Resolution planning and funding Juan Carlos Quintero V. Chief Officer of Investments, Risks and Resolution Mechanisms Fogafín

“A deposit insurance system is not intended to deal, by itself, with systemically significant bank failures or a “systemic crisis”. In such cases all financial system safety- net participants must work together effectively. In addition, the costs of dealing with systemic failures should not be borne solely by the deposit insurance system but dealt with through other means such as by the state.” 1 1 Core principles for Effective Deposit Insurance Systems (2009) Q: What is the role of the Deposit Insurance Agency (DIA) in a systemic crisis? Introduction

Fogafín (Colombia’s DIA for financial institutions) was created in 1985, following an important financial crisis that forced the government to nationalize a significant part of the financial system, with two main purposes: Provide capital support for financial institutions without unduly benefiting shareholders, administrators or those responsible for the difficulties. Organize a deposit insurance scheme. A: In the case of Fogafín, its role is not limited to non-systemic events. Resolution planning and funding Introduction

Resolution planning: how does resolution work Is there a private sector solution to this situation? Closed Bank Resolution* (least-cost resolution principle)  Purchase of assets and assignment of liabilities  Liquidation and deposit payoff NO Does the closing affect the payment system of the economy? NO YES Private Resolution Mechanisms  Assets and liabilities transfer  Merger and acquisition*  Voluntary liquidation Open Bank Resolution*  Open bank assistance  Nationalization Fogafín: pay box plus (IADI’s assessment) YES * Resolution mechanisms in which Fogafín takes part. Weak bank

Resolution planning: what have we been working in Development of operational plans (protocols with detailed processes, ) Mergers and acquisitions Purchase and assumptions transactions Liquidation and payout Open bank assistance Revision of how the mechanisms are vs. how they should be (law) Purchase and assumptions transactions Liquidation and payout Working within the safety net Better coordination within the CCSSF Socializing current developments (living wills / bail in)

Resolution planning: challenges going forward Operational plans Testing and fine-tuning through simulations How the mechanisms are vs. how they should be Continue pushing with developed alternatives Open bank assistance External diagnostic Working within the safety net Involve other members in resolution Simulation that involves other safety-net participants

Resolution funding: how it is organized In June, the reserve reached US$ 4.6 billions (3.1% of the total deposits). Asset composition: Negative correlation between assets and liabilities (small open economy) Local assets: non systemic events Foreign assets: systemic events Resources should be ready to deal with a one time failure but also to support a systemic event.

Resolution funding: what have we done Determine a target fund ratio Loss distribution function Risk tolerance of the DIS Search for ways to achieve it Higher premiums Reinsurance schemes Contingent credit lines Asset allocation Risk-based process Principles / priorities: investment horizon Eligible Deposits Growth and DIF Growth – DIF as a Proportion of the Eligible Deposits

Target fund ratio Materialize ways to make achieve it Incorporate it explicitly Investments Continue the thought process: investment seminar Tranches / portfolio currency composition Resolution funding: challenges going forward

Resolution planning: Detailed operational procedures and simulating Looking at best practices and pushing for change Resolution funding: Target funding level: looking for ways to achieve it Investment policies: increasing importance The DIA’s role in systemic events Why not? Summing up…

Thank you Juan Carlos Quintero V.