Reserve Bank reveals $37 billion loss, largest in its history

The federal government is unlikely to get any assistance from the Reserve Bank to repair the budget bottom line for years after the institution revealed the largest loss in Australian financial history at almost $37 billion.

Bank deputy governor Michele Bullock on Wednesday said if the RBA were a commercial operation, it would have been wound up because of the loss caused by its efforts to protect the economy through its $300 billion bond-buying program during the COVID pandemic.

Michele Bullock has revealed the RBA will record a near $37 billion loss for the 2021-22 financial year.Credit: Alex Ellinghausen

During the depths of the pandemic, the RBA was buying $5 billion a week worth of federal and state government debt as part of its quantitative easing program aimed at safeguarding the economy.

The bond purchase program was the first time the Reserve effectively printed money to stabilise the economy, which suffered its biggest three-month contraction since the Great Depression during the June quarter of 2020.

By the time the program finished in February this year, the bank had bought $224 billion of federal debt and $57 billion issued by the states and territories.

While the bank holds those bonds, the surge in interest rates here and around the world means the RBA is now sitting on a huge valuation loss on those assets.

Bullock, in an address in Sydney, said while the bank had made $8.2 billion in underlying earnings through the 2021-22 financial year, it had suffered a record $44.9 billion valuation loss.

Funds it has to offset some of these valuation losses had been completely exhausted, leaving the bank with a $21 billion shortfall and in negative equity.

Bullock said despite the loss, which dwarfs the previous record loss of $4.9 billion set in 2010-11, the bank continued to function.

“If any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern,” she said.

“But central banks are not like commercial entities. Unlike a normal business, there are no going concern issues with a central bank in a country like Australia.

“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. The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job.”

Bullock said while the bank would continue to operate with negative equity, it had told the government it needed to rebuild its finances.

It had not sought a government injection of funds, but had made clear it would retain future profits.

In the 2020-21 financial year, despite recording a paper loss of $4.3 billion, the RBA paid a $2.6 billion dividend to the federal government. Since 2014, the Reserve has boosted the federal bottom line by more than $12.5 billion.

Treasurer Jim Chalmers, speaking in Brisbane, said the RBA had signalled it did not need a capital injection to deal with the shortfall.

In 2014, then treasurer Joe Hockey borrowed $8.8 billion that was then given to the Reserve Bank to boost its reserve fund, which had been run down due to dealing with the global financial crisis and dividend payments to the Gillard government.

Chalmers said the government had not been expecting a dividend from the Reserve Bank.

“We weren’t counting this year on a dividend from the Reserve Bank. I think it’s been obvious for some time that there won’t be one,” he said.

In a review of the bond purchase program, the Reserve Bank said it had reduced the interest rate on federal debt by about 0.3 percentage points and narrowed the gap between federal and state government debt interest rates.

Treasurer Jim Chalmers says he was not expecting dividends from the Reserve Bank.Credit: Alex Ellinghausen

It found not only did it push down the cost of government debt, it lowered the cost of other interest rates across the economy and also suppressed the value of the Australian dollar.

Combined, the program may have increased the size of the economy by $25 billion over its first three years of operation and will continue to boost GDP.

“The BPP [bond purchase program] was successful in lowering government bond yields, which flowed through to lower funding costs across the economy and a lower exchange rate than otherwise. This contributed to the strong recovery in the Australian economy following the pandemic,” it found.

“While difficult to quantify, it is clear that the BPP and other monetary policy measures reinforced each other and together provided significant policy stimulus leading to the strong economic recovery and the unemployment rate now being at its lowest level in almost 50 years.”

The review found the program also gave federal and state governments the financial space to increase their spending through the pandemic. The cost of their debt issued under the program was about $7 billion than had the BPP not been in operation.

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