DEPOSIT INSURANCE CORPORATION OF ONTARIO

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Association of Credit Unions of Ontario Annual
General Meeting June 4, 2007 Andy Poprawa,
President CEO
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Agenda

• DICO Update
• System Overview
• DICO Initiatives for 2007
• New Legislation, Regulations Guidelines
• Updating Risk Ratings
• Reviewing Premiums
• Priorities for 2008
• Questions Discussion

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Highlights

• Depositors funds protected
• Confidence in CUs and CPs maintained
• One possible insurance loss in 2007
• Insurance Fund of 106 million (year end target
  of 110 million)
• 87 of member institutions pay now 1.00 or less
  in premiums
• Loan guarantee 150 million until 2008

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Current Issues

• Operational risks
• Data systems conversions
• Human Resources - demographics
• Fraud smaller institutions
• Strategic risks Growth strategies
• Mergers
• Acquisitions
• Governance Risks
• electing directors
• demographics

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Ontario System Profile 1Q07

• 217 Institutions
• 25.2 Billion in assets
• Capital
• Leverage basis 7.19
• Risk Weighted 14.11
• Return on Assets 43 basis points
• Efficiency ratio 84.6
• Liquidity 13.33

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Ontario System Profile Credit Unions and Caisse
Populaires (4Q06)
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Profile By Size
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Profile By Size
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System Profile By Risk Level ( of System Assets)
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System Profile by DPS Risk Ratings(Distribution
based on of System Assets)
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Intervention Levels by Program
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System Performance Benchmarks
Latest available data
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System Performance Benchmarks 2006
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Important Trends Strategic Risk

• Caisses credit unions recognize that scale
  competency are critical to survival
• Responses band together in a network
  (LAlliance/La Fédé), merge (Meridian, Alterna,
  United Communities) or as a last resort, wind-up
• Smaller some mid sized credit union managers
  feel that they can hang on to retirement
• Prognosis continued consolidation driven by
  need to survive with some smaller/mid size
  institutions probably hanging on too long

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Important Trends Structural Risk

• Financial Margins trending down - at 2.87
• Non-interest expenses stable at 3.02
• Mortgage commercial loan demand increasing
• Increasing competition for market share
• With rates rising initial pressure on margins
  fund long term assets with short term liabilities
• Prognosis increase in rates in 2007
• Traditional savings/loans business not viable in
  longer term

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Important Trends Liquidity Risk

• Liquidity levels stable long term downward
  trend
• 1Q2007 at 13.33 (compared to 14.2 in 06)
• Loan growth still outpacing retail deposit growth
• Deposit broker growing as a source of funds
• Demographic challenges wealth transfer
• More larger institutions increased capacity to
  make larger loans
• Prognosis continuing long term pressure on
  liquidity

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Important Trends Credit Risk

• Credit risk driven by level of rates, employment
  levels and risk appetite of institutions
• Rates will remain relatively low in 2007/8
• Employment appears strong - Canada near full
  employment (possible concern auto/forestry
  sectors)
• Personal lending still declining as a share of
  portfolio
• Risk appetite of credit unions shifting to higher
  risk loans to increase margins (commercial
  agricultural)
• Loan delinquency trending higher
• Prognosis near the top of credit cycle -
  overall credit risk should remain relatively low
  but vigilance is required in certain sectors and
  geographical areas

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Important Trends Governance Risk

• Almost all member institutions now embrace
  governance requirements
• Caisses and larger credit unions have implemented
  sound practices and likelihood of governance
  failures is low
• Small and mid-size credit unions continue to be
  at risk particularly of managers that have too
  much control
• Prognosis small and mid-size credit unions need
  to be monitored more closely to ensure governance
  failures are minimized

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Important Trends Market Risk

• Most institutions entrust excess funds to their
  leagues or other FIs
• As liquidity falls, exposure to market risk
  decreases since funds are shifted to loans
• Despite volatile markets over past few years no
  major losses experienced
• Prognosis continued volatility in the markets
  but unlikely to suffer losses as long as risk
  appetite does not change

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Important Trends Operational Risk

• As institutions get larger and more complex,
  enterprise risk management becomes more
  challenging
• Improving practices at larger credit unions and
  caisses
• Merger risks
• Technology risk multiple banking systems
• People risk succession planning a concern
• Prognosis increasing risk that requires
  improved risk management by institutions and
  increased risk assessment by DICO

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Observations on Institutional Risk

• Overall current level of regulatory capital of
  most member institutions relatively strong but
  level and cost of investment capital still of
  concern
• Inherent risk continues to vary by nature of
  institution - diversity in size, complexity
• Profitability and long-term viability of some
  institutions a concern
• Image/reputational risk changing as size of
  institutions increase investment shares? (i.e.
  Mariposa)
• Emerging risks i.e. commercial loans,
  technology, card fraud

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Deposit Insurance Reserve Fund Comparison with
Other Provincial Jurisdictions
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Deposit Insurance Premiums Comparison with Other
Provincial Jurisdictions
Including deficit reduction of 1.10.
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Trend in the Deposit Insurance Reserve Fund and
Net Provision for Losses
Deposit Insurance Reserve Fund
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Reserve Fund Forecast to 2008Based on Existing
Premium Rates and Normal Insured Deposit Growth
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DICO Strategic Plan Phases

• 1994 1997
• Getting Our House in Order
• 1997 2000
• Eliminating the Deficit
• 2000 2003
• Building Financial Soundness
• 2004 2006
• Modernizing and Streamlining
• 2007 2009
• Enhancing Risk Management

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DICO Strategic Plan - 2007 to 2009

• Enhancing Risk Management
• Implement Legislation Regulation
• Enhance Risk Rating Systems
• Update Premium System
• Fully fund the Reserve Fund
• Minimize Operating Expenses

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Specific Priorities for 2007

• Implement changes required as a result of new
  legislation, i.e., policies, processes,
  procedures
• Continue to enhance risk management capabilities
  staff training development
• Update fund target range for 2008 to 2012
• Review premium structure and required premium
  levels
• Update MOUs with various stakeholders, especially
  Ministry, FSCO, Coalition leagues

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New Mandate - Solvency Regulator

• New Responsibilities
• Responsibility for solvency related areas
• Transitional Plan
• Work with Ministry FSCO Industry advisory
  committee
• New guidelines lending, capital, liquidity
• Issues raised by industry representatives
• Governance Appointment of Directors
• Communication Annual Meeting
• Fairness and Transparency Ombudsperson

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New Rules

• Regulatory Trends
• Moving from a prescriptive to a prudent person
  regime
• Follows trend at national and international
  levels
• Reflects maturation of the sector in Ontario
• To the extent possible provide for a level
  playing field given the relative size and
  complexity of credits unions and caisses

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Updating Risk Ratings

• Plan on updating each institutions risk profile
  at least annually
• Objective is to understand each institutions
  risk appetite, inherent risks and its ability to
  manage those risks
• Important in effective implementation of a risk
  based prudent person approach

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Impact on Deposit Insurance Premiums

• No initial impact
• Differential premium scale will remain unchanged
  for 2007
• Review of DPS to be undertaken during 2007
• Industry advisory panel established waiting for
  final regulations before re-starting
  consultations
• Possible revisions to be effective in 2008 or
  later
• Different models considered regulatory
  assessment versus insurance premiums

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• Questions and Open Discussion