Reserve Bank of Australia Annual Report – 2009 Operations in Financial Markets
At the time of last year's annual report, financial markets had been subject to serious dislocation for close to a year, although Australian markets had been less affected than those in other countries. The situation worsened dramatically over September and October 2008, including in Australia, following the failure of Lehman Brothers in the United States. The evolution of the financial crisis has been discussed in detail in the Reserve Bank's quarterly Statement on Monetary Policy and semi-annual Financial Stability Review over the past year.
In the face of this turbulence, much of the focus of the Reserve Bank's operations over the course of the year has been directed towards ensuring that the financial system in Australia continued to function as smoothly as possible, in addition to its conventional mandate of keeping the cash rate at the target set by the Reserve Bank Board. Most of the Bank's actions in response to the crisis have been conducted within its longstanding framework for market operations. The framework has proven to be sufficiently flexible to enable the Bank to respond promptly and in a targeted manner to market developments.
The actions taken by the Reserve Bank resulted in a large, though temporary, increase in the size of its balance sheet. However, by the end of 2008/09, conditions in financial markets had improved significantly and a number of the short-term measures undertaken by the Bank had been wound down. As a result, the size of the Bank's balance sheet was little changed in net terms over the financial year.
Domestic Market Operations
In Australia, monetary policy is implemented in terms of a target for the cash rate – the interest rate on unsecured overnight loans between banks – determined by the Reserve Bank Board at its monthly monetary policy meeting. Over the past year, the Board has reduced the target on six occasions, bringing the rate down sharply from 7.25 per cent to 3.00 per cent.
While the announcement of a new target rate is sufficient in itself for market participants to move the cash rate to the new target, the Reserve Bank conducts daily open market operations to adjust the level of exchange settlement (ES) balances to ensure the cash rate remains at the target. ES balances are liabilities of the Reserve Bank held by commercial banks and certain other institutions to meet their settlement obligations with each other and the Bank. As such, ES balances provide banks with their most immediate source of liquidity. Payment flows between ES account holders and the Reserve Bank's customers (principally, the Australian Government) have the potential to affect the aggregate volume of ES balances.
Each day, the Reserve Bank must gauge the overall demand for ES balances from the financial system and adjust the supply of funds accordingly so as to keep the cash rate at the target. With the tensions that emerged within global financial markets in mid 2007 intensifying at various times over 2008/09, the Bank judged that a relatively high volume of ES balances was necessary. Over the past year, ES balances have averaged almost $4 billion, compared with $2.5 billion in 2007/08 and around $750 million in the five years prior to the onset of the financial crisis. These developments are explained in more detail below.
Most of the Reserve Bank's transactions in the open market are contracted as repurchase agreements (repos), whereby the Bank purchases securities with an agreement to resell them to the counterparty at an agreed maturity date. Dealing operations are announced each morning, though the Bank is also willing to conduct an additional round of dealing with the market should conditions require it. In 2008/09, there was one instance in which the Bank conducted a second round of market operations to offset unexpectedly large flows to the government, the first since December 2005.
The Reserve Bank provides a standing facility for ES account holders where banks that experience an unexpected shortfall in their cash position late in the day (typically because of unforeseen payment flows), and are not able to source those funds from the market, are able to borrow from the Reserve Bank on a secured basis at a rate 25 basis points above the cash rate target. Notwithstanding the financial turbulence, throughout the past year, usage of the Bank's standing facility was a little less than in recent years.
| Number of times used |
Value ($ million) | |
|---|---|---|
| 2002/03 | 14 | 1,673 |
| 2003/04 | 24 | 2,159 |
| 2004/05 | 11 | 1,394 |
| 2005/06 | 10 | 436 |
| 2006/07 | 24 | 3,589 |
| 2007/08 | 18 | 4,220 |
| 2008/09 | 15 | 3,257 |
Source: RBA |
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Actions Undertaken During the Financial Turbulence
As noted, the framework used in Australia for implementing monetary policy proved resilient to the financial turmoil and enabled the Reserve Bank to modify its operations quickly to address specific pressures. As pressures within financial markets intensified significantly during September and October 2008 following the intervention by the US authorities to support Fannie Mae, Freddie Mac and AIG and the collapse of Lehman Brothers, the Bank made a number of modifications to its market operations. These included:
- increasing the supply of ES balances;
- lengthening the term of its repos;
- conducting a larger share of its repos using private securities;
- widening the pool of securities eligible for use in repos;
- introducing a term deposit facility; and
- initiating a swap facility with the US Federal Reserve for institutions to receive US dollar funding.
