Reserve Bank of Australia Annual Report – 1989 The Bank's Accounts

Commentary

The Bank's financial statements for 1988/89, together with explanatory notes, are set out in the following pages. Rural Credits Department was wound up during the year and no accounts are presented for 1988/89. There were no other significant changes to the Bank's accounting arrangements or policies during the year.

As detailed in Note 2, the Bank's net operating earnings (after writing off Bank premises) were $417 million in 1988/89, compared with $1,530 million in 1987/88. Net earnings on investments declined by 41 per cent to $1,124 million. In part, this resulted from a lower average yield because of relatively higher holdings of foreign securities but was mainly due to trading losses as yields rose. Losses of $128 million were also incurred on sales of foreign currencies compared with net gains, sometimes very large, in other recent years. Other factors constraining net earnings were increased interest payments on deposits and termination payments to staff accepting voluntary redundancy offers (see page 65 and Note 13).

Section 78 of the Reserve Bank Act permits the Bank to provide for contingencies by setting aside amounts, with the approval of the Treasurer, prior to determining net profits. Specific provisions relating, inter alia, to risks associated with exchange rate and interest rate fluctuations are maintained in the accounts of Central Banking Business, whose small earnings figure in 1988/89 left little scope for transfers to these provisions. However, further augmentation of reserves/provisions was effected through a transfer of $240 million to a Reserve for Contingencies and General Purposes in Note Issue Department (see Note 3).

After these transactions, the Bank's net profits for 1988/89 were $140 million, compared with $786 million in 1987/88. There was no interim payment to the Commonwealth out of 1988/89 profits; the whole of the $140 million will be paid in August 1989.

The Bank's consolidated balance sheet contracted by $0.5 billion to $24.6 billion during 1988/89. This followed a fall of $1 billion in 1987/88.

On the liabilities side, the Bank's capital and reserves again decreased, despite the transfer from Note Issue Department earnings; there was a decrease of $0.6 billion in the gold revaluation reserve. Deposit liabilities declined by $0.9 billion; the two main factors were the programmed reduction in Non-callable deposits (previously Statutory Reserve Deposits) and a fall in government deposits. As well, profits payable to the Commonwealth were $0.3 billion lower. On the other hand, Australian currency notes on issue increased by $1 billion.

On the assets side, the fall in value of gold has been noted. Foreign exchange holdings, however, increased by $0.8 billion, largely reflecting interest receipts. The Bank's transactions in Commonwealth Government securities resulted in a net fall in the value of holdings of $0.5 billion over the year.

The Banking Legislation Amendment Bill, currently before Parliament, includes provisions that would, if enacted, remove the requirement for the Bank to keep separate accounts for a Note Issue Department. Such separation is no longer seen as serving any useful purpose and discontinuation would permit the Bank to streamline its administrative and accounting procedures.