News Release:

October 9, 1997

Alberta Treasury Branches Act and Regulation
For Immediate Release

Introduction

With proclamation of the Alberta Treasury Branches Act, Alberta Treasury Branches (ATB) is established as a provincial Crown corporation with the ability to operate under the same kind of rules that apply to other financial institutions. The legislation and regulation, consistent with that for other financial institutions, contain broad powers in line with a rapidly evolving financial services marketplace.

Following is an overview of new regulatory provisions under the new legislation.

Significant Borrower (S. 4 (1))

The definition of a significant borrower is added to the new Act. A significant borrower is a person or company who has indebtedness to an ATB branch exceeding amounts prescribed by regulation. The amount prescribed by regulation is the greater of $200,000 and 25% of net worth for individuals and 25% of equity for companies.

A director who is a significant borrower or is a director, officer or employee of a significant borrower; who has a 10% interest in a company which is a significant borrower; or who has a spouse or relative in one of these situations, would be an affiliated director. At least one-half of the Board of Directors must be unaffiliated. The Secretary to the Board will monitor compliance.

Business Purpose (S. 11 (2)(b))

ATB may act as a trustee for self-directed registered retirement income funds, self-directed registered education savings plans, and self-directed registered retirement savings plans. Previously, ATB was not able to act as a trustee in any form.

Implementation of this power will be considered in the context of ATBÆs three-year business plan.

Restricted Business (S. 12 (h))

ATB is prohibited from the following business:

• acting as a receiver, liquidator or sequestrator;
• guaranteeing unfixed sums of money;
• acting as an insurer, agent or adjuster within the meaning of the Insurance Act;
• acting as an information management corporation;
• acting as a financial leasing corporation; or
• carrying on any other activity prescribed by regulation.

Some of these activities may be undertaken through subsidiaries, for example, acting as receiver, liquidator, sequestrator, insurer (only for life insurance not property and casualty), and an information management corporation. ATB however is prohibited from acting as a financial leasing corporation.

ATB's primary obligation is to the Crown and depositors. Exposure to derivatives should be limited to mitigating risks on ATB's balance sheet. ATB's power to enter into swaps and other financial derivatives is restricted to the purpose of hedging risks associated with interest rates, exchange rates and similar risks. ATB may offer interest rate and foreign currency swaps to clients only when the purpose of the transaction is to hedge against these risks to mitigate ATB's credit risk.

Counterparties must have minimum debt ratings (i.e., a minimum of AA- rating on bonds from Dominion Bond Rating Service) to ensure that they represent a reasonable credit risk.

Deposit Guarantee Fee (S. 14)

ATB is required by regulation to pay the Government of Alberta a deposit guarantee fee in recognition of the cost to government of providing an unconditional guarantee for ATB deposits. ATB will pay an annual fee equal to 1/6 of 1% of all deposits, which is the premium paid by members of the Canada Deposit Insurance Corporation.

The fee will be phased in over six years. Beginning in 1999, ATB will pay 50% of the fee and an additional 10% will be added each year until 100% of the fee is paid in 2004. The timeline is generally consistent with the maturity schedule for ATB's deposits.

The fee will be payable in subordinated debt owing to the Crown, which could be counted as regulatory capital by ATB for the purpose of capital regulations. The deposit fee will be based on ATBÆs deposits at year-end and is payable before June 30^th, immediately following the fiscal year end.

Investment in Real Estate (S. 17)

Investment in real estate is limited by regulation to 3.5% of assets for ATB and its subsidiaries, excluding subsidiaries that are financial institutions. This limit is roughly equivalent to the investment limit for banks (70% of capital, which equates to approximately 3.5% of assets).

The limit does not include real estate realized from foreclosed loans unless the real estate is held for more than seven years. Investment realized on real estate as loan security is excluded for seven years, to allow for reasonable time to dispose of the security.

Financial institution subsidiaries are excluded from this limitation because financial institutions are subject to separate limits in their own legislation.

Real estate and equities are two types of investments that are explicitly limited in financial institution legislation because of their greater potential for volatility. The equity limit is set out in investment limits provided below.

Investment Limits and Rules (S.18)

Connected Persons Rule

ATB is prohibited from making loans to or other investments in any person or connected persons for amounts in excess of 1% of ATB's assets (currently approximately $85 million).

