RESERVE BANK OF AUSTRALIA 2015 ANNUAL REPORT ANNUAL REPORT 2015 | CONTACT DETAILS 171 Reserve Bank of Australia Annual Report 2015 Contents Governor’s Foreword 1 Part 1: About the Reserve Bank Our Charter, Core Functions and Values 5 Governance of the Reserve Bank 7 Reserve Bank Board 12 Accountability and Communication 20 Organisation Structure 28 Part 2: Our Operations in 2014/15 Operations in Financial Markets 37 Banking and Payment Services 47 Banknotes 53 International Financial Cooperation 62 Community Engagement 73 Part 3: Management and Accountability Our People 85 Management of the Reserve Bank 90 Risk Management 96 Earnings and Distribution 104 Pro Forma Business Accounts 109 Statutory Reporting Requirements 110 Part 4: Financial Statements Statement of Assurance 117 Financial Statements 118 Notes to the Financial Statements 123 Independent Auditor’s Report 160 Part 5: Indexes Statutory Reporting Requirements Index 165 List of Tables 167 List of Graphs 168 Abbreviations 169 Contact Details 171 This report is available electronically in PDF and HTML formats on the Reserve Bank’s website: www.rba.gov.au/publications/annual-reports/rba/index.html. The Reserve Bank welcomes comments on this report. Feedback and enquiries about any aspects of this report may be directed to: Information Department Reserve Bank of Australia 65 Martin Place Sydney NSW 2000 GPO Box 3947 Sydney NSW 2001 Telephone: +61 2 9551 9830 Facsimile: +61 2 9551 8033 Email: [email protected] © Reserve Bank of Australia 2015. All rights reserved. The contents of this publication shall not be reproduced, sold or distributed without the written prior consent of the Reserve Bank of Australia. Annual reports are available on the Reserve Bank’s website, www.rba.gov.au. Some graphs in this report were generated using Mathematica. ISSN 1448-5303 (Print) ISSN 1448-5192 (Online) Governor’s Foreword International developments were again a source These were absorbed without widespread spillovers, of concern and uncertainty in 2014/15. The global though it is apparent that financial markets have economy recorded growth, but fell a little short of less underlying liquidity than was the case in earlier forecasts from a year earlier. Financial conditions periods. Over the year ahead, there will, no doubt, continued to be remarkably accommodative, as be further news for markets to absorb – not least major jurisdictions ran extraordinary monetary the approach of higher US interest rates. policy settings in an effort to support demand in The Australian economy recorded moderate their respective economies. Short-term interest growth in 2014/15. As in the world economy as a rates remained at or near zero and, in some whole, the growth was a little disappointing, leaving countries, rates on deposits at the central bank fell unemployment relatively unchanged at a higher- into negative territory. Long-term interest rates early than-desirable rate. Inflation remained low and, in 2015 reached the lowest levels ever recorded abstracting from the temporary effects of falling and in some European countries were negative energy prices, was consistent with the medium-term for terms as long as 10 years. Although the Federal target. After a lengthy period of stability in policy Reserve completed its ‘quantitative easing’ program settings, the Reserve Bank Board adjusted the cash some time ago, central bank balance sheets in rate twice during 2014/15, taking it to 2 per cent, the Japan and Europe are still expanding significantly. lowest recorded on a sustained basis since the 1950s. The Chinese economy has slowed, affecting demand The Reserve Bank continued the build-up of several for natural resources. This has affected Australia’s major projects during 2014/15. As has been noted terms of trade, which have also been driven lower in previous annual reports, these projects are by an increasing supply of commodities, including resulting in a very significant, but largely temporary, from Australia. Financial markets returned to more increase in costs, with most of the likely outlays normal levels of volatility as they contemplated, still in the future as work to deliver key projects among other things, the events in Greece and the gathers further momentum. These costs are mainly, rise and crash of a Chinese equity market bubble. though not entirely, in the IT area, as the projects ANNUAL REPORT 2015 | GOVERNOR’S FOREWORD 1 are very technology intensive. Preparations to Adding the realised valuation gains to underlying introduce a series of banknotes with upgraded earnings results in earnings available for distribution security features, overhauling the technology as per the Reserve Bank Act 1959 of about $3.5 billion. architecture that supports banking