Alberta Treasury Branches—now known legally as ATB Financial (ATB)—is a $50 billion deposit-taking financial institution which, for all intents and purposes, operates like a chartered bank. This Alberta-based entity administers and manages over $18 billion in investments and has nearly 750,000 customers. ATB will be 80 years old this September, and has had a long and storied (though mainly untold) history. ATB has grown into North America’s largest public bank, seven times larger in terms of assets (loans) than its peer, the Bank of North Dakota. While the ATB Financial Act mandates a legislative debate on ATB’s continuance every five years, such a review has not occurred since 2012. We therefore feel it is timely for a public debate on the future role of this critical Alberta institution.
This report traces the origins and history of this government-owned institution and draws out important lessons from this experience. We then consider the role of public banks within the framework of the role of money and banking in a modern economy. Drawing from this, we put forth a number of policy recommendations that we feel should be considered of strategic value to Alberta’s financial and economic future. We encourage readers—particularly government policymakers—to review these proposals with a critical but open mind.
ATB’s history and lessons learned
Over its eight-decade history, ATB has been embroiled in two scandals—the road-building scandal of the 1950s and the West Edmonton Mall scandal of the 1990s—both of which suggest important lessons for ATB’s future.
In both cases, ATB placed too many loans in the hands of a small group of related companies. Since ATB is essentially limited to Alberta in lending money, it is necessary for the institution to ensure its loan portfolio is diversified by industry and geography, and that it limits lending large sums to one company and related companies.
A second lesson is the need to ensure that granting of loans is removed from political interference. In both scandals, large loans and loan guarantees to prominent businesses were subject to outright political direction or to strong “political interest.” Key legislative and regulatory changes in 1996 and 1997 have generally been effective in insulating ATB’s credit adjudication from such political direction.
Lesson three can be characterized as the “principal-agent” problem. ATB is legally an “agent of the Crown.” This status allows ATB to exclusively contract within its mandate, thereby simplifying administrative and financial procedures. The literature on principal-agent theorizes that an agent may take on more risks than would the principal, which leads to behaviour rewarding to the agent but may, at the same time, place the principal at financial risk. This may also work in another direction: namely, a principal that does not want to act directly may use its agent to carry out certain activity indirectly. This issue is important as it relates to executive compensation and may contribute to greater risk-taking by financial institutions ultimately bailed out by taxpayers.
Finally, ATB’s current reporting is deficient in two important respects. First, there is a paucity of information concerning the sectoral distribution of its commercial loan book. Secondly, ATB has been a laggard in explaining its executive compensation. In spite of numerous recommendations in previous auditor general reports, ATB provides a vague three-page summary. Since the board of directors approves the annual report, including financial statements, this is suggestive of weak governance practices.
Our analysis suggests there are a number of economic and political barriers standing in the way of privatizing ATB. First, there is ATB’s vast rural network, which remains politically popular in remote communities. A new board of a privatized ATB would likely act to increase profitability by closing uneconomic rural branches and agencies. Another issue would be whether the privatized entity could be taken over and the head office moved outside the province. In addition, for privatization to make sense financially, there would need to be much more detailed disclosure on ATB’s loan book and executive compensation—measures that might preclude governments from proceeding. The 100 per cent government deposit guarantee, which gives ATB a significant competitive advantage, would fall off over time. All these factors, when combined, suggest privatization of ATB would be a major challenge for any government.
Public banks and money creation
Public banking is common around the world, particularly in developing and newly-developed countries. Globally, about 40 per cent of banks are publicly owned. However, there are only two public banks operating in North America: ATB and the Bank of North Dakota (founded in 1919). The countries with public banks weathered the credit crisis of 2007–08 more effectively than those without. Public banks have an inherent competitive advantage over private banks in that they can operate with a no-profit motive. Theoretically, a public bank does not need to charge the same interest rates on loans as other conventional banks if it simply is operating on a cost-recovery basis while providing for an appropriate loan loss allowance.
We contrasted the cost efficiency of ATB with other financial institutions for their 2017 fiscal operations. ATB’s ratio of operating costs (non-interest operating expenses) plus provision for credit losses was 3.13 per cent, higher than Servus Credit Union (2.34 per cent) and much higher than the Bank of North Dakota (0.88 per cent). In comparison, the same ratios for the Canadian retail arms of Canada’s five largest banks ranged from a low of 1.89 per cent for RBC to high of 3.17 per cent for Scotiabank.
One of the major benefits of operating a public bank like ATB is that it does not technically pay taxes and is not expected to generate the same profits as publicly traded commercial banks. While ATB makes a payment in lieu of taxes, this requirement could be eliminated. Therefore, ATB could operate with a significant competitive advantage as a low-cost-of-loan provider, with interest costs at considerably less than the prime rate. More importantly for Alberta’s economy, ATB could help to finance strategic community asset development by lowering the cost of loans for all community-asset and local-business development.
