In our view, large, complex European banking groups are no longer too big to be allowed to fail. The legal toolkit offered by enhanced resolution frameworks and years of work by the banks themselves to improve resolvability mean that if one of them fails, a bail-in-led resolution could plausibly restore it to viability. The Bank of England's recent resolvability assessment for major U.K. banks, the Single Resolution Board's resolvability heatmap for eurozone banks, and FINMA's resolvability assessment of the major Swiss banks appear to confirm our view.

Amid the resolution planning, banks and resolution authorities face a key choice--whether to plan to keep a cross-border banking group substantially intact if it fails, or rather allow it to fragment and fall apart along national lines. The first strategy envisages taking the resolution action, notably the bail-in of certain creditors, at a single point of entry (SPE)--normally the ultimate holding company. Under the second strategy, there are multiple points of entry (MPE)--one for each resolution subgroup (see chart 1).

Chart 1

Most major banking groups domiciled in Europe, and all those domiciled in the U.S. and Canada, lend themselves to an SPE strategy. But a few European groups are lined up with an MPE strategy. These are in effect groups that operate as a cohesive whole, but have loose operational and financial bonds across them, and so are more easily separated into pieces. The choice of MPE reflects an accommodation between each banking group and its regulators. In general, these groups have substantial cross-border presences, and they tend to operate those businesses through subsidiaries rather than branches of the parent bank. In these cases, an MPE strategy can be easier and cheaper for the group to deliver than SPE. The choice can also reflect that some host regulators, those overseeing overseas subsidiaries that are systemically important in their own market, have a strong preference to place the least possible reliance on actions and preparations undertaken at the parent level.

Much of S&P Global Ratings' fundamental bank analysis is agnostic as to whether a group is earmarked for SPE or MPE resolution. However, the MPE groups pose particular analytical challenges in some areas. In this report, we highlight some of those challenges and outline our ratings approach for both resolution strategies. Through the lens of our additional-loss absorbing capacity (ALAC) analysis, 51 rated European banking groups from 15 countries currently benefit from rating uplift thanks to a supportive resolution strategy and substantial ALAC buffers that would protect senior preferred obligations in the unlikely event of non-viability of the bank.

Different Attributes For Different Approaches

At first sight, it's not always obvious whether a cross-border banking group would be lined up for SPE or MPE resolution. Common characteristics of MPE groups are that they predominantly operate their international presences through subsidiaries rather than branches, and those subsidiaries are self-funded, have minimal intragroup exposures, and are operationally self-supporting. Nevertheless, like subsidiaries in SPE groups, most tend to share a common brand with the rest of the group, be closely integrated into group strategy and risk management, and operate substantially identical technologies as their affiliates. Many international groups would fit this description, so why are only a small fraction of them designated as MPE?

The decision over which approach to take largely reflects management preference but requires approval from the resolution authority, which in some countries is the central bank. SPE resolution keeps the group intact (in the initial recapitalization phase at least), which retains franchise value and efficiencies that come with branch-led presences that maximize funding and capital fungibility, and shared operations. For groups like this, planning for MPE would require some duplication of capabilities and related inefficiency on a going-concern basis to ensure that the group can fragment when it becomes nonviable. However, this cohesiveness comes at a cost--carrying enough bail-in capacity to substantially recapitalize the entire banking group. Furthermore, since SPE resolution is led by the home regulator of the ultimate parent, it requires substantial trust and coordination among national resolution authorities, particularly where subsidiaries are systemically important in their own market. In this respect, resolution colleges for each cross-border banking group provide a key forum for information-sharing and coordination among their key regulators, but the risk remains that cohesion would break down in stress. Still, and despite SPE resolution remaining substantially untested in practice, this construct is an attractive proposition for most banks and their regulators.

On the contrary, MPE resolution is best suited to groups that comprise self-sufficient, sizable subsidiaries that already established a meaningful debt market presence. This means that they have lower barriers to building their own bail-in capacity and otherwise organizing themselves in a way that is consistent with the resolution plan--that is, they will become resolvable relatively quickly. MPE is also attractive to groups that have substantial presences in jurisdictions that require no bail-in or recapitalization capacity. This provides a saving in terms of the total bail-in capacity that the group must build and maintain. Finally, regulators are the ultimate arbiter, and we see a notable reluctance among some host regulators to accept SPE strategies where local systemic banks are substantially foreign-owned.

