they are offset against other sources of income. • if after this distributable earnings are positive, the treasurer determines, after consulting the reserve bank board, any amounts to be transferred from distributable earnings to the rbrf. the remainder of distributable earnings is payable as a dividend to the commonwealth. • if, however, the unrealised losses are so severe that they totally deplete all other income, the rbrf is used to absorb the losses. the act is, however, silent on what happens if the rbrf isn ’ t large enough to absorb the remaining losses. so, how has this played out in 2021 / 22? in 2021 / 22 the reserve bank recorded an accounting loss of $ 36. 7 billion. while underlying earnings were $ 8. 2 billion, valuation losses were $ 44. 9 billion. only $ 0. 5 billion could be absorbed by the upr so there still remained $ 36. 2 billion in losses to distribute. the rbrf absorbed $ 15. 4 billion of this before it was exhausted, leaving around $ 21 billion in losses. this will be recorded as accumulated losses on the bank ’ s balance sheet ( table 2 ). this means that the bank has negative equity. table 2 : distribution of rba accounting loss in 2021 / 22 $ billion – accounting loss −36. 7 – absorbed by : – unrealised profits reserve −0. 5 – reserve bank reserve fund −15. 4 – transferred to accumulated losses −20. 8 – other reserves – net equity 8. 4 −12. 4 if any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern. but central banks are not like commercial entities. unlike a normal business, there are no going concern issues with a central bank in a country like australia. under the reserve bank act, the government provides a guarantee against the liabilities of the reserve bank. furthermore, since it has the ability to create money, the bank can continue to meet its obligations as they become due and so it is not insolvent. the negative equity position will, therefore, not affect the ability of the reserve bank to do its job. indeed, a number of central banks in other countries have a similar issue – large bond portfolios that, if markedto - market, will result in substantial accounting losses and, potentially, negative equity. but the reserve bank of australia is

had to rise. as i will discuss later, this will mean that the interest paid on some of our liabilities will for a time be higher than the return we receive on our assets, and as a result the bank will be making losses. but the economic stimulus from the bpp contributed to higher revenues for the government, helping to reduce the budget deficit relative to earlier expectations. it also resulted in government debt being issued at a lower fixed cost than otherwise. although the review concluded that the bpp achieved its aims, it did highlight a number of lessons. on the positive side, as i mentioned, the bpp was quite flexible. it was implemented with relatively short purchase horizons so it could be adjusted dependent upon market conditions and the economic outlook. indeed this flexibility, along with the communication of developments in the program ahead of time, allowed for a relatively smooth exit from the program, particularly as compared with the exit from the yield target. on the other hand, just as we concluded in the review of the yield target, if more weight had been given to possible upside scenarios on the economy, the assessment of the relative costs and benefits of the bpp might have been different and led to alternative decisions. the review concluded that it would only be appropriate to consider the use of a bpp in the future in extreme circumstances – that is, when the cash rate target has been lowered as far as possible. this brings me to the bank ’ s balance sheet and its 2021 / 22 financial results. r e s e r v e b a n k o f au s t r a l i a the bank ’ s balance sheet the review of the bpp discusses the losses that the bank is expected to incur over coming years because the return on its assets will be less than the interest paid on its liabilities – primarily balances in exchange settlement accounts. but, in about a month ’ s time, the bank will release its annual accounts in which it will report a large accounting loss and negative equity. what i want to do now is to step through the main features of the bank ’ s balance sheet and the 2021 / 22 outcomes. the bank ’ s balance sheet is relatively simple. on the asset side, the bank essentially holds domestic bonds ( either outright or under repurchase agreements ) and foreign exchange reserves. [ 2 ] prior to 2020, the bank ’ s balance sheet was between $ 150 billion and $ 200 billion. most of the assets were either foreign exchange reserves or domestic securities