Persons are connected if

• a loan, guarantee or investment is for the same purpose, the expected source of repayment is the same, or the security for the loan or investment is the same, or
• one person is a company that is affiliated through common ownership with another company.

However, if persons are financially independent of each other, for example having sources of income from other investments or other assets, they would not be considered connected.

Following are investment vehicles that are exceptions to the rule prohibiting investments in excess of 1% of ATB's assets:

• loans to or investments in subsidiaries;
• shares in entities in which ATB is authorized to hold a 10% or greater interest;
• loans to or securities issued by a university, municipality, hospital or school board in Canada;
• loans to the Government of Canada or a province or to their agencies;
• loans guaranteed by the Government of Canada or a province;
• securities on which payment is ensured by legislated school or municipal taxes on property situated within the jurisdiction of the school or municipality;
• residential mortgage loans made in accordance with the regulation, as described below;
• securities on which payment is guaranteed by the Government of Canada or a province;
• debt securities including bankers' acceptances (other than subordinated debt securities), that are issued or guaranteed by a financial institution authorized to take deposits in Canada;
• deposits with financial institutions authorized to take deposits in Canada.

The connected person rule is designed to limit ATB's exposure to a single borrower or a group of borrowers which in practice represents one risk to the institution. This rule is consistent with rules in other financial institution statutes. ATB's Credit Department will be responsible for monitoring compliance.

Eligible Investments Over 10%

ATB may have a significant interest (more than 10%) in the following types of companies, which must be incorporated in Alberta:

• a securities dealer, a mutual fund distribution corporation, an investment counselling corporation, a portfolio management corporation (registered or defined as such under the Securities Act);
• an insurer, as defined under the Insurance Act, with activities limited to term-life insurance, annuities, risk management and financial advisory services;
• a real property brokerage corporation, limited to acting as an agent for vendors or purchasers of real estate owned or administered by ATB;
• a real property corporation, dealing with real property or dealing with shares of a corporation or ownership interests in an unincorporated entity that is dealing with real property;
• a factoring corporation, acting as a factor in relation to accounts receivable;
• an asset management corporation that administers and disposes of foreclosed property and other security realized from defaulting borrowers;
• an information management corporation, carrying on the business of the collection, manipulation and transmission of information that is primarily financial or economic in nature, or of the sale of related software;
• a service corporation whose activities are limited to the provision of management services to ATB and ATBÆs corporate group.

The definitions of these subsidiaries are consistent with Alberta financial institution legislation.

Liquidity

ATB shall have and keep available unencumbered liquid assets in an amount equal to at least 6% of total assets. These liquid assets may be in the form of cash and acceptable securities.

ATB also is required to formulate a liquidity policy to manage liquidity in a prudent manner.

Compliance with this requirement will be the responsibility of the Office of the Chief Financial Officer for ATB.

Common Shares

Investment in common shares by ATB and its subsidiaries, other than financial institution subsidiaries, is limited to 3.5% of assets. This limit is consistent with the limit for banks (70% of capital, which equates to approximately 3.5% of assets).

The aggregate limit on investment in real estate and common shares by ATB and its subsidiaries, other than financial institution subsidiaries, is 5% of assets. This limit also is consistent with that for banks (100% of regulatory capital, which equates to approximately 5% of assets).

Financial institution subsidiaries are excluded from this limitation because financial institutions are subject to separate limits in their own legislation.

Compliance with this requirement will be the responsibility of ATB's Controller.

Residential Mortgage Loans

ATB's investment in residential mortgage loans is limited to Alberta. The investment is limited to 75% of the market value of the real estate at the time the mortgage is purchased, unless the excess amount is insured by the Canada Mortgage and Housing Corporation (CMHC) or an insurance company, or is self-insured by ATB at rates comparable to those charged by CMHC. This 75% loan-to-value ratio is the standard in legislation for financial institutions across Canada.

Mortgage investments that ATB has committed to or made before October 8, 1997, at 75-80% of the property's market value are grandfathered unless the amortization term is renewed or extended.

Capital Adequacy (S. 20)

ATB is required to maintain its assets at a level such that capital equals or exceeds the greater amount of 8% of risk-weighted assets and 5% of assets. This is consistent with the standards for chartered banks. Required capital is defined as the sum of notional capital plus retained earnings (less deficit) plus any subordinated debt owing to the Crown, as demonstrated in the following table.