Moreover, a public bank can normally borrow at lower interest rates (depending on the creditworthiness of the sponsoring government), thereby reducing the long-term cost of public investments. These advantages are unique to a public bank like ATB. A key to monitoring the quality and efficiency of management and governance of a public bank is to ensure the costs of running the loan and deposit business are as efficient and effective as possible. Our argument is that so long as all operating costs and loan losses are sufficiently covered by revenues, a public bank can operate sustainably and at a competitive advantage to commercial banks, providing considerable credit cost savings to all Albertans.
There is an often-misunderstood process of money creation. A common view of banking is that banks act as intermediaries between savers and borrowers. This view suggests that banks can only lend money from savers or from its capital base. This view is not entirely accurate. Bankers can and do make loans through a process, in effect, of loaning the borrower a deposit which forms the offsetting liability to the loan. Once the borrower uses these deposits by transferring value through cheques or other transfer mechanisms, the lending bank will be presented with the cheque and require funds to be transferred to the other financial institution. In general, so long as the economy is expanding, the loans made are prudent, and an institution’s loans are widely disbursed, commercial or public banks can expand lending themselves. Indeed, the majority (97 per cent) of our modern money supply is created when private banks issue loans; only 3 per cent is created by central banks or national governments as cash, minted coinage, printed money, or currency. This means that there is effectively no limit to how much new debt-money private banks can create to meet all society’s needs and aspirations for a good and happy life so long as these loans are paid back or the lending institution has the capacity to absorb loan losses. This credit capacity is also, in theory, available to public banks like ATB, particularly lending against the full suite of assets (natural, human, social, and physical capital) of the province of Alberta.
The following are the key recommendations arising from the report. Given the significant regulatory changes introduced in the late 1990s, we believe there is no conflict between the lessons learned of political interference and the legislature’s right to set broad policy over ATB, permitting ATB to operate independently, and then holding the minister to account for the policy outcomes.
1. Provide low-cost financing for Albertans. Our analysis has shown that ATB can operate on the basis of recovering all of its current operating cost and offering an interest rate of approximately 2.50 per cent or less to legitimate Alberta borrowers without relying on a subsidy from the provincial government. We believe there is room for even greater operating cost efficiencies and lessons learned from the Bank of North Dakota, which operates at less than one per cent of its loan portfolio.
2. Finance social housing. ATB could provide at-cost mortgages to low-income households, similar to Habitat for Humanity’s zero-interest home equity mortgages.
3. Provide loans for Alberta’s Climate Leadership Plan programs, including renewable energy and energy efficiency programs. ATB could play a key strategic role in financing investment in Alberta’s undercapitalized renewable energy capacity and energy efficiency opportunities. ATB’s expertise in deposit-gathering, credit adjudication, and providing payment services is an ideal vehicle to facilitate the delivery of broad-based government programs to accelerate the movement away from fossil fuel generation and the emergence of a clean economy.
4. Hold Government of Alberta bonds. Under current projections, the Alberta government will be borrowing upwards of $53.6 billion over the next three fiscal years from financial markets. According to the 2018–19 budget, debt-servicing costs are forecast to reach $2.286 billion by 2019–20, an amount nearly equivalent to the forecasted income $2.315 billion from Alberta’s investment funds. Two provincial agencies that have the capability of holding Alberta’s debt are ATB and the Alberta Investment Management Corporation (AIMCo). One potential role for ATB would be to buy the short-term paper of the Alberta government instead of federal securities. This could mean significant debt servicing cost savings to the province, would keep interest income inside the province, and such securities qualify as eligible collateral at the Bank of Canada.
5. Provide agriculture loans. Unfortunately—and incredibly—ATB no longer discloses its loans to the agriculture sector. Former disclosures reported $1.4 billion in agriculture loans outstanding at March 31, 2011. At the end of March 2017, $2.24 billion of agriculture loans were outstanding under the Agriculture Financial Services Act. Agriculture Financial Services Corporation could be integrated into ATB and made the pre-eminent lender to Alberta’s agricultural community.
6. Recapitalize ATB. The government should eliminate ATB’s fictitious notional capital counted as Tier 2 capital. Capital requirements would be simplified by requiring ATB to hold a minimum of 10 per cent of risk-weighted assets in core, or Tier 1, capital. Instead of the fiction of paying tax, this levy would be eliminated, as would the deposit guarantee fee. These changes would eliminate the circularity of payments between different parts of the Crown and would generate almost $100 million in retained earnings every year that could support $1 billion in new loans. The government should also consider converting the wholesale borrowing of $1.12 billion to Tier 1 capital, which would give ATB ample capital to grow under a new and simplified regulatory capital regime.
Our report and the policy suggestions above are intended to stimulate an important conversation in Alberta and across Canada about the nature of banking, money, and finance in general. We believe money and its creation should be seen as a form of a public utility, whereby the creation of money through credit benefits the greatest number of people at the least possible cost to society.
ATB is our bank. If we want to control our economic destiny, we need to control the power to issue credit and invest in the assets of the people and natural assets of the province.
We welcome a healthy and vigorous debate about what we believe is a feasible and positive future for ATB: becoming a financial institution that is focused on meeting the social and economic needs of Alberta residents.