In its original incarnation, Alberta Treasury Branches (ATB) was envisioned as an institution that would provide financing to areas of Alberta that were having difficulty raising money from traditional Eastern banks in the time of the Great Depression. There was a belief that this need was especially strong in the rural areas. It is clear that ATB has grown beyond this mandate, as it now competes in Alberta as a full-service bank and has grown aggressively in large urban centres. Of the market share that does not include chartered banks in Alberta, ATB has a 60 per cent share, while credit unions collectively have a 40 per cent share. There is evidence that the Alberta government not only recognizes this, but that it also encourages ATB to compete with other financial institutions “in all areas of the province.” This is a very curious situation, especially in the province of Alberta. ATB seems to have escaped the Klein-era dictum that the government should not be in the business of doing business.
By the mid 1990s, there was a growing recognition that ATB was operating with certain competitive advantages that were bestowed upon it by financial regulations created by the government of Alberta. For instance, as noted in the Flynn Report, ATB paid no deposit insurance, yet the government of Alberta guaranteed all deposits. Further, ATB paid no income tax to the federal or provincial governments and operated with very lax capital requirements.
As a result of the Flynn Report, the Treasury Branches Working Group was formed. This group provided several policy recommendations to the Alberta government. In response, the government moved to correct the competitive imbalances noted in the Flynn Report. In spite of this move to change the rules under which ATB operates, ATB still has several competitive advantages in Alberta financial markets. ATB now pays deposit insurance but at a rate that is lower than that paid by, for instance, credit unions in Alberta. Moreover, this rate can vary from year to year at the discretion of the government of Alberta. ATB now makes a payment to the government in lieu of taxes. However, this tax arrangement should be questioned. ATB does not pay taxes per se, but rather issues subordinated debentures to the government of Alberta. For no apparent reason, these debentures can be used in partial fulfillment of Tier 2 capital requirements.
The essential problem with ATB in the 1990s was not that it had competitive advantages per se but rather that it faced lax capital controls combined with a full government guarantee. This gave rise to a rather perverse incentive structure. That is, ATB had no incentive to maintain any fiscal discipline. Financial institutions are required to limit asset growth to what can be accommodated within the existing capital base of the institution. For ATB, this constraint was not present and caused it to take on more risk than it could easily absorb. As a result of this, subsequent to the downturn in the early 1980s, the balance sheet of ATB deteriorated considerably. The reason for this was that ATB had no incentive to behave in a financially prudent manner. In economics, this is known as a moral hazard problem. As soon as the downturn started, ATB went into a negative equity position and remained in that position until 1999.
As a result of the Flynn Report and the Treasury Branches Working Group recommendations, the government instituted a system of capital controls. In spite of this change, when another financial downturn began in late 2008, ATB’s balance sheet began to deteriorate once again. It is apparent that the capital control changes did not remove the moral hazard problem. ATB still seems to be able to operate in a fiscally prudent manner only when the economy of Alberta is growing. This suggests that either the capital control changes did not impose sufficient discipline on ATB or that the moral hazard problem lies largely in the full government guarantee.
The answer to this lies in the behaviour of the government in response to the latest deterioration of ATB’s balance sheet. It seems clear that ATB was having difficulty meeting its capital requirements in 2009 and 2010. In response to this, the government stepped in and issued $600-million in notional capital in 2009 and authorized ATB to include $568-million in “capital investment deposits” as Tier 2 capital. The Alberta government is obviously willing to step in and shore up the balance sheet of ATB when needed. It seems that the moral hazard problem that existed in the 1990s is still a problem today. If the government is willing to issue notional capital in order for ATB to meet its capital requirements, this serves to make capital controls irrelevant and ATB will continue to have very few, if any, constraints on its behaviour.
It appears that, in spite of the fact that ATB is still operating with some competitive advantages in Alberta’s financial markets, it is only able to operate efficiently when the economy of Alberta is performing well, as it is crippled by the incentives put in place by some combination of lax capital controls and government guarantees.
It must be remembered that the shareholders of ATB are the taxpayers of Alberta. However, ATB has remitted no dividends to the government since 1982, when it became virtually insolvent. Therefore, the taxpayers are absorbing some non-trivial risk while getting no return. This is a poor business model.
The general conclusion that emerges from this study is that there is a sense in which the existence of ATB represents poor public policy. Even if the government were capable of designing capital control rules with proper incentives, the full government guarantee would also have to be removed in order for ATB to face proper fiscal discipline. The problem here is that, in this situation, the government would then be simply duplicating what is already being accomplished by the private sector. Given that Alberta now seems to be adequately served by private sector financial institutions, this represents a misallocation of resources.
It would appear that, given all of the above, one sensible conclusion is that the government of Alberta should consider privatizing ATB.
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