“Recent experience in Mexico implementing an auxiliary supervision model”. April, 2007

2 More than 500 societies with diverse size and different legal structures. Non regulated sector - broadly dispersed across the country & active for more than 50 years. Illegal deposit collections. Large number of depositors affected by cooperatives bankruptcies/frauds. High cost paid by federal and state governments. Situation in Mexico

3 Savings & loan Law Defines sector structure and minimum features. Takes advantage of established support organizations (federations & confederations). Establishes a differentiated regulatory framework –Exceptions / entrance level. –Prudential regulation according to societies size. –Operations catalog according to assets size, number of members or clients and geographic scope. Incorporates transformation incentives. Considers a reasonable term to comply with regulation. Defines two types of savings & loan societies legal forms: LTD and cooperatives.

4 Law does not apply to cooperatives/societies with the following features: – Collection of deposits is only from members and lent amongst them. – Maximum 250 members. – Assets below 350,000 UDIS 1/. – No advertisement of products and services. – Registered in an authorized federation. 1/ Aprox. US$ 121, Savings & loan Law

5 FEDERATION S&L 1 S&L 9 S&L 4 S&L 6 S&L 5 S&L 10 S&L 8 S&L 2 S&L 3 S&L 7 SUPERVISION COMMITTEE (AUXILIARY SUPERVISION) TECHNICAL ASSISTANCE CONFEDERATION TECHNICAL COMMITTEE (SAVINGS PROTECTION FUND ) FED 3 FED 4 FED 5 FED 1 FED 2 CNBVCNBV Auxiliary supervision scheme Three tier system FED 6

6 Main purpose of confederations Protection fund administration, which serves to protect savings of each member/client according to the operations level of each S&L society: It acts as a collaboration organism for the design and execution of advisory and training programs, intending to facilitate and enhance the activities across the sector. Level I4,000 UDIS Level II6,000 UDIS Level III8,000 UDIS Level IV10,000 UDIS

7 Affiliated S&L Societies Legal Auditor Board of Directors Federations organization Audit Committee Supervision Committee General Manager

8 Main purpose of federations Auxiliary supervision through supervision committee. Determine economic & administrative sanctions for S&L societies. Obtain financial and other type of information from S&L societies. Deliver technical assistance services. Standardize manuals & operative procedures as well as IT systems.

9 President Committee Off-Site Supervisor Supervision committee On-Site Supervisor InspectorsFinancial Analysts

10 Supervision committee functions Propose S&L societies for authorization by CNBV. Carry out auxiliary supervision: — Supervise observance of prudential regulation. — Carry out on-site inspections. — Determine preventive and corrective programs for S&L societies. — Inform CNBV about S&L societies situation.

11 Supervision committee member requirements Financial & management experience. Prohibition to be advisors of the supervised S&L societies. Prohibition to be employee or member of the S&L board or audit committee, or of the board of the federation. Prohibition to have relationship with the board of directors, audit committee or CEO of an S&L. Certification by an institution recognized by CNBV.

12 Supervision committee certification Today, the CNBV has only recognized Developpement International Desjardins (DID) to certify supervision committee members. The process of certification includes: — Theoretical instruction. — Practical instruction. — Certification test. The theoretical and practical instructions are given by the confederation and the certification test is applied by DID. Duration: Two years

13 Supervision committee independence Supervision committee presidents must report the results of their activities to the CNBV and the federation board. Supervision committee members can be removed only with CNBV’s approval. CNBV issued minimum auxiliary supervision guidelines which must be followed. Periodical meetings are held between CNBV and supervision committees.

14 CNBV’s functions Grant and revoke licenses for the operation of S&L societies, federations and confederations. Assign operations level to S&L societies. Direct supervision of S&L societies, federations and confederations. Coordinate and review the auxiliary supervision. Issue secondary regulation and accounting rules. Impose penalties and economic sanctions. Faculties of veto and removal for board of directors members and senior management.

15 - Assets size - Members or clients - Geographic scope - Technical ability Operations level Allocation Authorized operations by level Operations level & differentiated regulation -Assets size Applicable regulation

16 MINIMUM CAPITAL CAPITAL REQUIREMENTS INTERNAL CONTROL CREDITPROCESS RISK MANAGEMENT LOAN PROVISION OPERATIONS EXTERNAL AUDIT ACCOUNTING CRITERIA S&Ls Regulation

17 Governance in S&L societies Their corporate governance structure should be formed at least with the following: — General assembly — Board of directors — Audit committee or equivalent — Credit committee or equivalent — General manager or director The general assembly elects the board of directors members and has the attributions to remove them.

18 Governance in S&L societies (cont.) Board of directors will be formed with 5 to 10 people. For cooperatives: — Maximum term of 5 years with possibility of one reelection. — Elections for half of the members are alternated every 2.5 years. Fit and proper requirements for board members: — Financial & management experience — Good reputation and a good credit bureau profile — Prohibition to be employee of a S&L or to have a position of popular election or political party leadership — No activities with conflict of interest

19 Governance in S&L societies (cont.) S&L societies should have at least one independent board member. Boards members should not be part of management in the S&L society. CNBV has veto powers over the board of directors, audit committee and the general manager/director. Operations with related parties will need approval of ¾ of the board of directors: — Maximum for limited companies — Maximum for cooperatives 10% of share capital 50% of share capital

20 Current Situation AuthorizedPending 1 confederation10S&L societies (authorizations requested) 12 federations350 S&L societies (working to request their authorization) 24 S&L societies - 12 limited companies - 12 cooperatives 113 Societies 1/ (opposing regulation/supervision) 1/ Represents less than 2.5% of the S&L sector total assets.

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