services to the The Treasurer decided, after consulting the Board, government, building the Bank’s contribution to that a sum of about $1.6 billion from distributable the New Payments Platform and upgrading the earnings be placed to the credit of the Reserve capacity to assess the quality of collateral that Bank Reserve Fund, effectively the Bank’s capital. may be presented to the Bank at various points of Accordingly, this reserve stood at $12.7 billion at its market operations are all driven by the Bank’s balance date, a strong position given the risks on the Charter obligations. The Bank’s staff numbers are Bank’s balance sheet. The remainder of distributable commensurately rising, with the IT Department by earnings, a sum of about $1.9 billion, will be paid as a far the largest in size, employing most additional dividend to the Commonwealth. staff on limited-term contracts. As always, the Reserve Bank’s management and The cost of running the Reserve Bank’s existing staff have performed to a very high standard, under operations rose by a little more than 1 per cent challenging conditions. This was very clearly in in 2014/15. The additional costs from the projects evidence during the terrible events at the Lindt Café, added a further 3.4 per cent. As the full effect of the adjacent to the Head Office building, in December project workload comes through, total outlays will 2014. The Bank’s building was locked down for rise, reaching a peak during 2015/16. some hours and was not available the following day, The Reserve Bank’s net profit in 2014/15 amounted requiring the Business Resumption Site to be used to $6.9 billion, a significant rise from the previous for all the Bank’s routine operations. The security and year (abstracting from proceeds of the one-off operational areas of the Bank responded admirably grant received from the Australian Government in to these events, despite sharing the profound sense that year). As explained in the chapter on ‘Earnings of loss evident so widely in the community, and all and Distribution’, the fall in the exchange rate has the Bank’s normal operations were able to continue resulted in substantial valuation gains. Part of these without interruption. The Reserve Bank Board and I, were realised as the Bank’s portfolio of foreign personally, record our admiration and appreciation reserves turned over, while the unrealised gains for the skills and dedication of all our people. are set aside against the risk of future losses or will be realised as relevant assets are sold. Underlying earnings remain low because of low yields on the Bank’s portfolio but, at $832 million, were higher than in the previous year as the Bank’s balance sheet Glenn Stevens expanded and ADIs began paying fees associated Governor and Chair, Reserve Bank Board with the Committed Liquidity Facility from the 2 September 2015 beginning of 2015. The full-year effect of these fees will further boost underlying earnings in 2015/16. 2 RESERVE BANK OF AUSTRALIA Part 1: About the Reserve Bank Our Charter, Core Functions and Values In its role as Australia’s central bank, the Reserve Bank of Australia determines and implements monetary policy, undertakes a range of other activities in financial markets and banking, issues the nation’s banknotes and operates infrastructure critical to the payments system. Charter and Core Functions The sixth Statement on the Conduct of Monetary Policy, signed by the Treasurer and the Governor in The Reserve Bank of Australia is established by October 2013 following the election of the Coalition statute as Australia’s central bank. Its enabling Government records the common understanding legislation is the Reserve Bank Act 1959. The Bank of the Government and the Reserve Bank on key pursues national economic policy objectives. Its aspects of the monetary policy framework. responsibility for monetary policy is set out in section 10(2) of the Reserve Bank Act, which states: The Reserve Bank conducts operations in financial markets, operates Australia’s main high-value It is the duty of the Reserve Bank Board, within the payments system and undertakes analysis of limits of its powers, to ensure that the monetary markets and institutional developments. It also and banking policy of the Bank is directed to the participates in discussions with government and greatest advantage of the people of Australia and other domestic regulators about regulatory design that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve initiatives, largely through the Council of Financial Bank Board, will best contribute to: Regulators (CFR). The CFR is chaired by the Governor and brings together the Bank, Australian Prudential (a) the stability of the currency of Australia; Regulation Authority,