THE NEW FINANCIAL SUPERVISOR IN COLOMBIA

1. THE NEW FINANCIAL SUPERVISOR IN COLOMBIA Cartagena, 23 de junio 2006

2. Index • Financial System main trends • Pre-merge financial scenario • New structure for financial supervision • The challenges today • The challenges tomorrow

3. Total Assets Under Surveillance Market Share Trend 95/05

4. Total Assets Under Surveillance: Main Participants

5. Fixed Income And EquityDaily Traded Volumes: 97-06

6. Trading Platforms Market Share: 97-06 SEN: Central Bank wholesale government debt trading system. MEC: Stock Exchange retail fixed income and equity trading system opened to all financial sector market participants plus some large portfolio holders (government agencies). The market was demutualized as the unified Colombian Stock Exchange started operations in July 2001.

7. Forex Operations

8. Main Market Participants MEC + SEN

9. US$ - TES (Gov Debt) – IGBC (Exchange Index) Prices

10. Institutions, assets and daily traded volume by institutions

11. Main Financial Conglomerates Market Share

12. Index • Financial System main trends • Pre-merge financial scenario • New structure for financial supervision • The Challenges today • The Challenges tomorrow

13. Pre-merge financial scenario: general conditions • Important reallocation of risk throughout financial institutions including bank assets and pension funds • Relevant institutional savings growth • Market demutualization • Strong growth of fixed income and equity trade with important implications and demands on market conduct regulation and supervision

14. Pre-merge financial scenario: general conditions • Basic market infrastructure development (trading platforms, central depositories and dematerialization, payment systems, centralized asset valuation) • New challenges for risk management among market participants, regulators and supervisors

15. Pre-merge financial scenario: political decisions • Finance Minister commitment to renew regulation and supervision for the Financial Sector • Consensus building among former Banking and Securities Superintendencies, Finance Ministry and Financial Industry • Overall Governance of the Financial Sector • Policy definitions: Congress • Regulation: Finance Ministry • Supervision: Banking/Securities Superintendences

16. Pre-merge financial scenario: basic conclusions • Different kinds of financial sector institutions perform similar activities. • Common activities exposed to common risks. • Financial System stability and consumer protection are highly dependent on adequate and specialized risk management

17. Index • Financial System main trends • Pre-merge financial scenario • New structure for financial supervision • The Challenges today • The Challenges tomorrow

18. Core Supervisory Structure Relationship Matrix

19. Main Objectives • Avoid/Eliminate regulatory arbitrage. • Financial system stability. • Consumer protection.

20. Value Chain RESEARCH AND DEVELOPMENT CORE SUPERVISORY STRUCTURE FINANCIAL SYSTEM R E G U L A T I O N C U S T O M E R SUPERVISORY METHODOLOGIES DESIGN / RISK ANALYSIS RESEARCH / MARKET ANALYSIS / INFO ADMINISTRATION REGULATORY COORDINATION CONSUMER PROTECTION SUPPORT AREAS SECRETARY GENERAL AND ADMINISTRATION LEGAL AFFAIRS INFORMATION TECHNOLOGY

