RBA Boosts Capital From Earnings On Interest Rate Risk; Govt Dividend Sacrificed

• Published on
• 17 Sep 2021, 07:23 PM

By Sophia Rodrigues

(Sydney, September 17, 2021)—For the first time since 2016, the Reserve Bank of Australia appears to have retained all or a portion of its earnings available for distribution to government, a move that may be aimed at boosting capacity to absorb any future losses from its large bond purchases.

The RBA’s balance sheet as of September 15 showed a rise of A$1.247 billion in Capital and Reserve Bank Reserve Fund (RBRF) to A$15.406 billion, marking the first such increase since the A$1.39 billion rise in October 2016.

The RBRF is the RBA’s general reserve and is essentially its capital. It is funded from transfers from earnings available for distribution and its purpose is to provide the capacity to absorb losses when it is necessary to do so.

The RBRF saw a big boost of A$8.8 billion in 2014 as rise in exchange rate in 2009-10 and 2010-11 led to large valuation losses and depleted the fund. The RBA had begun to the rebuild the reserve since then but because it was likely to take a long time, the then-Treasurer granted A$8.8 billion to boost the RBRF.

In 2015, the fund was boosted by A$1.57 billion from a transfer of earnings meant for distribution to government. The reason was again an appreciation in the Australian dollar which left the RBRF at a at a lower-than-prudent level.

In 2016, once again the fund was increased by A$1.39 billion from earnings available for distribution because of rise in the RBA’s assets at risk. Back then, the RBA had set a target for capital of 15% of its assets at risk.

In 2016-17, the RBA board reviewed the framework for its capital and decided to adopt an approach more reflective of the risks on the balance sheet, and this resulted in replacement of target based on assets at rick to target based on assigning capital charges to different classes of assets.

“These charges reflect an assessment of the respective risks of these assets, mainly foreign exchange and interest rate risk,” the RBA said.

In the latest 2020-21 year, the RBA’s outright holdings of domestic government rose sharply due to its bond purchase program and in support of the yield target, resulting in a rise in interest rate risk.

The prior year 2019-20 also saw a rise in interest rate risk due to the large increase in government bond purchases but the RBA viewed the risk of a large rise in bond yields in the period ahead as low. This, and the fact that the capital position was strong, meant it saw no need to boost its RBRF.  So the entire earnings of A$2.57 billion was paid as dividend to the government.

It is likely this time the RBA has judged a need to increase RBRF because its bond holdings is more than double from last year, and its conviction about rise in bond yields would be lower than the year before.

Treasurer Josh Frydenberg appears to have agreed.

The RBA could not be reached for comment or to confirm, so CB-Intel has relied on its understanding and available resources for this story.

--Contact: Sophia@centralbankintel.com