These developments are discussed in detail below. Reflecting the flexibility of the pre-existing framework, these changes were implemented quickly and smoothly and did not need to be as extensive as those implemented by most other central banks. Notably, because the Reserve Bank already had a wide range of counterparties for its open market operations – including banks, other deposit-taking institutions, securities dealers and other financial institutions – it did not see a need to change the eligibility criteria or implement new facilities to disperse liquidity more widely in the market.
Increasing ES Balances and Introduction of Term Deposit Facility
Prior to the dislocation in financial markets, ES balances were typically around $750 million. As the financial turbulence became more severe, the demand for risk-free liquid assets by private institutions increased. The Reserve Bank accommodated this desire by its counterparties to hold larger cash balances by increasing the supply of ES balances, thereby increasing the size of the Bank's balance sheet. Had it not done so, there would have been upward pressure on the cash rate, raising it above the target set by the Board. As market conditions deteriorated in September 2008, the Bank increased aggregate ES funds sharply, with aggregate balances reaching a peak of $11 billion in October.
To provide the market with an additional risk-free asset and enable the Reserve Bank to undertake a larger volume of term repos, without increasing ES balances to such a level that would put downward pressure on the overnight cash rate, the Bank introduced a term deposit facility in October. Under this facility, institutions could bid to hold short-term deposits at the Bank (usually of one or two weeks duration). These deposits acted to reduce the amount of cash in the market for the life of the deposit. By late December, reflecting both year-end liquidity demands and also to accommodate the Bank's desire to provide liquidity to the market at longer terms, the Bank had around $20 billion outstanding in the form of overnight ES balances or term deposits.
As market conditions improved during 2009, the Reserve Bank was able to scale back its activities in the market. The reduced demand for longer-term repos reduced the need to drain liquidity from the overnight cash market through term deposits, and the improved market conditions themselves also reduced demand for the term deposit facility. Consequently, in March, the facility was allowed to wind down. ES balances were also progressively reduced to around $2¼ billion by June 2009 as institutions felt comfortable in reducing their level of precautionary cash balances. Notably, throughout this entire period and notwithstanding the large movements in ES balances, the cash rate traded at the target set by the Board on every day in 2008/09.
| Basis point deviations | ||||||
|---|---|---|---|---|---|---|
| −2 | −1 | 0 | 1 | 2 | 3 | |
| 2003/04 | 0 | 0 | 250 | 5 | 0 | 0 |
| 2004/05 | 0 | 0 | 253 | 0 | 0 | 0 |
| 2005/06 | 0 | 0 | 253 | 0 | 0 | 0 |
| 2006/07 | 0 | 2 | 249 | 0 | 0 | 1 |
| 2007/08 | 1 | 8 | 244 | 0 | 0 | 0 |
| 2008/09 | 0 | 0 | 254 | 0 | 0 | 0 |
Term of Repurchase Agreements
Prior to the crisis, the longest term the Reserve Bank generally offered for repos was around three months; such repos were offered about once a week. As tensions emerged in financial markets in the second half of 2007, and with greater pressure in longer-term markets, the Bank extended the terms of its dealing, first to regular dealing in three-month repos, then periodically in six-month and one-year repos.
When the dislocation in term funding markets became extreme in mid September 2008, the Reserve Bank announced that it would offer six-month and one-year maturities every dealing day. This helped improve liquidity in the underlying market for bank paper, since counterparties must use collateral with a term at least as long as that of the repo. The regular offering of long-term repos also provided greater certainty of term funding to financial institutions.
