Reserve Bank 'resisted' Swan's $500m raid
Letters released on Thursday under freedom of information laws show Reserve Bank governor Glenn Stevens told Mr Swan the bank's board had wanted to put all of its $1.1 billion in 2011-12 earnings into a fund to rebuild its capital reserves. Even if all the profits were put into the fund, Mr Stevens said the bank's permanent capital would still be "significantly below a level appropriate for the risks held on the bank's balance sheet in the medium term".
"The board seeks your approval to transfer all of the bank's distributable earnings in 2011-12 to the Reserve Bank Reserve Fund," Mr Stevens wrote to Mr Swan in July last year. "This would be consistent with your earlier agreement to this approach to begin the process of restoring the balance of this reserve, which has been largely depleted by the losses of the previous two years."
Despite this advice, Mr Swan asked the bank to pay the government a $500 million dividend, which was paid to the Commonwealth in September. The remaining $596 million was put into the bank's reserve fund, which acts as a buffer against financial shocks.
In a letter to Mr Stevens in August, Mr Swan said: "The government believes it is appropriate that taxpayers receive a dividend from the Reserve Bank, where circumstances permit.
"I am writing to inform you of my decision, as we have discussed, to have a sum of $500 million made available to the Commonwealth as a dividend, to be paid in the 2012-13 financial year."
The decision to extract a dividend from the Reserve was made before Mr Swan had conceded his pledge to deliver a budget surplus in 2012-13 was in deep trouble.
Shadow treasurer Joe Hockey seized on the correspondence as proof the government was trying to use the dividend to meet its political pledge on the surplus.
"In raiding one of Australia's most important and trusted institutions, Wayne Swan has compromised both the integrity and the functioning of the Reserve Bank," Mr Hockey said.
Mr Stevens has said he would have preferred all the profits had stayed in the bank, but it was Mr Swan's decision to make.
A spokeswoman for Mr Swan defended his decision and said the government was not planning to take a divided this year.
"We ensured the RBA retained more than half the earnings the [Reserve] had available for distribution in that year," she said.
The Coalition says it will tip fresh capital into the bank's reserve fund in government, but Mr Swan said Treasury had advised this would risk politicising the central bank.
The Reserve's buffer fund is a pool of capital used to protect the bank against market shocks.
Even if all of the bank's earnings had been paid into the buffer fund, Mr Stevens said this would have only taken the fund's balance to $2.4 billion - well shy of the $6.9 billion it reached in 2009.
Frequently Asked Questions about this Article…
Freedom of information letters show Treasurer Wayne Swan asked the Reserve Bank to make $500 million available to the Commonwealth as a dividend (paid in September). The bank's board had wanted to transfer all of its $1.1 billion in 2011–12 distributable earnings into the Reserve Bank Reserve Fund, but $500 million was taken as a dividend and the remaining $596 million was put into the reserve fund.
Reserve Bank governor Glenn Stevens told Mr Swan the board wanted to put all 2011–12 distributable earnings into the Reserve Bank Reserve Fund to rebuild depleted capital reserves. He warned that even with all profits transferred, the bank's permanent capital would still be significantly below levels appropriate for the risks on its balance sheet in the medium term.
The Reserve Bank Reserve Fund is a pool of capital used to protect the bank against market shocks. For everyday investors, its size matters because it's part of the central bank's ability to absorb financial shocks — the letters noted that even if all 2011–12 earnings were paid into the fund it would have reached about $2.4 billion, well below the $6.9 billion level seen in 2009.
Opposition figures argued the dividend was used to help meet the government's political pledge on a budget surplus. The documents show the dividend decision was made before Treasurer Swan had conceded his surplus pledge for 2012–13 was in difficulty, and Shadow Treasurer Joe Hockey said the government was effectively using the dividend to meet that pledge.
Glenn Stevens said he would have preferred that all the bank's profits remained in the bank to rebuild capital, but the decision to pay the $500 million dividend was made by Treasurer Wayne Swan.
Shadow Treasurer Joe Hockey said the move was a 'raid' on one of Australia's most important and trusted institutions and that Wayne Swan had compromised the integrity and functioning of the Reserve Bank by extracting the dividend.
The article says the Coalition indicated it would tip fresh capital into the Reserve Bank Reserve Fund if it were in government. Treasurer Swan countered that Treasury had advised adding capital from government could risk politicising the central bank.
The key takeaway is that the Reserve Bank's reserve fund is intended to buffer the bank against market shocks, and officials warned its capital was below desirable levels. Extracting a dividend reduces the amount available to rebuild that buffer — the bank retained more than half of distributable earnings that year, but even keeping all earnings would not have restored the fund to its 2009 peak, which highlights ongoing capital constraints at the central bank.
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