Break the Bank

Should Alberta sell ATB?

By Glen Mumey and Nolan Derby

Many Albertans are aware that our government is incurring budget deficits and that our Treasury has accumulated a substantial debt, approaching $45-billion. Fewer realize that our province is also extensively engaged in investing and lending. The government-owned Alberta Investment Management Corporation buys market securities. The Agriculture Financial Services Corporation lends money to farmers and small businesses. Most significantly, a government-owned bank, ATB Financial, takes deposits and issues loans.

This Crown ownership of financial institutions stems from 80 years of successive Social Credit and Progressive Conservative governments. Premiers Aberhart, Manning, Lougheed, Getty and Klein all played important parts in creating or preserving public financial investment.

These entities have disadvantages. They’re much smaller than their national and international competitors. Much of their investment has depended on the fortunes of the volatile, commodity-based Alberta economy. And their management and efficiency may have been affected by board appointments of governing-party stalwarts.

On the other hand, these institutions have provided some benefits. The creation of the ATB during the Aberhart era provided some “New Deal” effect in a province stricken by the Great Depression and drought. Lougheed’s Heritage Savings Trust Fund astutely bought park land in Calgary and Edmonton, and Heritage monies have at times been isolated from politicians and successfully invested by low-paid Treasury bureaucrats.

But do ATB’s historical roots, investment performance and unusual mandate justify its ongoing existence? It’s past time we citizens of Alberta ask ourselves whether we should continue to own a bank.

ATB arose from 1930s economic calamity. Drought on the prairies was shrinking food production, and global economic conditions were driving prices down. Many individuals and governments, north and south of the 49th parallel, were broke. Eastern banks were seen as hostile to Western interests. This was before the oil boom: agriculture dominated Alberta’s economy. The dissatisfaction led to political upheaval.

Our province already had a ruling party based on agricultural populism, the United Farmers of Alberta. That party had concerned itself with financial markets by passing a law restricting mortgage foreclosures. The UFA lost the election of 1935, however, to Social Credit and William “Bible Bill” Aberhart.

Social Credit took its name from the monetary doctrine of a British theorist, Major C.H. Douglas. Early in his administration, Aberhart, with a government in desperate financial condition, undertook a classic monetary policy solution: expand the money supply. The government paid a “dividend” to citizens in the form of “prosperity certificates,” essentially chits against an insolvent Treasury. This “funny money” proved unpopular with merchants. Aberhart’s 1937 attempt to take over local banks was likewise unsuccessful—rejected by the province’s Lieutenant-Governor and declared unconstitutional by the Supreme Court of Canada.

Still, Aberhart held to his view that “a state credit house is required… to issue credit to producers and distributors at no interest; and… to issue credit to each qualifying citizen.” His next move was to create a system of treasury branches. The first opened in Rocky Mountain House in 1938. These were effectively publicly owned branch banks, accepting deposits and making loans. The infusion of Aberhart’s views was evident, though. A depositor didn’t write cheques, but special vouchers. If one were issued in payment to an Alberta business, the full amount of the voucher wouldn’t be charged against the depositor’s account. They’d get a rebate as a reward for stimulating the local economy.

All banks incur risk-control costs. But ATB must protect itself against a single, volatile provincial economy.

A policy of generous loans and of rebates to depositors was—unsurprisingly—costly. As an Aberhart biographer wrote, “For a long time the Treasury Branches were a drain on the public purse.” But better times returned to the province. Aberhart died in 1943 and was replaced by his protégé Ernest Manning, who was more practical and conservative. The Branches began to more closely resemble private-sector banks and soon had over 100 locations.

The Branches flourished as the province transformed from a have-not to the richest in Canada. Their success was due to Alberta seeing more boom than bust, but the tolerance of their wealthy owner helped. The province didn’t require dividends and contributed money during periods of stress. Life was easy for the government’s fortunate progeny.