As a result of these actions, the average term to maturity of the Reserve Bank's new repos increased from around 20 days in June 2007 to around 120 days at its peak in late 2008. As banks' access to funding has improved over recent months, demand for repos at longer maturities has declined significantly. In response, the Bank's dealing at longer terms has become less frequent, with one-year repos typically offered once a week, rather than daily, and for considerably smaller amounts than at the peak of the turbulence. This has seen the average term to maturity of new repos decline to around 30 days.
Collateral in Repurchase Agreements
In its market operations, the Reserve Bank takes bids separately for repos of government securities and private securities. This enables the Bank to observe the relative pressures in these markets through the bids submitted for the different classes of collateral and respond to those pressures by dealing accordingly in those different classes. With greater tensions evident in the market for private securities, the Bank increased the share of repos collateralised by private securities to around 80 per cent in 2008/09, compared with an average of around 25 per cent prior to the turmoil. These actions improved the liquidity of the market for the private securities, as purchasers of these assets could be confident that liquidity from these instruments would be available from the Bank, even if it were unavailable in the market.
In the first few months of the crisis in the second half of 2007, the Reserve Bank expanded the range of eligible collateral to include a wider range of securities issued by authorised deposit-taking institutions (ADIs) and securities backed by high-quality residential mortgages, thereby making these securities more liquid. The Bank further expanded the range of eligible securities in November 2008 to include all P-1 or AAA-rated assets.
Around the same time, the Reserve Bank relaxed the restriction that prevented banks from using asset-backed securities (ABS) in which a related party was involved in the loan origination or securitisation. Most Australian banks, and a number of building societies and credit unions, have put together securities backed by mortgages on their books to meet the criteria specified by the Bank – ‘self-securitised’ residential mortgage-backed securities (RMBS). This served to increase significantly the pool of assets that ADIs could use in the Bank's repo operations. By December 2008, the Bank had repos of $45 billion backed by self-securitised RMBS as collateral. Much of this collateral was accepted in the Bank's longer-term repos and in the US dollar term repo facility, and has subsequently matured. As a result, the value of the Bank's repos involving such assets has since declined to a little over $20 billion.
As in all repo operations, the risk involved in accepting these new collateral classes is mitigated by the high quality of the collateral, the initial margin (or ‘haircut’) applied and the regular marking-to-market of the value of the collateral (see the chapter on ‘Risk Management’). The new securities eligible for use in repo operations are in the highest ratings categories (AAA for long-term and P-1 for short-term) and, for self-securitised ABS, additional restrictions are placed on the underlying mortgages to ensure they are of a high quality. Riskier securities also require a higher haircut, with margins up to 10 per cent applied, meaning that the Reserve Bank is protected against larger price falls.
| Collateral type | End June 2009 | End December 2008 | |||
|---|---|---|---|---|---|
| $ billion | per cent | $ billion | per cent | ||
| General Collateral | |||||
| – CGS | 2.5 | 6 | 0.7 | ½ | |
| – Semis | 1.2 | 3 | 1.2 | 1 | |
| – Supras | 0.4 | 1 | 0.8 | 1 | |
| – Govt guaranteed ADI paper | 0.3 | 1 | 0 | 0 | |
| Private Securities | |||||
| – ADI paper | 11.8 | 28 | 42.7 | 43 | |
| – RMBS (self-securitised) | 21.2 | 50 | 44.7 | 45 | |
| – RMBS (other) | 4.9 | 12 | 5.2 | 5 | |
| – ABCP | 0 | 0 | 2.9 | 3 | |
| – Other | 0.2 | <½ | 0.6 | ½ | |
| Total | 42.3 | 98.9 | |||
US Dollar Term Repo Facility
From mid 2007, the cost of borrowing US dollars in offshore markets increased sharply compared with the borrowing costs in local US markets. This significantly impaired the operation of the forward foreign exchange market, raising the premium paid on US dollars when swapped against other currencies.[1]
To relieve the pressure this created on financial institutions outside the United States, the Federal Reserve entered into currency swaps with other central banks, which then on-lent the US dollars to banks operating in the local markets against the receipt from the counterparty of local currency assets. Initially, in December 2007, these swap facilities were with the European Central Bank and the Swiss National Bank. In September 2008, the Fed extended the arrangement to a number of other central banks, including the Reserve Bank, to improve the availability of US dollars in other markets and time zones. The US dollars were provided at a premium to the cost of obtaining US dollars in normal market conditions, to ensure that as conditions improved, counterparties would be inclined to return to the market to obtain funds there rather than become dependent on the facility.