Based on these premises, it is unsurprising that groups like Santander and BBVA, which have large self-sufficient subsidiaries in Latin America, Europe, and the U.S., are designated as MPE. This is also the case for pan-European groups like Erste, NLB, and RBI, with substantial subsidiarized presences across Central and Eastern Europe (see table 1). And then there are the nuanced cases: groups like Commerzbank that might lend themselves to SPE but are MPE, groups like Société Générale, UniCredit, OTP, Sabadell, and KBC that could lend themselves to MPE but are SPE, and HSBC, which is MPE but operates more of a hybrid strategy that we treat analytically as SPE (see below).

Table 1

Described below are five topics that are pertinent to our analysis of MPE groups. In the Annex, we outline how we analyze the MPE banking groups mentioned above.

Analytical Considerations

1. Constructing the group SACP

For all banking groups, assessing the creditworthiness of the overall group is central to our analysis. We describe the intrinsic creditworthiness of groups (before considering ALAC and other forms of extraordinary external support) in the group stand-alone credit profile (SACP). This analysis is informed by ratios based on consolidated financial statements, as if the group was a single entity. However, a qualitative overlay is always important--no banking group is a seamless whole, and every group has some imperfect fungibility of resources, and some areas of relative strength and weakness.

In this respect, MPE and SPE groups may pose different analytical questions. A group of self-sufficient and strongly regulated subsidiaries might suggest a limited need to move spare resources around the group, but also limited capacity to do so. Trapped capital and liquidity may mean that consolidated ratios look too rosy. Branch-centric, more lightly-subsidiarized SPE groups have less need to hold significant pools of capital beyond the main bank operating company, and are generally better able to mobilize parental funding strength and/or excess liquidity around the group.

2. Approaching ALAC support

When it comes to resolution and resolvability, our analytical approach tends to follow the regulatory one. In other words, when regulators designate a group as SPE or MPE, we tend to take the same analytical approach when considering the potential for group or ALAC support uplift. However, there are two examples when we might not do so:

Groups with hybrid strategies.   HSBC is an unusual banking group in terms of its size, global reach, and heavily subsidiarized operating model. From a regulatory perspective, it developed an MPE-centric structure, creating regional resolution subgroups that are self-sufficient from an operational perspective and substantially also from a funding perspective. In a groupwide stress, this gives regulators the option to step in at subsidiary level, and also for HSBC group management to execute a break-up. However, unlike the other MPE groups, HSBC funds these subgroups' bail-in buffers from the group holding company, HSBC Holdings PLC, rather than ask them to issue directly into the market. In this respect, therefore, it looks like an SPE group from a total loss-absorbing capacity (TLAC) funding perspective as even after a debt-to-equity conversion of the internal bail-in capacity, it will still own those subsidiaries. Analytically, we treat HSBC as SPE.

Groups in transition.   While regulators' designation of a banking group as SPE or MPE tends to mirror the way that it has been managed previously, this is not always true. For example, for Erste group, now designated as MPE, its subsidiaries have been substantially self-sufficient operationally but relied on the parent to buy their junior instruments. It's only very recently that key subsidiaries like Ceska sporitelna in the Czech Republic have started to issue bail-in buffer debt instruments into the external market. Reflecting this, until recently we took an SPE analytical approach to Erste, but we have now moved to an MPE approach (see Ceska Outlook Revised To Positive On Effective Resolution Strategy And Loss-Absorption Buffers; Affirmed At 'A/A-1', published Sept. 29, 2021). By contrast, for UniCredit group, we have switched from an MPE to an SPE analytical approach. This followed confirmation from the group that it would persist with an SPE resolution strategy and after its sizable German and Austrian subsidiaries started to depend materially on bail-in capacity downstreamed from the parent as internal MREL, while former (legacy) instruments will mature gradually over the coming years without replacement (see Rating Actions On UniCredit’s German and Austrian Banks On Insulation From Parent After Review Of Resolution Approach, published Aug. 10, 2022).

Our analytical approach acknowledges the individual features of each group but tends to take a "follow the money" route--if the parent funds a subsidiary's bail-in buffers, we lean toward SPE; if they are funded by the subsidiary, we lean toward MPE.

