RBA reports equity wipe out due to pandemic bond losses

The Reserve Bank of Australia (RBA) announced that its equity had been emptied out by the losses that were incurred by the pandemic-era bond buying.

Despite that, the central bank assures that its ability to create money meant that it was not insolvent and operations would continue as usual.

According to a Reuters report, the RBA Deputy Governor Michele Bullock explained that the bank had suffered a mark-to-market valuation loss of A$44.9billion (RM136.04 billion) on its bond holdings between 2021 and 2022.

She said that the bonds were accumulated from Nov 2022 to Feb 2022 under the emergency stimulus programme, worth a total of A$300 billion.

The losses had exceeded the bank’s underlying earnings of A$8.2 billion, resulting in an accounting loss of A$36.7 billion.

Additionally, it also depleted RBA’s reserve funds and left it with a negative net equity worth A$12.4 billion.

Acknowledging that a situation like this would have ruined a typical commercial entity, Bullock said that the RBA’s liabilities are guaranteed by the government.

“Moreover, because it has the ability to create money, the Bank can continue to meet its commitments as they come due; therefore, it is not bankrupt,” she said and added that the negative equity will not hinder the RBA’s capacity to perform its duties.

Bullock remarked that other central banks around the globe will incur comparable losses on their emergency stimulus programmes, despite the fact that many marked their assets to market, as did the RBA.

Back in July of this year, the Swiss National Bank recorded a loss of 95.2 billion Swiss francs in its first half, the largest since its establishment in 1907.

The RBA also faces continued financial losses on its bond holdings, which it predicts could range from A$35 billion to A$58 billion until the final bond matures in 2033.

Bullock stated that the RBA aims to keep any future profits to restore its capital position and does not anticipate paying any dividends to the government for some years.

Furthermore, it would also mean that the RBA would not require a financial injection from the government, as it did in 2013 when its foreign currency reserves incurred valuation losses.

Treasurer Jim Chalmers had stated that he agreed with the RBA’s position and that the bond buying programme had been crucial in assisting the economy through the pandemic.

Recently, Chalmers initiated an impartial investigation into the RBA’s policy framework, Board structure, and communications.

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