The Reserve Bank auctioned the US dollars obtained under the swap to its regular pool of domestic counterparties at terms of between one and three months. Successful bidders pledged Australian dollar denominated securities under a repo. An additional haircut was required by the Bank to protect against movements in the exchange rate of the Australian dollar against the US dollar. By November 2008, nearly US$27 billion was outstanding in this facility.
As a result of the introduction of the central bank facilities, the premium on US dollars that had been evident in foreign exchange swaps had largely disappeared by early 2009. As market conditions improved over the course of the year and the cost of obtaining US dollars in the market declined, participation at the Reserve Bank's US dollar repo auctions fell such that at its most recent auctions no bids were received. Consequently, since May 2009 the Bank has not seen the need to offer this facility, and the last of the outstanding balances matured in July, though the agreement with the Federal Reserve was extended until February 2010 in line with other participating central banks.
Long-dated Operations
In its regular market operations, the Reserve Bank generally buys securities under repo. However, for many years it has also been willing to purchase Commonwealth Government securities (CGS) and semi-government securities on an outright basis where these securities have less than 18 months to maturity.
The Reserve Bank also maintains a portfolio of longer-dated semi-government securities, which it has purchased in the secondary market in targeted operations. The Bank conducted these longer-dated operations on 10 occasions during 2008/09, purchasing securities totalling $1.5 billion. This was substantially greater than the amounts purchased in earlier years. The additional purchases were predominantly made at times when there was a significant reduction in liquidity in the market for semi-government debt, reflecting the generalised deterioration in markets, the increase in supply of government-guaranteed debt globally and the downgrade to the Queensland Government's credit rating in February 2009. During these periods, the Bank judged that an increase in its portfolio of semi-government securities would be timely and appropriate. As usual, securities were sold from this portfolio at various times through the year for liquidity management purposes. Overall, reflecting the net of these transactions, the Bank's holdings of longer-dated semi-government debt, at around $2 billion, are little changed from a year ago.
Securities Lending
To enhance market liquidity and prevent shortages of particular securities, the Reserve Bank continued its practice of lending securities from its own portfolio. The Bank makes available for loan the CGS and semi-government securities that it holds on an outright basis. These transactions are contracted as sales under repos with the Bank usually purchasing ‘general collateral’ from the same counterparty in an offsetting trade. During 2008/09, income from securities lending was negligible, amounting to less than $0.1 million.
The Reserve Bank also operates a securities lending facility on behalf of the Australian Office of Financial Management (AOFM). Under this facility, market participants can borrow CGS under repo, selling general collateral in an offsetting reverse repo. As it is designed to be used only when securities are not readily available from the market, the margin between the two repo rates had always been set at 300 basis points. However, as the general collateral rate fell to 3 per cent during 2008/09 (in line with the reduction in the cash rate target), the AOFM narrowed the margin to ensure that repo rates on CGS lent through the facility would remain positive. The margin is now set as the lower of 300 basis points or 25 basis points below the cash rate target.
During 2008/09, the Reserve Bank lent an average of $80 million per day through the AOFM facility, significantly more than in previous years. However, this lending was concentrated in the latter part of 2008. The expansion in CGS issuance in recent months has meant there are fewer occasions in which dealers cannot source securities in the market to complete settlement, and the use of this facility has diminished considerably.
Foreign Exchange Operations
The Reserve Bank undertakes transactions in the foreign exchange market for policy reasons, to manage its portfolio of foreign currency reserves and also on behalf of its clients. Policy transactions include those intended to address disorderly market conditions, commonly known as foreign exchange intervention, as well as those undertaken as part of the Bank's domestic liquidity management. As was the case with the Bank's domestic market operations, the increased severity of the financial crisis had a significant impact on the Bank's foreign exchange operations at different times in 2008/09.
