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

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

2. Situation in Mexico • 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.

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. Savings & loan Law • 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 UDIS1/. • No advertisement of products and services. • Registered in an authorized federation. 1/ Aprox. US$ 121,000.00

5. Auxiliary supervision schemeThree tier system S&L 2 S&L 3 S&L 4 S&L 1 C N B V FED 1 FED 2 FEDERATION S&L 10 S&L 5 CONFEDERATION S&L 9 S&L 6 FED 3 FED 4 FED 5 S&L 8 S&L 7 FED 6 TECHNICAL COMMITTEE (SAVINGS PROTECTION FUND ) SUPERVISION COMMITTEE (AUXILIARY SUPERVISION) TECHNICAL ASSISTANCE

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.

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

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. Supervision committee President Committee On-Site Supervisor Off-Site Supervisor Inspectors Financial 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. Operations level & differentiated regulation • Assets size - Assets size - Members or clients - Geographic scope - Technical ability Operations level Allocation Authorized operations by level Applicable regulation

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

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 10% of share capital 50% of share capital • Maximum for cooperatives

20. Current Situation 1/ Represents less than 2.5% of the S&L sector total assets.

21. www.cnbv.gob.mx