Flying under the radar, the Finance Minister on 3 November introduced Bill 44 the Financial Statutes Amendment Act, an innocuous sounding Bill with important implications for ATB Financial. Minister Toews described the Bill as reducing red tape for “Alberta job creators while improving the resilience of Alberta’s financial institutions.” The Bill
will improve Alberta’s regulatory environment and the competitiveness of Alberta’s financial sector. It will help Alberta attract much-needed investment and job creation in support of our economic recovery plan, and it will balance the government’s commitment to responsible oversight of Alberta’s financial institutions with their need to compete and evolve.
Source: Facebook
However underneath the standard rhetoric of red tape reduction, job creation, and investment attraction lies a supervisory iron fist. New supervisory powers over ATB Financial was the result of “consultations with stakeholders” who identified the “many legislative and regulatory shortcomings that get in the way of the efficient function of this province’s financial sector.”
One would therefore expect to see a host of section repeals, but this is not in fact the case. There are more additions while simple changes such as regulatory decisions being made by the Minister instead of Cabinet or the reduction of board size by two people will not in itself make system more resilient.
ATB’s regulatory context has been modeled after the federal Office of the Superintendent of Financial Institutions (OSFI). However, one gaping hole was always evident- that of explicit supervisory powers that OSFI has under its own Act and various federal statutes such as the Bank Act. Now a similar range of supervisory powers has been given to the Alberta Superintendent of Financial Institutions.
Before delving into the specific additions to the ATB Financial Act (the other statutes amended include the Credit Union Act, various amendments to that Act, Loan and Trust Corporations Act, Financial Administration Act, Freedom of Information and Protection of Privacy Act, and Local Authorities Capital Financing Act), a review of the Legislative Assembly debate is warranted.
Legislative Assembly
At Second Reading, the first speaker was Sarah Hoffman (NDP- Edmonton Glenora) who focused on recent government accounting errors and the Alberta Capital Financing Authority’s (ACFA) loans to airports. Introductory comments about ATB Financial were laudatory recognizing ATB’s long history of supporting Albertans. She expressed concern that “some folks in northeastern Alberta who’ve lost their jobs because of impacts to ATB and interim closures, and I’m concerned about that.” Other comments related to line-ups at ATB and praise for ATB advertising at Alberta airports:
the airports, too. I know their campaign has changed a little bit, but I absolutely love the campaigns when you got off the airplanes in Edmonton or Calgary, that the hallway that connects you from the airplane to the terminal – it has a specific name that I can’t remember. But they were often plastered in facts about Alberta, right? Facts about how many bees we had or how we were in terms of honey production; facts about local attractions that we had in our region, things to make people excited that they were getting off the airplane in Alberta and what that meant for them in the time that they were spending there.
Government member Devinder Toor (Calgary-Falconridge) pointed out the new capacity for virtual meetings, reducing the size of the Credit Union Deposit Guarantee Corporation board by two members, and the transfer of some responsibilities from the Lieutenant Governor in Council to the Finance Minister improving administrative efficiencies.
Chris Nielsen (NDP- Edmonton Decore) also brought up accounting errors accusing the government of trying to make the books look better. He mentioned the government’s failure to create jobs and regional airports, but no specific references to changes to the ATB Financial Act. Jordan Walker (UCP- Sherwood Park) praised the timeliness of the Bill and how the NDP drove thousands of jobs away. He indicated the Bill made access to central bank liquidity easier, and the benefits of reducing red tape. There is however no mention whatsoever in the Bill to the Bank of Canada nor to liquidity.
In the evening session on 23 November, further debate took place. Joe Ceci, the former Finance Minister spend most of his allotted time talking about credit unions and airport authorities. David Shephard (NDP- Edmonton Centre) talked about AIMCo CEO’s early departure -“that long walk in the snow,” accounting errors, and ACFA loans to airports. Heather Sweet (NDP- Edmonton-Manning) also spoke about ACFA loans to airport authorities ($3 billion to Calgary and $750 million to Edmonton). At this stage ATB Financial appears to be off the radar.