After reaching a post-float high against the US dollar in July 2008, the Australian dollar depreciated sharply over the following few months in response to a marked deterioration in the global economic outlook, a related decline in commodity prices and a sharp reduction in risk appetite by financial institutions and investors as the global financial crisis deepened. The Australian dollar reached a low of US60 cents in late October, a depreciation of almost 40 per cent in just over three months. The Australian dollar depreciated by over 30 per cent on a trade-weighted basis over the same period. This constituted the most rapid depreciation in the Australian dollar since the float.
Despite the size and pace of the adjustment in the exchange rate, conditions in the Australian foreign exchange market held up into September. However, following the collapse of Lehman Brothers on 15 September, conditions deteriorated markedly and, by early October, along with most other markets, the Australian foreign exchange market was experiencing periods of extremely poor liquidity and unprecedented volatility. As funding was severely curtailed, some large leveraged global portfolios collapsed, with a number of trades forced through the market as the portfolios were liquidated. This was coupled with the more general retreat from ‘riskier’ assets. Moreover, through this period a number of parties used the Australian dollar as a proxy for the retrenchment of investments from other less liquid markets, including emerging market assets. The resultant breakdown in market liquidity led to increased ‘gapping’ in the exchange rate as there was little desire by market participants to absorb the forced flows. With the market becoming increasingly dysfunctional, the Reserve Bank intervened on a number of occasions in October and November.
These operations were not undertaken to target any particular level of the exchange rate. Indeed, the Reserve Bank regarded the significant depreciation of the Australian dollar from its July peak as consistent with the perceived deterioration in underlying fundamentals at the time. However, by October the breakdown in market conditions itself had become a significant factor in the increasingly rapid depreciation of the exchange rate. The primary objective of the Bank's intervention was to break this dynamic and underpin market liquidity to restore confidence in the price discovery process, thereby ensuring the market continued to function efficiently. In total, the Bank purchased A$3.8 billion through these operations. However, unlike in earlier intervention episodes, the Bank found that the size of individual transactions was generally small, reflecting the extremely poor liquidity in the market. Throughout the period, the market was not characterised by large flows associated with investors seeking to take short positions in the Australian dollar on the belief that it would depreciate further.
Liquidity gradually improved in the market from the beginning of 2009 and, from March, the Australian dollar appreciated steadily in response to signs of stabilisation in financial markets, some better economic news and a related increase in risk appetite. By the end of June, the Australian dollar had reversed more than half of the depreciation that took place in the second half of 2008. The Reserve Bank took the opportunity provided by the rise in the exchange rate to purchase foreign currency, replenishing the reserves drawn down as a result of the intervention. The combination of transactions in foreign currency and the earnings on reserves added $2.4 billion to net foreign currency reserves in 2008/09. The net depreciation of the Australian dollar over the year resulted in valuation gains of $5.1 billion. As a result, the Australian dollar value of net reserves rose by $7.5 billion to $43.3 billion.
Over the year, the Reserve Bank continued to use foreign exchange swaps to assist in domestic liquidity management. Swaps were used both to withdraw and supply domestic liquidity at different times. As a result, the Bank's forward foreign exchange position (its net obligation to deliver or receive foreign currency in the future) fluctuated through the year. Gross reserves, which include foreign exchange held outright (net reserves) and those held under foreign exchange swaps, ended the year at $52.3 billion.
As noted above, the Reserve Bank also operates in the foreign exchange market on behalf of its clients. The vast majority of these transactions are undertaken for the Bank's largest client, the Australian Government. The Government has a range of foreign currency obligations, the largest of which include defence expenditure, foreign aid and meeting the running costs of its embassies around the world. In the normal course, the Bank purchases foreign currency for the Government from the market as required. However, if the Australian dollar is under significant pressure or disorderly market conditions make price discovery difficult, the Bank may decide to provide foreign currency directly from reserves. In 2008/09, the Bank sold $6.9 billion of foreign currency to the Australian Government. For a short period during the worst of the market turbulence, the Bank did temporarily meet the Government's foreign currency needs from reserves but subsequently offset these transactions in the market as conditions improved.
