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

April, 2007

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• 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

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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.

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• 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

Savings & loan Law

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FEDERATION

S&L1

S&L9

S&L4

S&L6

S&L5

S&L10

S&L8

S&L2

S&L3

S&L7

SUPERVISION COMMITTEE(AUXILIARY SUPERVISION)

TECHNICAL ASSISTANCE

CONFEDERATION

TECHNICAL COMMITTEE(SAVINGS PROTECTION FUND )

FED3

FED4

FED5

FED1

FED2

CNBV

Auxiliary supervision schemeThree tier system

FED6

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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 I 4,000 UDIS

Level II 6,000 UDIS

Level III 8,000 UDIS

Level IV 10,000 UDIS

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Affiliated S&L Societies

Legal Auditor

Board of Directors

Federations organization

Audit Committee

Supervision Committee

General Manager

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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.

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President Committee

Off-Site Supervisor

Supervision committee

On-Site Supervisor

Inspectors Financial Analysts

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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.

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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.

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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

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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.

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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.

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- Assets size- Members or

clients- Geographic

scope- Technical ability

Operations level Allocation

Authorized operations by level

Operations level & differentiated regulation

- Assets size

Applicable regulation

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MINIMUM MINIMUM CAPITAL CAPITAL

CAPITAL CAPITAL REQUIREMENTSREQUIREMENTS

INTERNAL CONTROL

CREDIT CREDIT PROCESSPROCESS

RISK RISK MANAGEMENTMANAGEMENT

LOAN PROVISIONLOAN PROVISION

OPERATIONSOPERATIONS

EXTERNAL EXTERNAL AUDITAUDIT

ACCOUNTING CRITERIA

S&LsS&Ls

Regulation

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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.

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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

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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

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Current Situation

Authorized Pending

1 confederation 10 S&L societies (authorizations requested)

12 federations 350 S&L societies(working to request their

authorization)

24 S&L societies - 12 limited companies - 12 cooperatives

113 Societies1/

(opposing regulation/supervision)

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

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www.cnbv.gob.mxwww.cnbv.gob.mx