At Committee of the Whole on 30 November, Joe Ceci spoke about credit unions, the ACFA and regional airport authorities (the Government is liberalizing borrowing requirements for regional airport authorities given the COVID-19 pandemic), and accounting errors.
Rakhi Pancholi (NDP – Edmonton Whitemud) referred to accounting problems, the lack of transparency, AISH payments, and airport authorities. With respect to ATB, she indicated it was her understanding that ATB can not “access the Bank of Canada’s standing term liquidity facility, unlike the banks.” Even if this were true, how could Alberta statutes permit this without a corresponding authorization by the Government of Canada?
After Committee of the Whole the Bill passed Second Reading without a recorded vote. At Third Reading, on the evening of 1 December, the Bill was passed. Travis Toews, in moving Third Reading of Bill 44, emphasized accessing “capital from the Bank of Canada’s liquidity measures should global financial markets require that liquidity for these financial institutions.”
On 9 December 2020, outside House Sitting, Royal Assent was granted and the provisions of the Bill came into force that day. Throughout the debate, there was no commentary about the government’s new supervisory powers over ATB, including the Finance Minister’s opening summary of the Bill. This seems very odd when Alberta’s largest financial institution, at the end of 2020 and in the midst of a COVID-19 medical crisis, now is in a new environment where the Superintendent, not the Minister, has significant powers to direct ATB and to access information from ATB Financial.
New supervisory powers
Background
Under the original Alberta Treasury Branches Act, proclaimed in October 1997, there was no formal regime of regulation or supervision of the affairs of ATB. At the time, the focus was on creating a strong board, providing ATB with business powers comparable to the chartered banks, and creating rules and regulations limiting ATB’s investments in areas such as real estate or equities, and incorporating sanctions against self dealing by the board. In addition, a capital adequacy regime was put in place modelled generally on federal capital adequacy requirements.
In 2004, small steps were taken to move ATB towards a more normalized supervisory scheme. This supervisory system was “regulatory lite” where new guidelines were introduced and a legislative compliance reporting system was put in place. This meant ATB’s executive had to certify annually to the Board and to the government that ATB was complying with provisions of the Act and Regulations.
ATB was not on the government’s radar until 2007 when ATB and its subsidiary, ATB Investment Management, took very large provisions from its investments in non-bank sponsored, asset backed commercial paper. This led to a reshuffling in the capital adequacy requirements to ensure ATB would be in compliance with the Act.
Through the NDP’s term in power, two major decisions took place, excepting board appointments. First, in the October 2015 budget, ATB was tasked to lend money to deserving Alberta businesses on a non-political basis. The second change was to the name of the Alberta Treasury Branches Act– it was changed to the ATB Financial Act.
With a transition to a government committed to balancing the budget, attracting investment, creating jobs through corporate tax reductions, and investment attraction, the UCP government moved to narrow the business purpose of ATB. Bill 22 brought the following changes to ATB’s business objectives in November 2019, namely:
11.1 In carrying on its business, ATB Financial shall
(a) manage its business in a commercial and cost-effective
manner,
(b) seek to earn risk-adjusted rates of return that are similar to or better than the returns of comparable financial institutions in both the short term and the long term, and
(c) avoid an undue risk of loss by prudently managing its business, which includes establishing and implementing relevant plans, policies, standards and procedures.
These objectives were certainly in keeping with a fiscally conservative, investment driven government, with a self interest in promoting ATB’s profitability which flows into the government’s surplus or deficit. Was the UCP firing a shot across the bow of ATB’s board and management? This amendment came after five years of weak investment, high unemployment, and weak investment. The timing of this legislative directive came at a very unusual time for ATB. Prior to the pandemic, ATB had been facing headwinds for five years, although with the exception of fiscal 2016, it showed a profit, albeit not comparable to rival institutions. ATB executive and board also knew (or should have) that the organization was nowhere close to achieving risk-adjusted rate of return near that of their competitors. The Board directed management to get expenses under control. However, the largest impediment to that goal was the provision for credit losses which are notoriously volatile in Alberta’s economy.
