1 Proposed Legislative Changes CUMA September 18, 2006 Andy Poprawa, CEO Deposit Insurance Corporation of Ontario

2 PROCESS & RESPONSIBILITIES  Policy making and drafting is the responsibility of the Ministry of Finance  FSCO and DICO are providing technical advice to the Ministry as requested  Consultation draft issued on amendments to current regulations under current Act  Consultation draft issued on revisions to the Act

3 PURPOSE OF PROPOSALS  Respond to changes in market place  Address recommendations from Coalition  Provide opportunities for growth  Greater flexibility and autonomy for institutions  Improve regulatory efficiency  Provide for continuance of credit unions/caisses to another jurisdiction or other entity

4 MAJOR PROPOSED CHANGES  More focus on by-laws as opposed to Act for governance issues  Elimination of need for any committee except Audit Committee (to be made up solely of Directors)  Need to provide for director training in by-laws/policies  Can raise additional member share capital without need for offering statement up to $1,000 per member   Bond of association rules simplified - to be covered in by-laws   Employer sponsored RRSP recognized   Membership rules relaxed for syndicated loans  Pledging security limited to short term liquidity needs (revised limits to be prescribed) unless approved

5 MAJOR CHANGES - LENDING  Improved lending regime Limits based on capitalLimits based on capital Limits now exclude “insured” portion of loansLimits now exclude “insured” portion of loans Removal of lending license regimeRemoval of lending license regime Collateral mortgages >75% LTV allowedCollateral mortgages >75% LTV allowed  Two classes of MIs Class 1 Under $50 million in assetsUnder $50 million in assets No commercial lending other than existing limit of $25,000; loans for commercial purpose secured by residential mortgage loans are exemptNo commercial lending other than existing limit of $25,000; loans for commercial purpose secured by residential mortgage loans are exempt Class 2 All othersAll others Or where approved to be Class 2Or where approved to be Class 2

6 MAJOR CHANGES – CLASS 1  Simple rules for Class 1 Similar to existing rules for Capital, Liquidity and InvestmentsSimilar to existing rules for Capital, Liquidity and Investments Increased lending limits based on capital (revised table in Regulations)Increased lending limits based on capital (revised table in Regulations) Fully secured and under-secured personal loan limits (add under-secured to secured limit)Fully secured and under-secured personal loan limits (add under-secured to secured limit) No BIS II capital testNo BIS II capital test 5% minimum leverage capital test retained (including general loan loss allowance)5% minimum leverage capital test retained (including general loan loss allowance)

7 Revised Aggregate Lending Limits: Class 1 Asset SizeProposed lending limit for a person or entity and connected persons Current Limit for a person or entity and connected persons Minimum Increase Less than $500,000 Greater of 100% of regulatory capital or $60,000$33,000$27,000 $500,000 to $1 million Greater of 100% of regulatory capital or $100,000$64,000 $36,000 $1 million or more up to $2 million Greater of 80% of regulatory capital or $125,000 $75,000 $75,000 $50,000 $2 million or more up to $3 million Greater of 80% of regulatory capital or $155,000$105,000$50,000 $3 million or more up to $5 million Greater of 70% or regulatory capital or $185,000$125,000 $60,000

8 Revised Aggregate Lending Limits: Class 1 Asset SizeProposed lending limit for a person or entity and connected persons Current Limit for a person or entity and connected persons Minimum Increase $5 million or more up to $10 million Greater of 60% of regulatory capital or $235,000$150,000$85,000 $10 million or more up to $20 million Greater of 50% of regulatory capital or $295,000$175,000$120,000 $20 - $30 million Greater of 30% of regulatory capital or $400,000 $250,000 to $375,000 $250,000 to $375,000 $75,000 - $150,000 $30-$40 million $375,000 to $500,000 $375,000 to $500,000 $75,000 - $100,000 $40-$50 million $500,000 to $620,000 $500,000 to $620,000 $100,000 - $130,000

9 Revised Individual Lending Limits: Class 1 Class of loanPercentage of total lending limit Current limit per table Agricultural Loan0% Subject to Lending License Bridge loans100% Approx 80% up to $20 million 100 % above $20 million Institutional Loan50% Subject to Lending License Loans to Unincorporated Associations 5% Subject to Lending License Personal loans, fully secured20% The current limit is not limited to “fully secured” loans but rather any personal loan. Approx 20% up to $20 million 20% above $20 million Personal loans, under-secured6% Subject to Lending License Residential mortgage loan100% Approx 80% up to $20 million 100% above $20 million Loan under a syndicated loan agreement 0% Subject to Lending License

10 MAJOR CHANGES – CLASS 2   Class 2 MIs – Prudent Person Approach Improved flexibility for lending, investment and liquidity Limits etc. to be established in policy Max limit 25% of Reg. Capital for single exposure for loans or investments unless otherwise approved Capital Test Add general loss provision to capital (up to 1.25% of RWA for BIS II or.75% of total assets for leverage) BIS II primary test with Operational Risk and Interest Rate Risk components Leverage “floor” based on asset size Reduction over three years to gain experience

11 Dual Capital Test: Class 2 Institutions Total Assets FYE:2007 or earlier FYE 2008 FYE: 2008 or later <$50 million 5.00%4.75%4.50% $50 - $100 million 4.75%4.50%4.25% $100- $500 million 4.50%4.25%4.00% $500 million to $1 billion 4.25%4.00%3.75% $1 billion or more 4.00%3.75%3.50% Minimum of 8% Risk Weighted Capital or Minimum Leverage Based on Table

12 Examples of Proposed Capital Rules 2007 (effective minimum capital requirements in yellow) Total Assets Current Rules Min Capital Proposed Rules Leverage TestRisk Weighted Test RatioMin Capital Avg RWAMin Capital $50 million $ %$2.5045%$2.50 $75 million $ %$3.5650%$3.0 $100 million $ %$4.5050%$4.0 $300 million $ %$13.555%$13.2 $500 million $ %$ %$24.0 $1 billion $ %$40.060%$48.0

13 Examples of Proposed Capital Rules 2009 (effective minimum capital requirements in yellow) Total Assets Current Rules Min Capital Proposed Rules Leverage TestRisk Weighted Test RatioMin Capital Avg RWAMin Capital $50 million $ %$2.2545%$2.50 $75 million $ %$3.250%$3.0 $100 million $ %$4.050%$4.0 $300 million $ %$12.055%$13.2 $500 million $ %$ %$24.0 $1 billion $ %$35.060%$48.0

14 MAJOR CHANGES - DICO   Change in Mandate – Recognize Potential Conflicts “promote and otherwise contribute to the stability of the credit union sector with due regard to the need to allow credit unions to compete effectively while taking reasonable risks”   Responsible for “Solvency” Regulation Capital, liquidity, lending and borrowing regulation including Variances to limits for capital, liquidity and lending Changes to lending and Investment policies All orders can be appealed to the Financial Services Tribunal

15 MAJOR CHANGES - DICO   DICO Governance Board composition Maximum number reduced to 9 Qualifications established with a commitment to ensure industry knowledge on board Directors, officers and employees of credit unions or caisses not eligible Board Responsibilities Reporting to Minister annually on state of the sector Reporting to Minister on adequacy of fund Reporting on any other issues

16 Questions and Open Discussion