PROTECTING YOUR DEPOSITS Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Handling Problem Financial Institutions J.P Sabourin President and Chief Executive Officer Canada Deposit Insurance Corporation December 9, 2003

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada CDIC Objects Provide insurance against loss of deposits (maximum $60,000) Promote standards of sound business and financial practices Minimize exposure to loss for the Corporation CDIC Mandate

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada CDIC Objects Oversees member application process Undertakes ongoing risk assessment, monitoring, intervention Deals with financial institution failures The Corporation pursues objects throughout the life cycle of members

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Deposit Insurance Application Process Minister of Finance Office of the Superintendent of Financial Institutions (OSFI) Institutions must obtain approval from:

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Deposit Insurance Application Process Licensed under Bank Act or federal or provincial legislation CDIC ensures sound financial and governance footing of institutions CDIC Act Board of Directors

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Deposit Insurance Risk Assessment, Monitoring and Intervention Process Provision of insurance Assessment and management of risk Insurer (CDIC) Supervisor (OSFI) Traditional supervisory role Assessment of safety and soundness of institutions

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Soundness and prudence of risk management activities Financial performance Economic and competitive environment Compliance with statutory requirements Risks to CDIC are both internal and external to member institutions. They include: Deposit Insurance Risk Assessment, Monitoring and Intervention Process

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Applied to “directing minds” of an institution Sanctions can, and are, imposed when there is a breach of the Standards Termination of insurance policy Legal action against management and directors CDIC’s Standards of Sound Business and Financial Practices Deposit Insurance Risk Assessment, Monitoring and Intervention Process

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Able to charge institutions a higher premium Disincentive to higher risk-taking Provides and early warning to developing problems Information gathering allows for timely and appropriate action against institutions Differential Premium System Deposit Insurance Risk Assessment, Monitoring and Intervention Process

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Premium Surcharge Short-term behaviour modification Can be applied to healthy institutions that are following a riskier path CDIC may apply measures / sanctions to minimize exposure to loss Intervention Process 1

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Special examination Detailed review of assets and liabilities Assessment will dictate options for intervention and resolution CDIC may apply measures / sanctions to minimize exposure to loss Intervention Process 2

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Termination of policy Can be imposed immediately if and institution is in breach of Standards, by-laws or conditions of the policy CDIC may apply measures / sanctions to minimize exposure to loss Intervention Process 3

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Termination of policy Deposits in these institutions are insured for two years for demand deposits or to maturity for longer- term deposits Steps are generally taken to liquidate the bank or find a going concern solution CDIC may apply measures / sanctions to minimize exposure to loss Intervention Process 3

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Dealing with Failures 1.Formal liquidation and payout 2.Sale of the institution Options for intervention Options are assessed accounting for: Stability of the overall financial system Minimizing exposure to loss for CDIC

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Dealing with Failures CDIC releases payments to a maximum of $60,000 Depositor preference does not apply Insured, uninsured and general creditors receive a proportionate return “Modified payout” – funds are transferred to another member institution in a lump-sum payment 1. Deposit payout

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Dealing with Failures Actual purchase of the shares or purchase of some or all of the assets and the assumption of all liabilities 2. Purchase and assumption “Clean institution” purchase and assumption Purchase only the highest quality assets and assumes all liabilities May purchase only specific pools of assets 1

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Dealing with Failures Actual purchase of the shares or purchase of some or all of the assets and the assumption of all liabilities 2. Purchase and assumption “Whole institution” transaction All assets are purchased Occurs before insolvency Seen as re-capitalization of institution 2

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Dealing with Failures Bids reflect the expected value of assets, liabilities and perceived franchise value CDIC provides financial assistance for the difference between the market value estimate and the liabilities assumed Assistance varies: Fixed dollar amount; Secured loan; or A combined solution. 2. Purchase and assumption

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Dealing with Failures All depositors (uninsured or insured) receive full payment Non-deposit creditors may receive partial or full payment Full or substantial losses are imposed on subordinate debt holders and shareholders Distinctions for purchase and assumption transactions

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Failure Resolution of Central Guaranty Trust Company Central Guaranty Trustco Central Guaranty Trust (CGT) (Late 1980s) 4 th largest trust company in Canada

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Failure Resolution of Central Guarantee Trust Company CGT paying high dividends to Trustco CGT paying high dividends to Trustco Trustco showing deficits Early 1990s

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada CGT Q3 = $116 million loss CDIC constructed financial models to compare formal liquidation versus a going concern transaction December 1991 Failure Resolution of Central Guaranty Trust Company

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Expression of interest solicited from 45 organizations Toronto-Dominion Bank (TD) agreed to acquire $9 billion of assets and all liabilities Also acquired personal and pension trust business Failure Resolution of Central Guaranty Trust Company

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada CDIC provided a $1.35 billion loan for the transaction The loan was converted to an asset management company (Adelaide Capital Corporation) Adelaide managed, collected and optimized recoveries with assets to retire the CDIC loan Transaction closed January 1, 1993 Failure Resolution of Central Guaranty Trust Company

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada 1.Cost of purchase and assumption must resemble cost of liquidation 2.CDIC must have assurance of future viability of the institution 3.Must provide sufficient capitalization and meet capital requirements 4.CDIC must receive sufficient specified repayment of assistance Criteria for Assisting a Transaction

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada 5.Assistance must benefit troubled member, depositors and CDIC 6.Transaction must involve substantial investment or a guarantee (or combination) from acquirer 7.Acquirer must share risk with CDIC 8.Proposal must provide for adequate management resources Criteria for Assisting a Transaction

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada 9.Acquirer must service all assets 10.Professionally managed bidding process must be in place 11.Acquirer must establish quantitative limits on all financial items in a proposal 12.Shareholders, subdebtholders and other creditors must be prepared to make some concessions Criteria for Assisting a Transaction

Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Need for open communications and a transparent process Open communication must extend to the public Need to revisit trigger mechanisms to initiate an intervention situation Determination of ongoing viability results in prompt action before insolvency Conclusion

PROTECTING YOUR DEPOSITS Canada Canada Deposit Insurance Corporation Société d’assurance-dépôt du Canada Handling Problem Financial Institutions J.P Sabourin President and Chief Executive Officer Canada Deposit Insurance Corporation December 9, 2003