Reserve Bank reveals $37 billion loss, largest in its history ~ June 5, 2023

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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.

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.”