The RBA published their Annual Report for 2017. They reported an accounting loss of $897 million, or 0.5 per cent of the balance sheet, in 2016/17. The Bank’s underlying earnings were offset by net valuation losses of $1 857 million. The Treasurer, after consulting the Board, determined that all earnings available for distribution in 2016/17, a sum of $1 286 million, would be paid as a dividend to the Commonwealth.
The Reserve Bank of Australia is established by statute as Australia’s central bank. Its enabling legislation is the Reserve Bank Act 1959. The Bank pursues national economic policy objectives. Its responsibility for monetary policy is set out in section 10(2) of the Reserve Bank Act, which states:
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to: (a) the stability of the currency of Australia; (b) the maintenance of full employment inAustralia; and(c) the economic prosperity and welfare of the people of Australia.
Policies in pursuit of these objectives have found practical expression in a flexible, medium-term inflation target, which has formed the basis ofAustralia’s monetary policy framework since the early 1990s. The policy objective is for consumer price inflation to average between 2 and 3 per cent over time.
Australia’s financial stability policy framework includes mandates for financial stability for both APRA and the Reserve Bank. APRA is responsible for prudential supervision of financial institutions and the Bank is responsible for promoting overall financial system stability. In the event of a financial system disturbance the Bank and relevant agencies would work to mitigate the risk of systemic consequences. The Bank’s responsibility to promote financial stability does not, however, equate to a guarantee of solvency for financial institutions and the Bank does not see its balance sheet as being available to support insolvent institutions. Nevertheless, the Bank’s central position in the financial system – and its position as the ultimate provider of liquidity to the system – gives it a key role in financial crisis management, in conjunction with the other members of the Council of Financial Regulators (CFR).
The Reserve Bank holds a range of financial assets to pursue its monetary policy objectives and support an efficient and orderly payments system in Australia. The Reserve Bank’s balance sheet was $194 billion on 30 June 2017, compared with $167 billion a year earlier.
The Reserve Bank’s earnings arise from two sources: underlying earnings – comprising net interest and fee income, less operating costs – and valuation gains or losses. Net interest income arises because the Bank earns interest on almost all of its assets, albeit currently at low rates, while it pays no interest on a large portion of its liabilities, such as banknotes on issue and capital and reserves. Fees paid by authorised deposit-taking institutions associated with the Committed Liquidity Facility also make a significant contribution to underlying earnings.
Valuation gains and losses result from fluctuations in the value of the Reserve Bank’s assets in response to movements in exchange rates or in yields on securities.
In 2016/17, the Reserve Bank’s underlying earnings were $960 million, which was $263 million lower than the previous year because of lower net interest income resulting from a decline in the net interest margin. The reduced interest margin reflected, in part, the decline in short-term interest rates in Australia compared with the previous year. Underlying earnings remained at historically low levels with interest rates around the world also typically remaining low.
The Reserve Bank’s underlying earnings were offset by net valuation losses of $1 857 million, primarily from the appreciation of the Australian dollar during the year. The net valuation loss was composed of an unrealised valuation loss of $2 179 million offset by net realised gains of $322 million, largely as a result of the sale of foreign currency in the normal course of managing the portfolio of foreign reserves; these transactions had no effect on the value of the Australian dollar. The realised gains came from sales of assets on which unrealised gains had been recorded in earlier years, and therefore they acted to deplete the balance of the unrealised profits reserve, as discussed further below.
Despite the accounting loss in 2016/17, earnings were still available for distribution, as the net unrealised valuation loss of $2 179 million was absorbed by the unrealised profits reserve in accordance with the Reserve Bank Act as explained above. This left earnings available for distribution amounting to $1 286 million in 2016/17, compared with $4 612 million in the previous year, reflecting both lower underlying earnings and smaller realised gains.