The Government has given the Reserve Bank a $8.8 billion one-off grant to help it manage future economic crises.

The money will be added to a fund used to offset the central bank’s exposure to risky financial assets.

Chris Richardson from Deloitte Access Economics answers five questions about the fund, and what the grant means.

What is the Reserve Fund for?

All banks have reserves to tide them through tough times and unexpected losses. 

Although the Reserve Bank is a central bank, much the same logic applies.

This seems to be an awful lot of money – is it a sign of big troubles to come?

This is a repair job. The RBA’s reserves were run down in recent years as (1) the Australian dollar was strong and (2) its piggybank was raided to help the search for a Federal Government budget surplus (meaning that dividends to the Government were higher than they should have been).

Both these factors ate into the Reserve Bank’s reserves. The RBA loses money when the Australian dollar rises (because its holdings of foreign exchange are worth less when measured in $A at a higher rate). And it ‘loses money’ when it pays the government of the day a dividend.

Note that the Reserve has been sending up smoke signals on this for a while. As its 2011-12 annual report said, the relevant RBA reserve “was substantially depleted in 2009/10 and 2010/11 as it absorbed accounting losses. The Board … will seek to replenish this reserve over time to a level more appropriate to the risks faced by the Bank.”

It just got its way – and rightfully so.

Treasurer Joe Hockey mentioned “headwinds” from the US and Europe – is the Government preparing for another GFC?

No. Or, to be more exact, it doesn’t expect one, but there is a risk that something could happen (like a US budget crisis even worse than the recent one) that sends the Australian dollar skyrocketing. 

The latter would hurt the Reserve Bank’s reserves, and so it is smart to do something now.

What will this do to the budget bottom line?

It hurts this year’s budget bottom line by the full $8.8 billion – probably pushing the latter over $40 billion.  But an even better description is that this is a cost that has been hidden for several years now. 

Although this cost is being recognised this year, it actually ‘belongs’ to earlier years when these troubles were stored up.

Is there anything else that should be done to protect the RBA from any possible crises?

A little prayer never goes astray.  But no, this is a prudent step, done early in the Government’s term, and it should be sufficient to give the RBA the safety buffer it needs.