Stronghold has developed proprietary private sector solutions to provide banks & regulators new tools to strengthen bank balance sheets & capital positions.
The occasion is piled high with difficulty...
Although banks have more capital and liquidity than in the past, have been subject to stress tests, and are supported by central bank liquidity provision, their resilience may be tested in some countries in the face of large market and credit losses.
The IMF identifies 3 classes of policy responses to COVID-19:
Fiscal,
Monetary & Macro-Financial, and
Exchange Rate & Balance of Payments.
IMF Global Financial Stability Report 4/2020
Solutions
Stronghold has developed applications of our investment/credit insurance solutions, which can:
Raise non-dilutive capital for banks at risk and
Enable the true sale and thereby full risk transfer of distressed assets held by such banks including non performing loans.
These programs can significantly contribute to the challenges identified and can bring additional resources to complement the real world limits of the government and central bank policy responses.
21st Century Private Sector "Brady Bond"
The occasion is piled high with difficulty, and we must rise — with the occasion. As our case is new, so we must think anew, and act anew. …, we cannot escape history. We …, will be remembered in spite of ourselves. No personal significance, or insignificance, can spare one or another of us. The fiery trial through which we pass, will light us down, in honor or dishonor, to the latest generation.… The world knows we do know how to save it. We -- even we here -- hold the power, and bear the responsibility. … We shall nobly save, or meanly lose, the last best hope of earth. Other means may succeed; this could not fail. The way is plain, peaceful, generous, just -- a way which, if followed, the world will forever applaud, and God must forever bless.
Stronghold has developed proprietary private sector solutions to provide banks and their regulators with new tools to strengthen bank balance sheets and capital positions. Solutions described herein include:
Two non-dilutive capital raises (one where institutional shareholders of a bank purchase a Stronghold designed instrument and the second where the bank itself purchases a Stronghold designed instrument) and
Enabling the true sale and thereby full risk transfer of distressed assets including non performing loans.
Stronghold solutions fully defease principal and agreed interest obligations by means similar to those applied in collateralized insurance and reinsurance agreements — real assets in place to meet the contractual obligations of the instruments at the contracted time.
Private-sector solution —The solution requires no government or tax payer guarantees.
Augmenting Policy Responses — The solution provides Ministries of Finance, Central Banks, and banks themselves a clear means to strengthen bank balance sheets and capital positions thereby augmenting other policy responses.
Lincoln's 1862 Message to Congress
Background — Stronghold originally developed the solution as regulatory capital relief, to strengthen individual insurance company and bank balance sheets. What the solution can do for a single bank, it can do for a sovereign banking system. What the solution can do for a sovereign system, it can do for the entire EU banking system.
Program
Stronghold solutions legally defease principal and agreed interest obligations by means similar to those applied in collateralized insurance and reinsurance agreements — real assets in place to meet the contractual obligations of the instruments at the contracted time.
The program builds on two related programs:
1. Institutional shareholder purchase supporting non-dilutive capital raise:
A bank purchases a Stronghold designed bond. Following the sale of the bond, the issuer establishes:
- Collateralized (investment) Insurance Reserves to meet all contractual obligations of the bond and
- Purchases preferred shares from the bank.
The bond — a senior fully secured debt instrument of an insurance company — enables institutional shareholders to participate in a recapitalization of the bank without making a full-risk equity investment in the bank and without diluting their equity position in the bank. The investment grade accounting treatment of Stronghold designed instruments enable institutional investors to allocate from their entire investment portfolio, unconstrained by alternatives of risk policy constraints.
2. Distressed asset solution
A bank purchases a Stronghold designed bond.
Following the sale of the bond, the issuing Segregated Account:
Establishes reserves (as above) and
Purchases Non Performing Loans from the bank resulting in a stronger balance sheet the day of closing.
The solution can rapidly:
Strengthen bank balance sheets;
Free up of lending across the Euro zone; and
Mitigate current constraints on Central Banks.
Like Brady Bonds, the approach transfers the risk of these instruments off the balance sheets of the current creditors.
From a higher level perspective, the solution distributes current NPL risk over time, as an insurance program.
Should economies stabilize and recover, any commensurate appreciation of the NPLs in custody of the program can deliver enhanced yield to the bank purchasers of the instruments.
Improvement, in the condition of the banks themselves, can then generate similar enhanced returns to the shareholder purchasers of the first described application.
Next steps
Nothing stands in the way of deploying this solution at a scale commensurate with the challenge.
No other solution addresses the interests of all stakeholders as effectively.
A small team (legal, accounting, regulatory treatment) can quickly assess the approach.
Stronghold can provide additional a detailed accounting and regulatory treatment of the instrument (A Discussion of Accounting Considerations for Stronghold Designed Protected Cell Issued Bonds) under NDA.