In 1997 the Treasury Branches were incorporated as a Crown corporation, ATB Financial. The province continues to be the sole shareholder and has remained a generous and tolerant owner. Now, however, may be the time—particularly given a rapidly growing provincial debt—when ATB should be viewed from the standpoint of an owner who can no longer afford to be quite so complacent.

What, then, are the benefits of keeping ATB, and what are the costs? The possible upsides include ongoing return on investment and other services to the province. The downsides include important liability issues and forgoing the cash a sale would generate.

In its 2016/17 financial report, ATB valued its assets at $48.5-billion. These were mostly loans to Alberta businesses and individuals, reduced by the estimated amount borrowers won’t repay. ATB’s liabilities were $45.4-billion, mostly owed to depositors who can withdraw their money at any time. The difference between assets and liabilities—the government’s net investment value—was $3.1-billion.

Now, what return did the province get on this $3.1-billion in 2017? ATB’s report says that after the bank collected interest on loans, paid interest to its depositors and covered other expenses, some $151-million was left over. ATB reported this as net income. So, for 2017 we can divide $151-million by $3.1-billion and obtain government’s return on equity (ROE)—about 5 per cent. That, however, is for a single year, and not at a particularly good time for the Alberta economy.

The average rate of return was 8.6 per cent over the last 15 years—7.9 per cent over the last 10 years, and 8.2 per cent within the most recent five. During a time of low inflation, marked by the Great Recession and collapsed oil prices, these returns look pretty good. To appreciate the built-in disadvantages, however, ATB can be contrasted with Canada’s largest chartered bank, the Royal (RBC). Using RBC’s financial statements, a comparable calculation can be made:


Return on investment                 ATB                 RBC

Last 15 years                                             8.6%                18.2%

Last 10 years                                             7.9%                17.6%

Last 5 years                                                8.2%                18.5%


ATB has clearly underperformed RBC. One reason may be the former’s lack of geographic breadth. The bank largely operates within one province. Royal is across Canada and derives 39 per cent of its income from outside the country. All banks incur costs for risk control. ATB, however, must protect itself from the ups and downs of a single, volatile provincial economy. It may need to modify its business practices because of interdependence among and between its loan customers and depositors. Crown banks incur higher costs to mitigate risk than private banks do.

Sheer size difference is a factor. RBC has 24 times the assets of ATB. It wouldn’t have grown so big if it hadn’t been capturing some scale economies. RBC, despite its 24-fold size difference, has only about 16 times as many employees as ATB. RBC’s non-interest expense (personnel and other operating costs) only exceeds ATB’s by 21 times. Both entities use an incentive system of pay for their CEOs, with considerable annual variance. In 2015 RBC’s CEO was compensated to the tune of $11-million—about three and a half times the $3-million that ATB’s CEO was paid that year.

ATB is also, like all banks, highly leveraged: For each dollar of assets, it owes about 94 cents. Every year the bank must confront the possibility that more borrowers than expected will default and that depositors will withdraw more than anticipated. Although extra reward should follow extra risk, ATB’s lower returns are actually accompanied by higher risk. The government bears responsibility for paying ATB’s depositors. As an August 2017 Moody’s credit-rating opinion stated: “ATB would likely be reliant on the province in a period of financial stress.…” Holders of RBC stock, on the other hand, do not fear that RBC will ask them for more money.

ATB’s management process itself could be affected by Crown ownership. RBC’s private-sector ownership provides it with a strong incentive to lower costs, diversify and expand. A public institution may not only be constrained in these objectives but could be motivated to trade profitability for political goodwill. Economists have long observed that public enterprises are often used for political means, including the transfer of wealth to projects, causes and supporters preferred by the government of the day.

It’s impossible for citizens of Alberta to know why, exactly, ATB issues a given loan (or denies a particular applicant). But board appointments and political affiliation are more transparent. A 2007 investigation by the Edmonton Journal’s Darcy Henton and Jason Markusoff, for example, found that at least nine of ATB’s 13-member board had PC memberships.