3. Group status and the effective insulation of subsidiaries/subgroups

Our Group Rating Methodology provides a framework to reflect the potential benefits to subsidiaries of being part of broader, stronger groups, and also potential disadvantages if the group is weaker than they are. Generally, subsidiaries of rated banking groups receive significant uplift under the group status assessment to reflect the potential for extraordinary group support, most obviously from a capital or funding perspective. At the most favorable end, and unless there is some other limitation, we equalize ratings on "core" subsidiaries with the main group operating company to reflect our view that the parent would provide support under any foreseeable circumstances, if needed. By contrast, we rarely rate strong subsidiaries above the GCP since weaker parents often have significant scope to negatively influence their subsidiaries, whether through the extraction of capital, operational dependencies, or franchise. However, we may do so if we see the subsidiary as "insulated" or otherwise somehow ringfenced (refer to paragraphs 65-70 in our Group Rating Methodology).

In the context of SPE and MPE groups, we see some differences here given the severability and operational and financial self-sufficiency of MPE subsidiaries. These features make them potentially more salable than subsidiaries in SPE groups, but also potentially more resilient to parental distress and default. From a group status perspective, the idiosyncratic features of each group remain very relevant, but this divestability leads us to take a generally circumspect view on whether to assign "core" group status to subsidiaries that are not part of the parent's resolution subgroup. For example, we currently assign only "highly strategic" status, at best, to the rated subsidiaries of Santander, BBVA, and Erste that sit outside the parental resolution subgroup, even though many of them are strong performers and strategically relevant in a group context (see How We're Refining Our View Of The Strategic Importance Of Certain Spanish Bank Subsidiaries, published Aug. 2, 2019).

However, that severability and self-sufficiency can also support a view that these subsidiaries could be relatively well insulated from potential negative influence coming from the rest of the group, particularly if we also see strong regulatory oversight. It's still rare that we see these subsidiaries as intrinsically stronger than their parent group, but when they are, we sometimes rate them above the lead operating company of that group. For example, we have previously rated Santander UK PLC above parent Banco Santander S.A. based not on our view of group support, but rather the stand-alone merits of the U.K. subgroup alone, including its bail-in buffer.

UniCredit's German and Austrian subsidiaries are also rated above the parent, but for a different reason. We see these subsidiaries as relatively stronger than the parent, UniCredit SpA. As noted above, from an analytical perspective we see the group as now operating an effective SPE strategy instead of a de facto MPE strategy. SPE means that the subsidiaries established funding linkages with the parent, and there is no barrier to the parent deepening operational linkages with its subsidiaries as long as operational continuity is ensured in resolution. As a result, it is rare that we would consider rating stronger subsidiaries above the parent in a SPE group. However, we see unusual features in this case--not least limited business linkages with the parent, no day-to-day funding reliance, and the maintenance of higher capital and subordinated bail-in buffers. These support our assessment that these subsidiaries would likely avoid default even if the parent was subject to a resolution process.

4. Source of external support and notching point

Whether subsidiaries are part of SPE or MPE groups, we follow the same basic steps when we consider the extent to which our ratings on them should benefit from the prospect of extraordinary support, whether from their parent, or possibly from some other external source (see diagram excerpt in Annex).

However, for groups that benefit from ALAC support, there are subtle differences between SPE and MPE in how we reflect this in our ratings on the subsidiary.

• When we expect the subsidiaries' senior preferred creditors would not benefit from a resolution action at the parent, we determine potential group support uplift with reference to the group SACP. This applies to entities in SPE and MPE groups.
• When we expect the subsidiary's senior creditors would benefit from a resolution action financed by a bail-in buffer that was issued into the wholesale market by the bank parent, we see this internalized as group support and determine the scope for potential support uplift with reference to the ALAC-supported GCP. This applies to SPE groups and entities in the parental resolution subgroup for MPE groups.
• When we expect the subsidiary's senior creditors would benefit from a resolution action financed by a bail-in buffer that the subsidiary itself issued, whether into the wholesale market or to a nonbank parent, we could consider this as a source of potential ALAC uplift, which could lead us to rate the subsidiary above its SACP.

In practical terms, this can mean that different entities in each type of group benefit differently--in scale and source--from extraordinary support uplift (see chart 2).

Chart 2

5. Calculating ALAC for MPE subgroups and the parental subgroup

For SPE banking groups, we calculate the group's ALAC buffer based on consolidated data for ALAC-eligible instruments and S&P Global Ratings risk-weighted assets (RWAs). For MPE banking groups, we treat each resolution subgroup separately when assessing ALAC uplift potential--an MPE group comprises, in effect, a series of SPE subgroups.

