Deposit Insurance Corporation of Ontario

1
Improving the Odds

• Deposit Insurance Corporation of Ontario

Credit Union Managers Association October 9,
2002
2
Overview

• Where are we?
• Where are we going?

3
Where Are We?

• Overall system condition is good
• Risk of failures has been declining
• Overall system performance slipping slightly
• Some credit unions/caisses populaires performing
  better than others

4
Quick - System Condition at 2Q02
( ? ? from 2Q01)

• 285 institutions ? 25
• All met minimum capital requirements
• Average size 61 M ? from 52 M
• System Assets 17.4 Billion ? by 8.1
• System Capital 6.7 ? from 6.6
• Liquidity 17.7 ? from 17.5
• Commercial loans ? by 17

5
Quick System Performance at
2Q02 ( ? ? from 2Q01)

• Margins ? from 3.25 to 3.00
• Non-interest expenses ? from 3.49 to 3.34
• Non-interest income ? by .02
• Loan Costs slight ? from .17 to .16
• Gross Delinquency ? 1.40 to 1.30
• ROA 29 bp ? from 39 bp

6
Quick - DICO Financial

• DICO 2002 estimated financial results
• No major failures during 2002
• No new insurance losses to date
• Recoveries of 3.9 million on past losses
• Gross operating expenses 4.5 below budget
• Estimated fund of 41 million by year end

7
Quick - DICO Operational

• On-Site Verifications (OSVs)
• 155 completed/in progress as of July 31, 2002
• 68 of members failed credit management standard
  on first OSV
• Intervention Programs
• 28 on Watchlist - mostly resulting from OSVs
  sustained non-compliance with Bylaw 5
• 13 under Supervision
• 6 pending Supervision
• 1 under Administration

8
Distribution of Assets By Premium Category 2Q02
9
Distribution of Assets By Premium Category 4Q92
10
Where Are We Going?

• Reserve Fund Strategy
• Interest Rate Risk Regulation
• Bylaw 5 Review
• OSV Process Review
• Capital Rules

11
Deposit Insurance Reserve Fund (DIRF)

• Process to date
• Extensive research
• Actuarial model developed and thoroughly tested
• Intensive DICO Board review
• Consultation with Ministry of Finance
• Discussion Paper

12
Deposit Insurance Reserve Fund

• Discussion Paper addresses two basic questions
• How large should the DIRF be?
• How and how fast should we get there?

13
Deposit Insurance Reserve Fund

• Design Principles
• Lower risk lower reserve fund
• Model responsive to changes in risk
• Premiums stability for three to five year periods

14
Deposit Insurance Reserve Fund

• Variables
• Premium levels
• Economic scenarios
• Risk migration
• Probability of failure
• Loss ratios
• Deposit growth
• Investment yields DICO expenses

15
Deposit Insurance Reserve Fund

• Probability of Failure
• Tier 1 1 in 2,000
• Tier 2 1 in 1,000
• Tier 3 1 in 500
• Tier 4 1 in 250
• Tier 5 1 in 28
• Loss Ratios
• MI gt 100 M 8
• MI gt 10 M 15
• MI lt 10 M 33

16
Deposit Insurance Reserve Fund

• DIRF Proposal
• Ultimate fund target of 69 basis points to be
  adjusted periodically based on risk level
• Interim target of 47 basis points by 2008 (versus
  current level of 22 basis points)
• Premiums adjusted down or up based on progress

17
Deposit Insurance Reserve Fund

• Looking Forward
• Premiums will fall over time if the aggregate
  risk is lower
• Individual credit unions will continue to manage
  their premiums within the DPS

18
Deposit Insurance Reserve Fund (DIRF)

• Next Steps
• Discussion paper released
• After comments received, finalize DIRF strategy
• Report to the Minister of Finance by spring 2003

19
Where Are We Going?

• Interest Rate Risk Regulation
• Under review completion in 2003
• Bylaw 5 Review
• Under review 2003 completion by 2004
• OSV Process Review
• 2002 changes implemented
• Further changes after Bylaw 5 amended
• Capital Rules
• Under discussion with FSCO Ministry

20
Questions Dialogue