Reserves Management
The Reserve Bank has responsibility for managing the portfolio of foreign currency assets and gold held on its balance sheet to facilitate policy operations in the foreign exchange and domestic cash markets. The severe market turmoil of the past two years has highlighted the importance of a small open economy such as Australia having access to sufficient reserves of foreign currency. It has also demonstrated the importance of having those reserves invested in high-quality assets and ensuring the reserves are sufficiently liquid to meet policy needs in all market conditions.
In common with most central banks, the Reserve Bank uses a benchmark to guide the investment process and to facilitate risk management. The benchmark represents the best estimate of the Bank's long-run optimal investment allocation given the investment constraints it faces. The Bank has used a formal benchmark for its reserves since the early 1990s and there have been very few changes to it since then. For many years, the benchmark has had a currency and asset allocation of 45 per cent to the United States, 45 per cent to Europe and 10 per cent to Japan. Investments within those currencies are limited to sovereign debt instruments, investments secured by sovereign or quasi-sovereign debt under repos, and commercial bank deposits. The exposure of the investments within each of the three currencies to changes in interest rates had been set at a weighted average maturity, or duration, of 30 months.
| United States | Europe | Japan | |
|---|---|---|---|
| Asset allocation (% of total) | 45 | 45 | 10 |
| Currency allocation (% of total) | 45 | 45 | 10 |
| Duration (months) | 18 | 18 | 18 |
The financial crisis affected the reserves management process in a number of ways over the year. The need to deploy reserves to fund intervention in the foreign exchange market at a time when a number of markets were dysfunctional meant that it was not practical to attempt to maintain portfolio allocations in line with the benchmark. Accordingly, the requirement that reserves allocations be in line with benchmark allocations was suspended temporarily. Credit and counterparty exposures were kept under constant review. With a number of new sovereign-guaranteed instruments available in the market, the Reserve Bank took the opportunity to invest a portion of foreign currency reserves in AAA-rated government-guaranteed bank debt and US agency debt, which offer a higher return than the sovereign's direct issuance.
In addition, the exceptionally low level of interest rates prevailing in early 2009 led the Reserve Bank to review the interest rate risk of the portfolio. While the benchmark had been designed to be resilient to the typical movement in yields over the cycle, the level of rates observed over the past year has been at the extreme of the range of the outcomes for which the benchmark was designed. Indeed, recent outcomes have on occasion been outside the experience on which the benchmark had been based. Following an analysis of the risk/return possibilities, a decision was taken to reduce the benchmark duration from 30 months to 18 months. The changes to the risk profile of the portfolio are discussed in more detail in the chapter on ‘Risk Management’.
Over 2008/09, the return on foreign currency assets, measured in SDRs, was 7.1 per cent, above the average of recent years. The Australian dollar value of the return on reserves was $5.2 billion, nearly $3 billion higher than in the previous financial year. This outcome was due largely to the significant decline in global bond yields, which generated large mark-to-market capital gains on the Reserve Bank's holdings of foreign currency sovereign debt. These gains more than offset the reduction in interest earnings arising from the lower level of yields. In addition, the lower average Australian dollar exchange rate in 2008/09 increased the Australian dollar value of foreign earnings by over 15 per cent.
| US | Europe | Japan | |
|---|---|---|---|
| 2002/03 | 6.6 | 7.2 | 1.3 |
| 2003/04 | 0 | 1.9 | 0 |
| 2004/05 | 4.1 | 5.8 | 1.1 |
| 2005/06 | 1.2 | 0.1 | −0.9 |
| 2006/07 | 5.6 | 2.2 | 1.1 |
| 2007/08 | 8.1 | 4.0 | 1.7 |
| 2008/09 | 5.2 | 8.1 | 1.8 |
| Actual | Benchmark | Value of difference (A$ million) |
|
|---|---|---|---|
| 2002/03 | 6.7 | 6.4 | 77 |
| 2003/04 | 0.5 | 0.3 | 67 |
| 2004/05 | 4.7 | 4.5 | 38 |
| 2005/06 | 1.2 | 1.0 | 55 |
| 2006/07 | 3.1 | 3.0 | 40 |
| 2007/08 | 6.5 | 6.2 | 83 |
| 2008/09 | 7.1 | 6.7 | 165 |
The Reserve Bank maintained its investments in the Asian Bond Funds over the year. The Asian Bond Funds, an initiative of the EMEAP group, are designed to support the development of local bond markets in the region and to provide an additional vehicle for investors to access these markets. The Bank has modest investments in both the US dollar denominated fund, ABF1, and the local currency denominated fund, ABF2. At the end of June 2009, the total allocation of reserves to these funds was $425 million. The return on these investments over 2008/09 was 4.6 per cent, measured in US dollar terms.