Risk-weighted assets are classified according to credit risk. For example, government bonds are classified at 0% credit risk since risk at default is negligible, uninsured residential mortgages at 50%, and commercial loans at 100%. This means that for every $100 in commercial loans, a financial institution must maintain $8 in capital but only $4 in capital is required for every $100 in uninsured residential mortgage loans.

In the future, ATB's growth will be constrained by its earnings, which provide the capital base on which to leverage the balance sheet. The amount of capital required for loan transactions will be a factor in making decisions on ATBÆs loan portfolio.

Related Parties (S. 34 (a))

Related party transactions are restricted by regulation. The regulation requires establishment of management procedures, which may be in the form of a bylaw and will be made public in the Alberta Gazette.

The basic principle, common to financial institutions, is that transactions between persons with influence over ATB's financial decisions must be carefully scrutinized and, except for senior officers and staff, carried out at fair market rate.

This legislative framework ensures that persons who can exercise control or influence over a financial institution do not act to the detriment of the depositors and, in ATB's case, the Government of Alberta as owner of ATB. Under the previous legislation, ATB was required to establish a conflict of interest bylaw, approved by the Provincial Treasurer and tabled in the Legislature.

The regulation generally bans related party transactions and defines related parties as follows:

• a director or senior officer of ATB;
• a person with a 10% or greater interest in an affiliate of ATB;
• the auditor of ATB or any of its affiliates;
• a spouse of a director or senior officer of ATB;
• a relative of either a director or senior officer, or their spouse, who shares the same home;
• a company in which a director or senior officer of ATB has 10% or greater interest or which is controlled by the auditor of ATB or a spouse of a director or senior officer of ATB;
• a company in which ATB has a 10% or greater interest or the auditor of such a company;
• a partner of ATB in a case where either party has a 10% or greater interest in the partnership or joint venture;
• an affiliate of ATB or a director or senior officer of an affiliate of ATB;
• a person designated as a related party where there is a relationship that might reasonably be expected to affect ATBÆs best judgement respecting a transaction.

Following are exceptions to the ban:

• transactions at the fair market rate, approved in accordance with procedures set out in ATB bylaws;
• loans to senior officers on a preferential basis;
• loans to directors, senior officers, and the spouse and relatives of directors and senior officers may not exceed + of 1% of ATB assets;
• all related party transactions must not exceed 2% of ATB assets.

Transactions between the Crown and ATB must be on fair market terms and subject to any approvals set out in the management procedures, but the Crown is not defined as a related party.

Compliance will be coordinated by the Secretary to the Board (through a register of related parties) and ATB's Credit Department.

Financial Administration Act

Provisions of the Financial Administration Act (FAA) apply to ATB except where it is prescribed otherwise by regulation. Under the FAA, ATB is exempted by order from the FAA except for key controls. The FAA exemption order ensures that sections of general relevance continue to apply as well as FAA interpretation provisions and definitions.

Following are the relevant key controls with references to sections of the FAA:

• provincial agency duty to provide information to Treasury Board (S. 6);
• Treasury Board power to make regulations and issue directives necessary for Treasury Board to exercise its powers and perform its duties (S. 7);
• provincial agency duty to provide information to the Provincial Treasurer (S. 17);
• power to appropriate surplus and set interest rates on retained earnings or advances (S. 45);
• Lieutenant Governor in Council power to authorize the Provincial Treasurer to make advances to or purchase securities of a provincial corporation (S. 62.1);
• Treasury Board power to make regulations or issue directives on standards for contracts (S. 79);
• prohibition on incorporating a provincial corporation without Lieutenant Governor in Council approval (S. 80.1);
• Provincial Treasurer is the exclusive agent for a provincial corporation issuing securities, except for deposits ordinarily received at a branch or agency in Alberta in the ordinary course of business (S. 81);
• discontinuance of provincial agencies (S. 81.1);
• Treasury Board power to authorize an examination of a provincial agency (S. 83);
• provincial corporation is not bound by an assignment of debt other than by way of regulations made by the provincial corporation (S. 91.1).

For further information please contact:

Darlene Dickinson
Chief Public Affairs Officer
Alberta Treasury Branches
(403) 493-7307

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