The core functions of the Reserve Bank include the provision of physical currency, using monetary policy to achieve price stability and support maximum sustainable employment, and promoting a sound and efficient financial system. To fulfil these functions, we carry out a wide range of tasks that require us to hold substantial amounts of financial assets and liabilities. These assets and liabilities form our balance sheet, which provides a snapshot of the financial position of the Reserve Bank at a given point in time.
In response to COVID-19 we’ve introduced a range of initiatives to provide additional monetary stimulus and to support the smooth functioning of New Zealand’s financial markets. These initiatives have enlarged our balance sheet from its December 2019 (pre-COVID-19) level of $24.6 billion to $66.6 billion at the end of October 2020. Of this increase $4.1 billion occurred during October. Our balance sheet is likely to increase further from here.
|Assets (NZ$ million)||Programme/Purpose||Dec-19||Oct-20||Liabilities (NZ$ million)||Programme/Purpose||Dec-19||Oct-20|
|NZ Government bonds||LSAPs - Nominal bonds||-||41,308||Notes and coins in circulation||Payment system||7,557||8,116|
|LSAPs - Index Linked bonds||-||2,577|
|BMLS||-||140||Crown settlement account||3,048||28,783|
|Early repurchases||248||2,948||Bank settlement accounts||7,493||21,769|
|Other (IP...)||3,512||3,476||Reserve Bank bills||Liquidity management and monetary policy implementation||1,225||-|
|Cash Lending||FLP||-||-||Equity||Revaluation gains/losses||2,752||3,210|
|Foreign Investment Assets using FX Swaps proceeds||Liquidity management and monetary policy implementation||7,302||-|
|Foreign Reserve Management assets||Foreign Reserves||12,383||13,231|
The initiatives below have increased the size of our assets in the balance sheet.
We’re buying up to $100bn of NZ Government Bonds, Local Government Funding Agency Bonds and, NZ Government Inflation-Indexed Bonds, as a part of a Large Scale Asset Purchase (LSAP) programme. At the end of October we had bought $43.9bn in Government bonds (an increase of $4.4bn from the previous month) and $1.8bn in LGFA bonds (an increase of $0.1bn from the previous month).
We introduced a Bond Market Liquidity Support (BMLS) programme to bolster the functioning and liquidity of the NZ Government and LGFA bond markets. The programme complements our activities above by allowing us to purchase small amounts of bonds at short notice, to provide confidence to market participants. At the end of October we had bought $140mn in Government bonds (a decrease of $1mn from the previous month) and $142mn in LGFA bonds through the BMLS (a decrease of $2mn from the previous month).
From December we will begin operating a new longer-term funding scheme for banks called the Funding for Lending Programme (FLP). FLP aims to lower the cost of borrowing for businesses and households, thereby supporting economic activity and employment, and helping keep prices stable.
We pre-emptively reinstated our Term Auction Facility (TAF) in March 2020, which was last used during the Global Financial Crisis as a way to alleviate pressures in funding markets and to provide banks with an alternative source of longer-term funding (up to 1 year term).
While there was some initial demand for this facility, our subsequent actions have meant that demand for emergency funding has eased. At the end of October banks had drawn down $160mn through the TAF (a decrease of $100mn from the previous month).
We introduced Corporate Open Market Operations (COMO) so that banks can borrow cash, for terms of up to three months, in exchange for a wider range of collateral, such as short-term corporate securities. The aim is to support the market for corporate securities by allowing them to be exchanged for cash if required. To date banks and their customers have not needed to use this facility.
In May 2020, we introduced a longer-term funding scheme for banks called the Term Lending Facility (TLF) in support of the Government’s Business Finance Guarantee Scheme. The purpose is to allow banks to access low-cost funding so they can lend to businesses at low interest rates. At the end of October banks had drawn down $145mn through the TLF (an increase of $103mn from the previous month).