21. OVERALL MANAGEMENT CONSULTATIVE FINANCIAL SUPERINTENDENT OF COLOMBIA GROUP COORDINATION ADVISORY COORDINATION FOR THE FINANCIAL SYSTEM LEGAL ORIGIN INTERNAL AFFAIRS DISCIPLINARY CONTROL CONSUMER PROTECTION I & T INFORMATION SYSTEMS UNDER OPERATIONS UNDER SFC Organizational Structure LEGAL AFFAIRS R&D SECRETARY GENERAL SUPERVISION METHODOLOGIES DESIGN / RIKS ANALYSIS ADMINISTRATIVE AND FINANCIAL JUDICIAL REPRESENTATION INFO ANALYSIS UNDER HUMANS RESOURCES APPEALS NORMATIVE COORDINATION UNDER DOCTRINE UNDER DIRECTORATE INSTITUTIONAL / PRUDENTIAL GLOBAL RISKS INSURANCE AND REINSURANCE AGENTS SECURITIES INTERMEDIARIES AND OTHER AGENTS MARKET RISK AND INTEGRITY CONGLOMERATES RISK AND CORPORATE GOVERNANCE SECURITIES ISSUERS, PORTFOLIOS AND OTHER AGENTS MONEY LAUNDERING RISK CREDIT RISK PENSION AND SEVERANCE FUNDS FIDUCIARY AGENTS CREDIT INSTITUTIONS OPERATIONAL RISK , MARKET RISKS SUPERVISORY TECNOLOGY AND OPERATIONAL RISKS SUPERVISORY MONEY LAUNDERING PREVENTION/ CONTROL SUPERVISORY CREDIT RISK SUPERVISORY CONGLOMERATES RISKS SUPERVISORY CREDIT INSTITUTIONS INSURANCE AGENTS ACCESS TO MARKET SECURITIES INTERMEDIARIES/ SELF REGULATED AGENTS DEFINED BENEFIT / DEFINED CONTRIBUTION SYSTEMS CONDUCT SUPERVISORY PROCESSES RISK CORPORATE GOVERNANCE INSURANCE TCHNICHAL RISKS SECURITIES ISSUERS SUPERVISORY CREDIT RISK SUPERVISORY CREDIT INSTITUTIONS FIDUCIARIES SUPERVISORY LEGAL INFRAESTRUCTURE SUPPLIERS /MONEY EXCHANGE AGENTS LEGAL INVESTMENT PORTFOLIO LEGAL LEGAL LEGAL LEGAL

22. CONSULTATIVE OVERALL MANAGEMENT FINANCIAL SUPERINTENDENT ADVISORY GROUP COORDINATION COORDINATION FOR THE FINANCIAL SYSTEM LEGAL ORIGIN INTERNAL CONTROL DISCIPLINARY CONTROL Present SFC Governance Structure EXTERNAL COMMITTEES MANAGERIAL COMMITTEES

23. External Committees • Consultative: representatives of the financial sector associations (10) • Advisory: independent professional advisors (5) • Government Coordination for the Financial System: • Finance Minister • Central Bank Governor • Deposit Insurance Agency (Fogafin) Director • Financial Superintendent

24. Managerial Committees The Committees are divided in:

25. SFC New Proposed Governance Structure • Board of Directors • Fixed term and clearly defined appointment procedures for head of SFC. • Accountability rules • Legal protection regime for Supervisors • Strengthened administrative and budgetary independence. • Supervision of competition practices and rules within the financial sector.

26. Index • Financial System main trends • Pre-merge financial scenario • New structure for financial supervision • The Challenges today • The Challenges tomorrow

27. Main Challenges of Initial Phase • Cohesion and motivation of the executive group, explanation and promotion of the new conceptual framework both within and outside SFC • Active commitment of the SFC staff to the definition and development of particular objectives by areas. • Assimilation of new functions, team-work and coordination among the new areas. • Financial System understanding of the SFC new structure, functions and responsibilities.

28. The Challenges Today • Implementation of newly approved Securities Law • Self-regulated organization for securities markets • Improved information disclosure. • Trading systems improvements • Derivatives and futures market • International standards for prudential regulation. • Improved supervision methodology design • ISO certification of supervision core processes.

29. Index • Financial System main trends • Pre-merge financial scenario • New structure for financial supervision • The challenges today • The challenges tomorrow

30. The Challenges Tomorrow • Consolidation of the new risk based supervision structure. • Widespread adoption of corporate governance standards, both within SFC and among supervised institutions. • Consolidated supervision of conglomerates. • Development of long term approach to issues related with pension funds and annuities. • Strengthened regulation for portfolio management and market conducts.

31. After all …… Given the aggressive and continued growth and complexity of the financial sector, building an adequate regulatory and supervisory agency becomes a constant challenge and never ending project !

32. Thank You