With the arrival of COVID and OPEC+ driving down oil prices, the 28 February 2020 budget and every budgetary goal had been blown out. Nine months later we now witness critical changes to ATB’s relationship with its sole shareholder, the Alberta government.
Supervisory Powers
A new section 29.1 has been added to the ATB Financial Act which creates the position of Superintendent of Financial Institutions appointed by the Minister. The Superintendent has broad powers in delegating authority. After establishing the position, 29,2 sets the “objects” of the Superintendent which provides an interesting policy context to courts who may be faced with adjudicating disputes. The objects are:
(a) to promote the adoption by the officers, the board and the management of policies and procedures designed to control and manage risk;
(b) to regulate ATB Financial and its subsidiaries in accordance with this Act;
(c) any additional objects prescribed.
In addition to defining in a broad manner the objects, the section goes on to set out “considerations” the Superintendent must into account when performing duties: These considerations include:
(a) the rights and interests of the depositors and creditors of ATB Financial and its subsidiaries;
(b) the interests of the Province, having due regard to
(i) the need to allow ATB Financial and its subsidiaries to compete effectively and to pursue the business objectives set out in section 11.1, and
(ii) the obligation of the board under section 3(2) to manage the business and affairs of ATB Financial;
(c) in the case of a subsidiary of ATB Financial, any oversight of the subsidiary conducted by other regulatory organizations.
The Superintendent must balance the rights of depositors and creditors with the Board’s mandate to oversee the operations of ATB while meeting the business objectives of earning risk-adjusted rate of return comparable with its competitors.
One difficulty with this setup is that it will inevitably pit the Superintendent’s duty to customers (depositors and creditors) with ATB’s management of risk, overseen by the Board. Both the Superintendent and Board reports to the same Minister. Ultimately it will be the Minister who decides whether the Superintendent’s “considerations” are appropriate. The Board also is already in a difficult position since part of a director’s duty of care is to “have due regard to the interests of the Crown in right of Alberta and the depositors of ATB Financial.” Note there is no mention of creditors in the Board’s remit. Also the Superintendent, in considering the “interests of the Province” must somehow ensure that ATB can “compete effectively” while meeting the risk-adjusted rate of return.
Section 29.3 sets out the powers and duties of the Superintendent. These duties and powers include the right to:
- issue directions in the form of supervisory bulletins;
- examine and make inquiries into the business and affairs of ATB and its subsidiaries;
- request information from ATB and its subsidiaries in the forms and time frames set by the Superintendent;
- take “corrective measures” where there are “reasonable grounds” to believe that ATB Financial or its subsidiaries is not: a) complying with legislation, regulations, guidelines etc., b) maintaining a sound financial condition, or c) following “sound business and financial practices;” and
- issue of temporary direction to ATB “if a delay would be prejudicial to the public interest” which may include a written direction to “cease or refrain from committing an act or pursuing a course of conduct;” and “to perform such acts as the Superintendent considers.”
This lengthy section then goes on to address representations from ATB and the duration of these temporary directions.
Section 29.4 spells out duties of the Superintendent towards maintaining “banking information” confidential, albeit with certain exceptions such as delegation or information sharing with other government agencies or law enforcement agencies.
Finally, there are substantive regulation-making powers to prescribe or clarify objects, powers and duties of the Superintendent and the nature of the temporary direction.
Timing
Why are these critical enforcement powers being created now? As Abpolecon.ca has documented over the past number of months, there are many serious challenges facing ATB Financial and consequently the Alberta government as sole shareholder. At first blush, these changes, made without fanfare and with virtually no legislator comment, gives the Minister/Government a much firmer say in the unfolding challenges at ATB Financial.
“Why now?” is best answered by the Government’s overall agenda. In order to balance the budget, it must make government more efficient- that is their mantra. Centralization of control is key to this objective as we have seen in moves to absorb the Alberta Capital Finance Authority into government and the enhancement of AIMCo’s sphere of influence. The redefinition of ATB’s business objectives is another effort, not simply symbolic, to improve returns to the shareholder.
