The RBA’s plunge into negative equity will have to be reckoned with, both in Martin Place and in Canberra, writes Grant Wilson.
Within the RMF, there is an extensive capital provisioning regime, that underpins the risks the RBA takes in financial markets. It also informs the RBA’s dividend policy in respect of Treasury.Last year the RBA conducted its typical stress tests on foreign exchange exposure and interest rate exposure .
Putting this together, the RBA provisioned $15.4 billion, held in the Reserve Bank Reserve Fund . Its total capital was $23.0 billion, bolstered by the Asset Revaluation Reserve on non-traded assets, such as gold and property.We estimate mark-to-market losses on the domestic interest rate portfolio of around $50 billion.
The negative carry that the RBA faces is particularly acute in respect of the TFF, with the main maturities not due until Q3 2023 and Q2 2024.At the balance sheet level, the losses the RBA is sitting on clearly exceed the provision held in the RBRF, and the broader measure of total capital. While we are not expecting the RBA to acknowledge this constitutes a failure of risk management, others will disagree.
In an Australian context it is certainly the case that higher yields have benefitted the various governments against fiscal baselines. In the
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