Dep Gov Bullock: RBA Equity In Deep Negative But Doesn’t Make It Insolvent

• Published on
• 21 Sep 2022, 12:09 PM

--RBA’s Net Equity Positive A$12.4B As of June 2022
--RBA Not Seeking Equity Injection From Government
--RBA Won’t Pay Dividend To Govt Until Capital Position Turns Positive

By Sophia Rodrigues

(Sydney, September 21, 2022)—The Reserve Bank of Australia’s equity position is in deep negative, but it won’t affect its ability to do its job and neither does it make it insolvent, Deputy Governor Michele Bullock said Wednesday.

The RBA can continue to operate with negative equity and will return to positive equity over time, Bullock said.

Bullock made the comments at a Bloomberg event in a speech titled, “Review of the Bond Purchase Program.”

Bullock said the RBA is expected to incur losses over coming years due to the bonds purchased under the BPP, and due to the impact of Term Funding Facility.

As of June 30, 2022, the RBA was in a net negative equity position of A$12.4 billion. This was due to valuation losses of A$44.9 billion which offset underlying earnings of A$8.2 billion, resulting in accounting loss of A$36.7 billion.

Bullock noted that for commercial entities this would have meant they would no longer be a going concern. But it is not the case with RBA.

“Unlike a normal business, there are no going concern issues with a central bank in a country like Australia. Under the Reserve Bank Act, the government provides a guarantee against the liabilities of the Reserve Bank. Furthermore, since it has the ability to create money, the Bank can continue to meet its obligations as they become due and so it is not insolvent,” she said.

The RBA has not sought equity injection from the government but has indicated that it expects to retain future profits until its capital is restored.

Bullock said it is worth noting that the government bonds that the RBA holds are actually liabilities issued by the government. So, while the RBA will report a large valuation loss in 2021-22, the government’s debt issuer - the Australian Office of Financial Management (AOFM) - will report a significant valuation gain.

For the whole of government, therefore, the RBA’s loss on this part of its portfolio will net off against the AOFM’s gain.

--Contact: Sophia@centralbankintel.com