Deposit Insurance Corporation of Ontario Credit Union Managers’ Association October 9, 2002 “Improving the Odds”

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 > $100 M – 8% MI > $10 M – 15% MI < $10 M – 33%

16 Deposit Insurance Reserve Fund DIRF Proposal: Ultimate fund target of 69 basis points – to be adjusted periodically based on risk levelUltimate 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)Interim target of 47 basis points by 2008 (versus current level of 22 basis points) Premiums adjusted down or up based on progressPremiums 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