We provide a Crown overdraft facility to help the Government manage short-term fluctuations in its cash flows. We temporarily increased the overdraft from $5bn to $10bn for a three month period to 1 July, to assist with the potential for some larger-than-usual changes in cash flows. The overdraft facility was utilised for a short period coinciding with the Government’s April 2020 bond maturity, and the account has since been replenished following the issuance of additional bonds and Treasury bills.
We initially injected large amounts of NZ dollars (in exchange for other assets) to meet increased demand for cash in the banking system. Our NZ dollar lending through the foreign exchange (FX) swap market saw our foreign currency assets increase by $6.9bn to $18.7bn during March, but this has since reduced to $0mn at the end of October.
As a part of our role of managing fluctuations in liquidity, we have begun to buy back the Government’s May 2021 bond. At the end of October we had repurchased $2.9bn of these bonds.
We are responsible for managing dysfunction in the foreign exchange market and in the financial system. We can also, in some circumstances, use foreign exchange intervention as a monetary policy tool when there is significant divergence in the New Zealand dollar from its fair value. These responsibilities require us to maintain a portfolio of foreign currency reserves. There has been no specific need to use the foreign reserves to affect the exchange rate recently. At the end of October our foreign reserve management holdings made up $13.2bn of our assets (an increase of $0.7bn from the previous month).
The initiatives above and below have also seen changes to our liabilities in the balance sheet.
We are the sole supplier of NZ dollar banknotes and coins. Currency is a liability on our balance sheet because banks that deal directly with the Reserve Bank to buy physical currency can return it to us in exchange for a deposit in their account at the Reserve Bank. Our currency liabilities initially increased by $0.8bn from $7.2bn in February as banks filled ATMs in preparation for potential disruptions to supply chains ahead of the COVID-19 lockdown. At the end of October our currency liabilities were $8.1bn.
If the balance in the Crown Settlement Account (CSA) is positive, our balance sheet shows a liability. If the Government is overdrawn, the loan is an asset on the balance sheet (see overdraft facility above).The CSA balance has increased substantially over recent months, reaching $28.8bn at the end of October ($28.5bn in September), as the government increased the pace of bond issuance.
Banks in New Zealand also hold accounts with us and use these accounts to settle inter-bank payments. These accounts cannot be overdrawn unlike the CSA.
We influence the total size of banks’ settlement account balances when we conduct our operations. For example, when we purchase bonds from banks through our Large Scale Asset Purchases (outlined above), banks’ deposit the cash proceeds back into their settlement accounts at the Reserve Bank. As we purchase more bonds, this results in an increase in the amount of assets on our balance sheet, but also increases the amount of deposits that banks leave with us (as we have replaced their bond holdings with cash).
At the end of October the banks’ settlement balances were $21.8bn, compared to $7.5bn in December 2019. Settlement cash balances are likely to remain elevated as more bonds are purchased through the LSAP programme.
The growth of banks' settlement balances has eased over recent months though, as increased Government Bond issuance withdraws cash from the banking system into the Crown Settlement Account.
The difference between our total assets and liabilities makes up our equity on the balance sheet. Our equity is held by the Crown and acts as a buffer against the potential for losses arising from our operations. We pay dividends to the Government when our profits cause our equity to rise above what we need to hold in reserve as a buffer. At the end of October our equity made up $3.2bn of our liabilities.
As stated in our annual report for 2020, we have recommended and the Minister of Finance has agreed that no dividend will be paid to the Government for 2019-2020. This is because there is uncertainty about further actions needed in the near term to achieve our policy objectives given the impacts of COVID-19 on the New Zealand economy. Retaining earnings strengthens our balance sheet and gives us the ability to absorb further risk in the future if required. This action is consistent with our dividend principles.
Monthly summary of our balance sheet (position as at month-end). We present the positions in three different ways:
For more detail about our operations in foreign currency and resulting positions see F5 - Reserve Bank foreign currency assets and liabilities.