Domestic Bonds

Red and blue RBA in 2021


RBA Governor Philip Lowe Changes Central Bank Capital Framework (AAPIMAGE)

The Reserve Bank of Australia recorded a “book loss” of A $ 4.3 billion, its first in years, with unrealized valuation losses exceeding the sum of the other components of profit, according to the 2021 annual report of the RBA.

Despite the book loss, profits of $ 3.9 billion were still available for distribution.

“This is because, in determining the amount available for distribution under the Reserve Bank Act 1959, unrealized valuation losses are offset against previously retained unrealized valuation gains,” says the RBA. .

A sum of $ 1.2 billion was transferred to the Reserve Bank Reserve Fund (RBRF), “in line with the Reserve Bank Board’s target for this reserve”.

$ 2.7 billion was paid out in dividends to the Australian government.

The RBA’s accounting loss of $ 4.3 billion included:

  • underlying profit of $ 4.2 billion, an increase of $ 2.8 billion from the previous year;
  • unrealized valuation losses of $ 8.2 billion, due to the appreciation of the Australian dollar during the year; and
  • a rise in bond yields in Australia and abroad and the unwinding of premiums on domestic government bonds purchased at a price above their face value (due to their coupon rates above market yields at the time ).

The capital framework is reassessed over time to take into account changes in the risk environment or significant changes in the composition of the Bank’s balance sheet, “as was the case in 2020/21”, states the Bank. RBA annual report in subdued tones.

“It was appropriate to do so given the significant changes in the size and structure of the Bank’s balance sheet, changes in the operation of monetary policy and the altered nature of risks.”

The Reserve Bank said that the recent board review of the capital framework “focused on the interest rate risk for the domestic portfolio, especially since government bonds purchased under the capital framework. of the bond purchase program and to support the three-year yield target are expected to be held to maturity.

“For these bonds, any mark-to-market loss that occurs when yields rise will be offset as the bonds mature at face value. This means that fluctuations in yields change the timing of any valuation gain or loss over time, but do not change the final yield that the Bank will earn on these bonds. “