April 14, 2011
The Role of Alberta Treasury Branches in the Alberta Financial Market
The case for privatization has never been stronger
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 during the Great Depression. ATB has grown beyond this mandate. It now competes in Alberta as a full-service bank and has grown aggressively in large urban centres. Of the Alberta market share that does not include chartered banks, ATB has a 60 per cent share, while credit unions collectively have a 40 per cent share. The Alberta government 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 some competitive advantages created by Alberta government financial regulations. For instance, ATB paid no deposit insurance, yet the Alberta government guaranteed all deposits. Further, ATB paid no income tax to the federal or provincial governments. Finally, and most importantly, ATB operated with very lax capital requirements, and operated with a full government guarantee. This gave rise to a rather perverse incentive structure. That is, ATB had no motivation 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. In the absence of this constrain, ATB took on more risk than it could easily absorb. As a result, subsequent to the downturn in the early 1980s, the balance sheet of ATB deteriorated considerably. 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, 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, ATB does not pay taxes per se, but rather issues subordinated debentures to the government of Alberta which can be used in partial fulfillment of Tier 2 capital requirements.
The most important change was that 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. It seems clear that ATB was having difficulty meeting its capital requirements in 2009 and 2010. In response, 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 present 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.
We must remember that ATB’s shareholders 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 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 is that in this situation the government would 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.
Given all of the above, a sensible conclusion is that the government of Alberta should consider privatizing ATB
(B.A. Hons. and M.A., University of Guelph; Ph.D., Queens University) is Associate Professor of Economics at the University of Calgary. Frank has worked at the Bank of Canada as an Economic Analyst, where he gained a deep appreciation for the difficulties associated with monetary policy formation. Frank’s main academic areas of interest are monetary policy and the application of time series analysis to macroeconomic data. He is a frequent commentator on macroeconomics and policy issues for the major national networks and has published many articles in leading economic journals. Frank had the privilege of supervising the Master of Arts (Economics) thesis of Stephen Harper. In addition, Frank served as a mentor for Danielle Smith while she was completing a Bachelor of Arts degree at the University of Calgary.