting A = D in expressions (2) and (3).