RBA Deputy Governor Michele Bullock spoke today about the review of the bond purchase program (BPP) during the pandemic; and the Bank’s financial statements for 2021/22. The two issues are related because, while the bond purchase program was a policy response to extraordinary economic circumstances, it has had big implications for the Bank’s balance sheet, profits and capital.
The Bond Purchase Program was implemented by the Bank as part of a package of measures designed to provide insurance against very bad economic outcomes as a result of the pandemic. The Bank’s internal review of the program suggests that it broadly achieved its aims.
But one outcome of the bond purchases and other policy measures has been that the Bank will report a substantial accounting loss in its 2021/22 annual accounts, resulting in the Bank being in a position of negative equity. If any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern.
While the Bank will report a large valuation loss in 2021/22, the government’s debt issuer – the Australian Office of Financial Management (AOFM) – will report a significant valuation gain. For the whole of government, therefore, the Bank’s loss on this part of its portfolio will net off against the AOFM’s gain.
This is a Numberwang like no other!
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