RBA governor Philip Lowe tweaks the central bank's capital framework (AAPIMAGE)
The Reserve Bank of Australia recorded an 'accounting loss' of A$4.3 billion, its first in years, as unrealised valuation losses exceeded the sum of other components of profit, the RBA’s 2021 annual report shows.
Despite the accounting loss, earnings of $3.9 billion were still available for distribution.
“This was because, when determining the amount available for distribution under the Reserve Bank Act 1959, unrealised valuation losses are offset against previously retained unrealised valuation gains,” the RBA explains.
A sum of $1.2 billion was transferred to the Reserve Bank Reserve Fund (RBRF), “consistent with the Reserve Bank Board’s target for this reserve”.
$2.7 billion was paid as a dividend to the Australian Government.
The RBA’s accounting loss of $4.3 billion, comprised:
- underlying earnings of $4.2 billion, an increase of $2.8 billion from the previous year;
- unrealised valuation losses of $8.2 billion, from the appreciation of the Australian dollar over the year; and
- a rise in bond yields in Australia and abroad, and the unwinding of premiums on domestic government bonds that were purchased at a higher price than their face value (due to their coupon rates being greater than the market yields at the time).
The capital framework is reassessed over time to take account of the changing risk environment or material changes in the composition of the Bank’s balance sheet, “as was the case in 2020/21”, the RBA annual report discloses in understated tones.
“It was appropriate to do so given the significant changes in the size and structure of the Bank’s balance sheet, the changes in the operation of monetary policy and the changed nature of the risks.”
The Reserve Bank said the board’s recent review of the capital framework “focused on interest rate risk for the domestic portfolio, particularly given that the government bonds purchased under the bond purchase program and to support the three-year yield target are intended to be held to maturity.
“For these bonds, any mark-to-market valuation losses that occur as yields increase will be offset at the time that the bonds mature at their face value. This means that fluctuations in yields alter the timing of any valuation gain or loss over time, but do not change the ultimate return the Bank will earn on these bonds.”