For resolution subgroups and subsidiaries that are outside the parental subgroup, the calculation of ALAC is relatively straightforward as long as (i) there are sufficient disclosures on the buffer instruments and (ii) we have calculated a risk-adjusted capital (RAC) ratio (and so S&P Global RWAs) for the subsidiary or subgroup.

When we calculate ALAC for the parental subgroup, company disclosures allow us to calculate the size of the subordinated buffer and we sometimes use estimates to determine the S&P Global RWAs based on consolidated group data. For example, for Commerzbank, we calculate a RAC ratio and so S&P Global RWAs for the consolidated group. We then estimate that about 10% of group RWAs relate to its Polish subsidiary, mBank, which sits beyond the parent subgroup perimeter. We therefore take 90% of group S&P Global RWAs for the Commerzbank ALAC calculation (see chart 3).

Chart 3

We also undertake some deeper analysis on how the parent balance sheet accounts for its investments in subsidiaries, and how the parent funded them.

As the Single Resolution Board (SRB) recognizes in its MREL policy, MPE parental subgroups could merit a MREL add-on for exposures to other resolution groups, notably the parent's investments in subsidiaries outside its own resolution perimeter. The SRB's methodology assumes that if there is a simultaneous resolution event of all the resolution subgroups, the value of these investments goes to zero, but also that there would be no need for the parent to recapitalize them. However, if the parent has left excess capital in the subsidiary, then the SRB methodology acknowledges that it would likely have an asset with some residual value, particularly if the investment is on the parent's balance sheet at book, rather than market, value.

Unlike MREL, which considers a bank's needed capacity for loss absorption and recapitalization, ALAC focuses purely on recapitalization. We consider a bank's loss-absorption capacity provided by going-concern capital in our RAC analysis and reflect it in our assessment of the stand-alone credit profile (SACP). Aligned with the SRB's thinking, our calculation of S&P RWAs for a parental resolution group's ALAC includes only the external exposures, not the intragroup investments (as they would not need to be recapitalized).

However, we also see another related analytical consideration. Parents that funded their investments in subsidiaries with equity will show greater resilience than those who funded these long-term assets substantially with debt--that is, those that have high double leverage. Like the SRB, we remain mindful not to penalize parents that overcapitalize their subsidiaries. However, we do consider whether to adjust up--that is, penalize--the ALAC thresholds for parents that have high double leverage in respect of investments in subsidiaries outside their resolution subgroup. We currently only make this adjustment for Santander, lifting the first-notch threshold from the standard 300 basis points (bps) to 500bps.

Both Strategies Still Need To Be Tested

Since the global financial crisis of 2007-2009, European lawmakers, regulators, and banks together overhauled the legal and regulatory frameworks and made many operational and financial changes to make resolution a credible response in case a major bank fails. We expect SPE resolution to remain the dominant preference among European banking groups, and with banks' resolution preparations now well-advanced we see limited prospect of further adoption of MPE strategies. We see SPE and MPE strategies as equally credible, but only time will tell whether these preparations will allow the authorities to restore failed banks to viability, without endangering financial stability, whether in an idiosyncratic stress or a systemic banking crisis.

Related Research

• Rating Actions On UniCredit’s German and Austrian Banks On Insulation From Parent After Review Of Resolution Approach, Aug. 10, 2022
• Bulletin: Single Resolution Board Says That Banks Must Go The Distance To Ensure Full Resolvability, July 13, 2022
• Bank of England Sees Systemic U.K. Banks As Substantially Resolvable, With Certain Gaps Still To Close, June 10, 2022
• mBank Outlook Revised To Developing On Risks From Swiss Franc Loans And Build-Up Of Bail-In Buffers; Ratings Affirmed, June 9, 2022
• Nova Ljubljanska Banka Upgraded To 'BBB/A-2' On Effective Resolution Strategy, Loss-Absorption Buffers; Outlook Stable, May 11, 2022
• Six European Banks Upgraded On ALAC Or Group Support Uplift; Off UCO On Implementation Of Revised FI Criteria, Dec. 16, 2021
• The Resolution Story For Europe's Banks: More Resolvability, Consistency, Credibility, Oct. 5, 2021
• Ceska Outlook Revised To Positive On Effective Resolution Strategy And Loss-Absorption Buffers; Affirmed At 'A/A-1', Sept. 29, 2021
• How We're Refining Our View Of The Strategic Importance Of Certain Spanish Bank Subsidiaries, Aug. 2, 2019

Annex 1

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Annex 2

Our ALAC approach for groups that we treat analytically as MPE:

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