Boards aren’t involved in day-to-day running of a public bank, but they do set the overall direction. For example, in September 2016 ATB announced it would provide an additional $1.5-billion to small businesses in Alberta. While this capital may help local businesses and generate positive headlines for ATB and the government, it also carries risk—and not just of bad loans. As Frontier Centre policy analyst Ian Madsen wrote, businesses outside of Alberta may now be less willing to expand here if they perceive they’ll be at a competitive disadvantage to local businesses with government-backed financing.

A 2007 Edmonton Journal report found that 9 of 13 ATB board members had PC memberships.

ATB may have some indirect upsides. At one time, its diffuse branch locations improved banking service in rural areas—though with modern transportation and electronic transactions, and the extensive branching of chartered banks and credit unions, this benefit is now probably less relevant. And while some director appointments at ATB may have been, and still may be, rewards for loyal members of the governing party, they could also keep ATB more attuned to local needs and issues.

Indeed, ATB may have a special sensitivity in transactions with Albertans. Its prime lending rate is like its competitors’, but bankers makes individual deals with their loan customers. They decide how much risk to tolerate, how much time to give for repayment, and what rate to charge (perhaps above prime, but sometimes below). Bank managers answerable to a board in Edmonton rather than Toronto may have more incentive to look after local needs, even at the risk of less profit. But chartered banks can also have understanding managers and likewise have an incentive to keep Alberta customers content.

An ATB home mortgage is offered with about the same terms as any other, with conditions circumscribed by federal regulations. On depositor rates, ATB at press time offers a better deal to Alberta savers than many of its market-owned competitors do. But even if this were a persistent benefit, does the government really want to subsidize Albertans in proportion to their saving account balances? ATB has been recognized as a good employer and active charitable donor—but so have RBC and other private-sector banks.

What would Alberta gain by getting out of the branch banking business? First, some cash. As noted, ATB’s most recent published net worth is about $3.1-billion. If ATB’s 726,000-strong customer base and 173 branch locations fit the portfolios of other institutions, bidding could go above that. In a Frontier Centre report, Ian Madsen estimated ATB’s value in 2017 at between $1.4–billion and $7-billion.

Selling ATB would also absolve the province of a large liability: its guarantee of deposits. A government seeking to diversify the economy might also like to shift local risk to institutions outside the province. Not too many years ago the province didn’t have to worry about its credit rating. Since the oil price collapse, however, that credit rating has now dropped by two levels. The cost per level is about 0.2 per cent in the borrowing rate. The government predicts Treasury debt will rise to over $70-billion, so another credit demotion could cost $140-million per year. Rating agencies have taken note of the ATB deposit liability. Some analysts suggest ATB’s responsibility for over $50-billion in deposits could prompt yet another provincial downgrade—which would negate most of the bank’s prospective income.

If the public benefits of owning ATB aren’t worth the costs, why, then, has our Crown bank not been a political issue—even among provincial politicians who claim to prefer less government? The first challenge is that ATB tells its own story. It has an incentive to preserve itself—think of the uncertainty for its executives and employees if the institution were to be liquidated or sold.

People also apply different criteria for retention than for acquisition. The Crown-owned bank is well embedded in the province’s economic and social structure. If there were no ATB today, creating such an institution when the province already had a high debt would be a non-starter.

Other reasons may be political. As former U of C economist Frank Atkins told a Frontier Centre audience in 2011, “Since people use ATB, people must like it. Of course, these people are voters. Particularly, the government is concerned about losing voters from rural communities.”

But such worries haven’t always stopped the government from selling a Crown corporation. During the 1990s, for example, the province privatized Alberta Energy Company and Alberta Government Telephones. AGT had a broader customer and employee base than ATB and a longer history.

We need more intensive study of the pros and cons of selling ATB. Albertans, after all, are the bank’s owners. If the case were made clear enough, selling may not be beyond the realm of the possible.

Glen Mumey is a professor emeritus (finance) from the U of A. Nolan Derby is a recent MA (economics) graduate from UBC.


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