The Reserve Bank holds around 80 tonnes of gold as part of its official reserve assets. The gold price was quite volatile through the year but ended the year broadly unchanged in US dollar terms, although it was around 20 per cent higher in Australian dollar terms. The value of the Bank's holdings of gold increased by around $0.5 billion to $3 billion. Income from gold loans, where the Bank lends gold to major gold market participants against collateral, declined further in 2008/09 to just $3.6 million. As was the case last year, gold leasing rates remained at low levels as demand for borrowing gold was negligible. As a result, the Bank took delivery of all but one maturing gold loan in 2008/09, with the amount on loan at the end of the year standing at just 4 tonnes, down from 27 tonnes in June 2008.
The Balance Sheet
The various measures described above saw the Reserve Bank's balance sheet expand substantially over the course of the year, peaking at $166 billion in November. However, with the improvement in market conditions, the demand for many of these facilities has decreased and the balance sheet has declined, such that the size of the Bank's assets and liabilities was little changed over the 12 months to June 2009.
Over the year, there was an increase in currency, which was offset by a decline in deposits. Currency on issue increased sharply in October last year as the turbulence in financial markets resulted in higher demand for banknotes. Some of the increased demand has since unwound, though currency holdings remain somewhat elevated.
There was substantial variation in deposits over the course of the year. Much of this reflected the policy decisions taken by the Reserve Bank discussed above. Deposits increased sharply after September, reflecting the increase in ES balances, the introduction of term deposits and the US dollar swap facility, as the Federal Reserve chose to hold the Australian dollars received in these swaps on account at the Bank.
| June 2008 | December 2008 | June 2009 | |
|---|---|---|---|
| Assets | 101 | 158 | 103 |
| Foreign | 45 | 54 | 54 |
| – Net reserves(a) | 35 | 47 | 43 |
| – FX swaps | 0 | −2 | 9 |
| – Other | 9 | 8 | 1 |
| Domestic | 56 | 70 | 48 |
| Federal Reserve swap collateral | n.a. | 34 | 0 |
| Liabilities | 101 | 158 | 103 |
| Deposits | 39 | 34 | 34 |
| Federal Reserve swap deposit | n.a. | 34 | 0 |
| Currency | 42 | 52 | 48 |
| Other (including capital) | 20 | 38 | 20 |
(a) Excludes Special Drawing Rights and Australia's reserve position at the International Monetary Fund Source: RBA |
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However, as financial markets have improved, Reserve Bank term deposits have fallen back to zero (from a peak of $18.5 billion in December), and the US dollar facility had only $330 million outstanding at the end of June, compared with a peak of $40 billion in November (and has since been completely unwound). Government deposits varied over the year, partly reflecting the normal seasonal influences, but also decreasing as the budget position shifted from surplus to deficit in response to increased expenditure and a sharp decline in revenue, before increasing as a result of increased government debt issuance later in the year.
The composition of assets changed significantly over the year, with an increase in the proportion of foreign assets. After being run down to almost zero last year, the Bank made greater use of foreign exchange swaps in managing its assets. In addition, net reserves rose by $10 billion, reflecting both reserves replenishment and revaluation gains. Following a $20 billion increase over the year to 30 June 2008, domestic securities declined by $6 billion this year, reflecting the increased use of foreign exchange swaps in liquidity management.
Footnote
For a discussion of the shortage of US dollars, see McGuire P and G von Peter (2009), ‘The US dollar shortage in global banking’, BIS Quarterly Review, March. [1]