RBNZ pays NZ$290 mln dividend for July 2010 year, makes NZ$111 mln loss; mostly on unhedged foreign exchange position

The Reserve Bank of New Zealand paid the government a NZ$290 million dividend for the year ended June 30, despite making a NZ$111 million loss mostly due to its unhedged foreign currency position, it said in its 2010 annual report, titled 'Financial Stability - Forecasting the Winds of Change'.

The dividend followed a voluntary dividend payment in April of NZ$45 million, which the Bank determined was surplus to its capital requirements emerging from the global financial crisis, Reserve Bank governor Alan Bollard said.

The RBNZ had equity of NZ$2.57 billion after the dividend, down from NZ$2.97 billion at the start of the year.

Any equity the RBNZ has that is in excess of what it requires to cover the financial risks of performing its functions is distributed to the government, it says in its financial statements.

Bollard said most of the NZ$111 million loss occurred on the Bank's unhedged foreign exchange position, as exchange rate and interest rate movements partially reversed the large unrealised gains of the previous year.

"While our reserves are still showing a positive return based on purchase costs, we foreshadowed in the 2009 Annual Report the likelihood of volatility in accounting profit and loss," he said.

In the 2009 year the RBNZ made a net profit of NZ$906 million and paid the government a NZ$630 million dividend.

The government gave NZ$600 million in capital to the RBNZ in 2009, but did not give any to the Bank in the 2010 year, according to the Bank's financial statements.

Here is the release from the RBNZ:

The Reserve Bank’s broad coverage of financial and economic functions has proved valuable in dealing with both financial and natural disasters, Reserve Bank Governor Alan Bollard said today when releasing the Bank’s 2009-2010 Annual Report (http://www.rbnz.govt.nz/about/whatwedo/0094054.html). 

Dr Bollard said the Bank is one of the few OECD central banks to retain all its functions in one organisation.  “A special pamphlet in the Annual Report illustrates how hugely useful it has been during the financial crisis and recovery to be carrying out monetary policy, financial stability, foreign reserves management, bank regulation, payments and settlements, and currency management all under one roof.

“It has also meant that we were able to assess rapidly how the recent Canterbury earthquake affected the financial system and economy, and where we could assist.”

Dr Bollard said the economic recovery was proving slow and fragile, as could be expected when an economic recession coincided with a financial crisis. 

“Nevertheless, the Bank is now able to manage a return to normality through the Official Cash Rate (OCR).  Most of the crisis policies have been withdrawn or are time-limited, including most of the special liquidity facilities for banks and other institutions and the Bank’s increased foreign reserves position.”

The Bank is now focusing on the further development of New Zealand’s prudential oversight regime for banks, non-bank deposit takers and insurance companies.  “The Bank’s new prudential liquidity policy has been at the forefront of prudential policy responses to the Global Financial Crisis, and has already proved its worth during the Greek sovereign debt crisis.  

“At the same time, we are monitoring international developments to strengthen bank regulatory requirements under the ‘Basel III’ initiative, which is expected to be largely finalised by the end of 2010, with measures then being introduced over a long phase-in period.  The Reserve Bank expects to adopt the bulk of these reforms, particularly around the strengthening of bank capital buffers.  However, measures will not be adopted if they are ill-suited to New Zealand conditions.”

Dr Bollard noted the Bank is now implementing its regulation of non-bank deposit takers with requirements in place for credit ratings, capital, connected exposures, and the composition of boards.  “To make this work for New Zealanders, the trustees, who are the front-line supervisors, will have to lift their game,” he said.

The Bank is also putting in place regulation of the insurance industry.

Financially, the Annual Report shows the Bank has made a dividend payment to government of $290 million for the 2010 year. “This leaves the Bank with equity of $2,574 million, a strong base for the potential risks inherent in our activities and large balance sheet,” Dr Bollard said.

This dividend follows a voluntary dividend payment in April 2010 of $45 million, which the Bank determined was surplus to its capital requirements emerging from the crisis.

The Annual Report also shows the Bank has maintained stable underlying income from interest earnings and stable operating costs. “Nonetheless, we have recorded a loss of $111 million for the year ended 30 June 2010, as a result of unrealised losses arising from adverse revaluations on our assets and liabilities.”

Dr Bollard said most of these losses occurred on the Bank’s unhedged foreign exchange position, as exchange rate and interest rate movements partially reversed the large unrealised gains of the previous year. 

“While our reserves are still showing a positive return based on purchase costs, we foreshadowed in the 2009 Annual Report the likelihood of volatility in accounting profit and loss.”

The Bank and the Minister of Finance have entered into a new Funding Agreement for the five years ended 30 June 2015.  This was ratified by Parliament on 20 July and focuses on extending capacity in new regulatory and surveillance areas, commencing a programme of upgrading bank notes, and establishing a small office in Auckland to offer more security in the event of a Wellington earthquake.

This follows a year in which the Bank completed development work to improve the robustness and efficiency of its payment and settlement systems, to update inventory systems to manage currency, and to fundamentally rebuild financial and economic statistical systems.

“The financial crisis reinforced that accurate knowledge and robust controls are crucial for a central bank,” Dr Bollard concluded.

(Update includes comparison with last year.)