Conflicting Roles
The difficulty facing the Finance Ministry is how to reconcile different roles the Ministry has vis-a-vis ATB Financial. First and foremost, ATB is an agent of the Crown and therefore ATB’s assets and liabilities flow back up to the Government. Control of agents is notoriously difficult and especially trying where the agent is a complex financial institution. The Government is also the guarantor of ATB’s deposit liabilities. Deposit guarantors are notoriously risk averse while the Agent’s management usually prefers more risk-taking. Another Ministry role is that of a shareholder who wishes strong returns for the capital invested in the venture, while minimizing risk. This profit-maximizing imperative is further complicated by desires of elected politicians to grow the economy, employ more Albertans and foster more investment through the lending process. In the case of ATB more than half of its branches and all its agencies are outside Calgary and Edmonton, key constituencies of the present government. A “normal”: shareholder would close uneconomical branches but rural MLAs would oppose such decisions. Then the Ministry has the regulatory/supervisory function which, in some respects, is similar to the risk management function within ATB itself. All these competing forces must be reconciled at the ministerial level or, in extreme circumstances, around the cabinet table.
The playing field, on which ATB and its government partner play, has now shifted. The coming months will be interesting as the province’s economy begins both to heal and to surface more borrower bankruptcies especially in commercial real estate, hospitality industries, and oil and gas lending at ATB.
The Liquidity Puzzle
While the Finance Minister did not mention financial institution access to central bank short-term liquidity facilities in introducing Bill 44, at Third Reading he stated:
It (Bill 44) will allow financial institutions to access capital (sic) from the Bank of Canada’s liquidity measures should global financial markets require that liquidity for these financial institution.
This goal was also mentioned by both government and opposition MLAs during debate. In reviewing the Bill three or four times, word searching “liquidity,” “Bank of Canada,” and “facilities,” I have still not be able to find the provision in Bill 44.
Freedom of Information – changes
The amendments to the definitions of “branch” and “branch facility” appear to be a legislative response to a 10 year saga which started with a very simple question access to information question from the Alberta Union of Provincial Employees (AUPE). In March 2010, AUPE sought to gain access to information held by ATB Financial with respect to the number of positions excluded from the bargaining unit. That May, ATB rejected the access request. In 2012, the Office of the Information and Privacy and Freedom of Information Commissioner (OIPC) rejected ATB’s position. ATB then sought judicial review of the Commissioner’s decision and in December 2014, the Alberta Court of Queen’s Bench rejected ATB’s position.
In Justice Manderscheid’s 24-page judgment, he distinguished between records of a treasury branch, noting Alberta Treasury Branches “is not in itself a treasury branch, and the two terms are not synonymous.”
At the end of July 2015 ATB wrote back to the union stating that ATB had “not excluded employees from the bargaining unit on the basis of the Public Service Employee Relations Act.”
AUPE then sought a review of ATB’s response on the basis of whether ATB met “its obligations required by section 10(1) of the Act (duty to assist applicants).” In September 2019, the OIPC again ruled in AUPE’s favour directing the
Public Body to search for and produce any records relating to policies and classifications relating to the following types of positions: administrative and support positions, budget officers, systems analysts, auditors, disbursement control officers, hearing officers who hear matters under the Provincial Offences Procedure Act and those positions within the Public Body that have similar duties as these positions. The Public Body is precluded from relying on section 4(1)(r) in its response.
This mountain of a molehill has now finally reached its apotheosis by addressing the problems in the definition of a treasury branch and treasury branch facility. Why management, and possibly the board, decided to grind the proceedings out for ten years wasting everyone’s time, then finally resort to the legislative card is a good question for the executive management at ATB, its board, and the Minister. That this picayune issue had gone on for ten years consuming tens, if not hundreds of thousands of dollars in legal fees, management and union time should be troubling to taxpayers.
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